Grupo Traxión, S.A.B. de C.V.

Good morning, ladies and gentlemen, and welcome to the Traxion Third 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, Abhi Lischting, Executive President and Co-Founder of Traxion. Sir, the floor is yours.

Thank you. Good morning. Welcome again. Adios, sir. Tracción continues delivering good news despite adverse global macroeconomic conditions. Today, I want to briefly discuss three matters, nearshoring, revenues, and margins. Nearshoring is a reality and will continue to penetrate in the next few years. Tracción is directly related to such trend, as around 50% of revenues come from it. Half is from final goods exported to the States, and the other half is from warehouse management, personal mobility, and raw material transportation. Thus, we expect a consistent and progressive increase of demand from such expansion. Our commercial force is in the frontline capturing the most profitable opportunities. In order to properly benefit from nearshoring, Traccion has several attributes. A strong 4PL logistic platform, a comprehensive footprint in cross-border operations, specialized and efficient cargo solutions, and the leading position in personal mobility within industrial parks. Moving on, Tracción had a very good quarter in terms of revenue. They came ahead of our expectations. It was the first quarter which we broke the $5 billion mark in revenue and represents the highest quarterly figure of our history. Most relevant is that growth came high in the three divisions, with logistics and technology posting the highest. It was a 29% increase, but even more important, with virtually no capex. This is precisely how we want to continue to develop this division. Our traditional business segment also posted impressive growth rates with 27% and 18.5% in mobility of cargo and personnel respectively. We continue to see a temporary impact in fuel, our most significant operating cost, which has increased more than 50%. However, the impact in margin has been just approximately 150 basis points and level at around 17.5%, which we think is very healthy given the circumstances. We will recover such compression in the short term since we believe that the fuel cost pass-through will be fully implemented by year-end. For 2022, we expect our full year revenue to grow higher than we expected. However, the impact in fuel cost is going to compress our year-end margins. In consequence, we expect to reach a very similar EBITDA figure to what we released in our guidance in February. We are convinced that we have managed this situation very well. Once again, the resiliency of our business model has proven effectively. We're excited with the growth brought by nearshoring and feel sure that the company will capitalize on common opportunities as it has always done, efficiently and profitably. To this, I end my remarks. Please, Rodolfo, go ahead.

Thank you, Avi. And thanks, everyone, for joining us today. Our commercial strategy continues to bear fruit, and there is a sizable level of demand of our three segments. That has resulted in a healthy double-digit growth at the top line. Right now, the most interesting growth opportunities we observe for the short and midterms come from the nearshoring trend, which has already driven a portion of our revenues. We have been started in several new operations with clients, mainly in the northern region of the country, whose business is directly related to such nearshoring. The logistics and technology segment continues to post the greatest growth, which is mainly driven by the commercial success of Traxporta, increased operation efficiencies in the 3PO logistics, and the launch of our pharma vertical. In terms of mobility of cargo, revenue growth has been driven by an increase in special cargo services such as refrigerated, in which Tracción continues to build a very respectable reputation, especially from the Bajío region to the border, and by increases in the price due to the growth in fuel cost pass-through. Both things have pushed revenue per kilometer almost 18%. Moving on to mobility of people, this quarter traction started operations with new clients, totally more than 400 buses. We also began artificial intelligence trials to seek improved operating efficiencies and increase our value added services to both clients and users. Finally, I would like to talk about the field pass through. As you know, we are in close contact with our clients. And we have achieved an important advance of pass-through in our contracts, which we expect to start kicking into revenues the next quarter. However, we do not expect a full impact of such pass-throughs until the first quarter of 2023. Having said that, I end my remarks, and I will hand it over to Wolf. Please.

Thanks, Rolfo. And hello, everyone. I want to start by highlighting that this quarter we are operating on a fully normalized basis compared to the same period of last year, where we still operate with higher demand from the last month of the pandemic. Growth in revenues was truly outstanding. Perhaps the most relevant aspect is that the three business divisions post high increases. Our level of service, strong relations with clients, and broad portfolio of supply chain solutions are indeed driving such expansion. We have managed to achieve a much better cost and expense control to partially offset the fuel increase that has been affecting our P&L since the beginning of this year. Moving on, in terms of leverage, there is an increase of more than $2.7 billion in total debt, mainly driven by M&A activity and organic growth. However, our leverage ratio is still in a very comfortable area and well within our strategic focus. We continue to make improvements in our overall debt profit, and we have a significant portion of our debt expiring in more than three years. All of that, coupled with rising interest rates, drove our comprehensive financial result to be $110 million higher than in the same period of last year. Despite of that, our cost of debt remains very efficient thanks to our overall debt profit. As you can see, We have made significant investments this quarter, both organic and inorganic, that will not fully contribute this year to EBITDA or to profitability. However, we expect such investments to fully kick in as we move into 2023. In terms of cash flow, there is an increase of more than 40% in net operating cash flow, mainly due to improvements in working capital cycle. Finally, Our CAPEX program is running as planned, and we expect to continue with such progress for the remainder of 2022. Thanks for your attention. I will hand over to Tonio. Please, Tonio.

Thank you. Hello, everyone. I just want to discuss some other highlights. First, revenue increase is the result of an intensive and successful commercial strategy that pushed growth to be higher than that of recent quarters, which translates into significant advances both in service penetration and market share. Our three segments reported very strong revenue increases, which is especially relevant given the global macro landscape. Margins in our traditional business lines are improving compared to the second quarter of this year, and we are starting to observe the effect of few pass-throughs. Loop cost continues to be the main reason affecting margins. However, as Abby mentioned, we think that a 150 basis point difference in margin compared with what we forecasted is not that material given the circumstances. And Tracción is posting among the highest margins in the industry. Many of our peers have had much worse effect in such item. EBITDA came in at 934 million pesos, which is also the highest EBITDA figure in our history and was mainly affected by fuel cost. And due to that, posted a growth of just 3.5% compared to the same period last year. In terms of inorganic growth, as you saw, we closed the Medistick deal. So Tracción is in the pharma logistics business since this quarter. We are confident that our commercial synergies are going to continue to materialize as we seek for more opportunities to multiply revenue of such division. We also closed the Vmodal acquisition through which we Tracción complemented its service portfolio with rail services. Most important is that both companies operate with a 100% asset-light focus in line with our inorganic growth strategy. Shifting gears, our ESG program continues to report significant advances. The action started trials of electric last mile vehicles for Redpact. This is a natural step for emissions reduction, and with such trials, we will start analyzing several metrics for further implementation. Furthermore, the company released its diversity and inclusion policy and its corporate governance manual. Please go into our website to access both documents. Well, thanks for your attention. With this, I wrap up my remarks and will now open the floor for 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. Your first question is coming from Juan Ponce from Verdesco. Your line is live.

Hi, good morning, everyone. Thanks for taking my questions. My first one is on the agreements with clients to pass through cost pressures. Can you remind us what percent have already agreed as a 3Q22? And also on that front, have clients been receptive? Have you seen any pushbacks in certain pockets of the market? That would be my first question.

How are you, Juan? This is Rodolfo. Right now, we are around 65% of pass-through to all our clients. Of course, it's not easy, as you said. There's always a pushback, but I think the market is aware that the necessity of the increase because of the fuel and because of all the needs in the logistics section. So we have been doing good. It has been tough, but we are now at 65%.

And just to follow up on this, you mentioned that you should be finished by year-end. Did I hear that correctly?

Yeah, that's our program. We're trying to finish up in the next quarter all the pass-throughs. Okay, thank you.

And my last question, you mentioned several opportunities in the northern region related to nearshoring. Can you please elaborate on what you are seeing on the ground and what level of growth rates should we expect in your overall business from nearshoring?

Thanks. Hi, Juan. This is Tonio. Good morning. Thanks for your question. We have been seeing a lot of new opportunities from clients arriving from the U.S. or China. Companies are operating from those countries that are coming to open plants in Mexico. We've seen a lot of opportunities mainly right now as of today, mainly in the personal transportation business. But of course, as other industrial parks get developed, we expect that we're going to capture some of the manufacturing and logistics derived from such openings. We know that there are some 90 industrial parks under construction in the northern part of Mexico right now.

Great. Thank you very much.

Thank you. Your next question is coming from Louis Yance from Compass. Your line is live.

Hi, guys. Thanks for taking my questions and congrats on the fact that it looks like margins have finally stabilized. So I guess a couple of questions. I guess on margins, let me start with, I guess, the logistics and technology that we saw some compression both sequentially as well as year over year. And you mentioned on your press release that it was due to pre-operating expenses on the pharma vertical. Just wondering how much of that gets reversed in the short term, meaning in the fourth quarter, should we expect those margins to kind of go back to low double digits? And as we move forward, once you integrate all this, especially the Medistick one that had significantly higher margins,

know where can we expect margins of this division to go in you know let's say 2023 that'll be my first question hi luis this is toño again good morning thanks uh as we have discussed uh well actually yeah the the pre-operating costs have diminished margins in the logistics and technology division this quarter uh the the Of course, it's a moving target because many, as you know, many business lines are under development here, Traxporta. We have the Last Mind Solutions Division. We have the 4PL. This includes the Pharma Vertical, of course. So such diversity of business lines carry different margins. But over the long run, you should expect and we should expect the Logistics and Technology Division to be around 10%. So, but of course, as I said, it's a moving target. We expect that as Medistique kicks further into revenues and into margin, it could lift the margins somewhat for that division.

Great. Thanks, Tonio. And then another question also on the margin side. You mentioned, you know, roughly 150 basis points have been taken from the margins due to the fuel price increase, but it seems to be just a matter of time once you get all the pass-throughs completed and reflected on the numbers. The stability margins that we saw sequentially, and actually it was more impressive if I take away the compression of logistics, actually cargo and personnel had a very nice improvement sequentially in terms of margins. Just wondering if that's related to perhaps seasonality or something else, or that's actually related to the fact that, as Rodolfo mentioned, 55% of the contracts already were negotiated, and you started to see some benefit, or out of the 150 basis points, all the benefits, should we think that they start in the fourth quarter?

It is. In cargo, it is mainly pricing, the difference you see. And in mobility of personnel, it is a mixture of both pricing and organic growth.

Okay, so it seems like you're still not seeing those benefits, so all those 150 APCs points, 150, I'm sorry, should start coming in the fourth quarter, right?

Yes, we expect those improved contracts, so to speak, to start kicking in in the fourth quarter and in the first quarter of next year. Okay, great.

And then on the capital allocation side, you know, now that both acquisitions, you know, have been closed. Just wondering, you know, when they were announced, those assets were generating roughly 260 million pesos, right? 220 from Medistick and maybe roughly 40 from Vmodel. Is that a reasonable assumption to think 260 for the next 12 months or given the synergies that you're probably already achieving or looking to achieve, you know, and the visibility you have now that the business is inside you guys, It's 260, probably the floor, and perhaps we should think about something, I don't know, closer into the 300, 400 million for the next year or so, or how should we think about that and the progression of synergies on those two newly acquired businesses?

Hi, Luis. We expect at least double of EBITDA from acquisitions next year.

Wow, that's quite a bit. Excellent. And then my last question, I guess, going back to the nearshoring thing, I mean, it was interesting. You guys mentioned, you know, if I heard you correctly, 50% of your revenues are somehow related to nearshoring. Could you spend or elaborate a little bit more on that? You know, where is it coming from? And perhaps, uh, I remember you used to have, I don't know, 10, 15% of your business was cross borders. That's still the number. Where do you see that, uh, So if you could give us more detail on your exposure to nearshoring, it would be great.

Of course, Luis. Well, as you know, it's 50%. We estimate that 50% of our revenues are related to nearshoring. We estimate that half of that, around 25% of revenues, are final goods exported to the U.S., The other half is divided into personal mobility in industrial parks in the north, some raw material transportation, and also logistics.

Excellent. And I'm guessing as this develops, because we're seeing clear signs that the near showing is a reality, you feel well-positioned in the northern part perhaps Given that this is a new trend that we weren't thinking that much about a year or two years ago, is it possible to think that you guys perhaps do some more acquisitions related to this so you can have a bigger footprint in the north to take advantage of this? Or how do you guys think about the evolution of your exposure to nearshoring in the next couple of years?

Of course, right now, what we are doing is the commercial muscle is on the front line in the field. We are seeking for opportunities. We are capitalizing on many of them. We are being very successful. Actually, near shoring, we have seen a lot of investment pouring in for the past two, three years. So what we expect is as industrial parks grow, continue to develop and companies continue to establish themselves into Mexico, we expect a growth in cross-border, in manufacturing. We expect also, as you can imagine and as you said, organic and inorganic production. if we encounter opportunities to strengthen our cross-border capabilities or our logistics capabilities to serve companies on a door-to-door service to the United States, those would be attractive opportunities for inorganic growth.

Greg, could you remind us how much is cross-border right now, roughly speaking?

The cross-border business is around 20% of our revenues. Wow, that's big.

Well, thanks a lot, guys, and congrats again on the results.

Thank you, Luis.

Thank you. Your next question is coming from Alex Dmykios from No Securities. Your line is live.

Good morning, gentlemen. Thank you very much for taking my questions. A couple of questions, if I may. Just to follow up on the previous question on margins. So if I've heard you correctly, you're expecting to recover these 150 basis points some point next year, and then with doubling of Medistick and V-model, can we actually see 2023 margins higher than, say, where they were in 2021? That's the first question.

Hi, Alex. This is Tonio. We expect to recover those 150 basis points in next year. We expect if circumstances normalize that the company is going to be able to recover and be above 19% of margin.

Okay, that's clear. And then just to clarify, on this quarter, on the third quarter, how much you actually consolidated from Medistick and BIM model, either on revenue or EBITDA, please?

We expect Medistick to at least double revenues next year.

No, but I mean this quarter, on the third quarter, how much it contributed.

Hi, Alex. How are you? In terms of revenues, it's around 100 million pesos, what the M&A contributed to the revenues. And in terms of EBITDA, it's around 24 million. So it's As you can see, we closed the acquisitions mainly at the end of the quarter, so we're not reflecting almost any figures in this report.

Okay, that's great. And looking into 2023 again, with the discussions that you're having with the clients, with the manufacturers of trucks and so on, how we should think about your fleet growth for next year or how you're thinking about fleet growth for next year?

Hi, Alex. This is Rodolfo. So what we're trying to do is do an efficiency of our fleet. We're trying to do a growth around 10%, 10, 50%, not more than that. But we're focusing really, really hard on improving the efficiency of the fleet we have right now. Okay, that's great.

And how much? efficiency gains do you think you can get from the fleet then?

So we have been working in this efficiency. Well, we always work on this. As you can see in the results, the pricing, it's improving. So we think that we still have some 5%, 6% to do in efficiency.

Hi, Alex. This is Antonio again. If you see, for example, the historic development of the fleet, we're going to see that the fleet has Since 2019, in organic terms, the fleet has only grown roughly 2%. Kilometer volume has grown more than 9%. Revenue per kilometer has grown more than 14%. So that's how we've been doing efficiencies with our fleet. And that's what we plan to do. However, we are seeing very strong demand for next year, especially in the refrigerated and other specialized services.

That's great. Thank you.

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

Good morning, everybody, and thanks for taking my question. I actually was curious about your views on, let's say, security costs for the business, how you're thinking about the rates of theft. So I guess We've seen, for example, I guess there's been some news that the government's planning to nationalize the police or do something along those lines that somehow merges them with the military. Do you think that certain things need to occur on a policy level that could help you facilitate your operations? How are you thinking about that and how are you thinking about overall policies security costs for your various segments. Thank you.

Hi, Steve. This is Tonio. Thanks for your question. Of course, security is very important for us, and it's very, very, very important for our clients. However, the security matters do not represent... They represent less than 1% of revenues on a P&L basis, so they are not that significant. But we are very, very, very busy... creating protocols. Actually, we have a security committee here, but it's very important for us to give peace of mind to our clients in terms of security. We have a lot of protocols and other procedures in place in order to improve significantly our security issues.

And regarding what you said about the government, it's not that far from what they have been doing in the last So, you know, there has been a lot of noise about this, but it's really the same as the other governments have been doing, you know, involving the military in some security matters, especially in the border. But it's roughly the same.

Okay, I appreciate that. Let me leave it there. Thanks, guys.

Thank you. Your next question is coming from Edson Marsuia from Sema Capital. Your line is live.

Hi, good morning. Thank you for taking my questions. The question is related to the acquisition of V-Moral. Could you give us a little bit more detail about the rationale of acquiring this company? Because it seems that, or at least, From our perspective, it's not clear how this energy will transform to better results to the company. It's part of a thousand years that we mentioned that 100 million was contributed to this quarter. That will be the first one. The second one is regarding to the cost of debt. Could you give us a little bit of an insight about how the IT rates are impacting the reporting part of the debt that we have, and what will we expect for the next quarters? Thank you.

Hi, Edson. How are you? This is Rodolfo. So regarding the B-model question, We see the intermodal business a great complement for our business right now. We have great cross-selling opportunities for business line of cargo and logistics. So we really think we can push this business section through our actual clients, and we think we can grow the company really good.

Hi, John. How are you? In terms of the second question, in terms of the cost of debt, as you can see, there's two different effects. The first one is mainly the company has usually more than 60% coverage of their debt. So we are right now between 65% including the M&A funding. So we usually try to be a little bit above that. So we're trying to do different things to analyze what is better for the company. So we should be around 60 to 72%, 75% that we are usually into that coverage of our debt. And in terms of the cost, as you can see, we have two different effects. First one was the hike in terms of the rates and the second one, was also the level of the debt, including the acquisitions at the end of the quarter. So that was mainly the main effect. And for the future, we expect a little bit to benefit with different improvements, the cost of debt in the company.

Okay. And last, regarding the cash and equivalents, compared to the previous quarter, right now we view cashes uh, below one billion purchase level. Um, do you feel comfortable enough, uh, regarding the construction activity?

Yes, thank you, Tom. We usually are, before COVID time, we were usually between these levels, between 600 to 850 million pesos. So we feel comfortable in these levels. And even if we create more cash, we will think what else we can do with that money in terms of the cash position in the company. But we feel comfortable in these levels.

Okay. Thank you so much and congratulations on the results.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Your next question is coming from Martin Laura from Miranda Global Research. Your line is live.

Hi, good morning and thank you for the call. I have two questions. The first one is where do you see the leverage during the next few quarters? And the second one is if we should expect additional pre-operating costs and expenses in the new pharmaceutical distribution business.

Hey, Martin. How are you? Regarding your first question, in terms of debt, if you remember, our internal policy is to be below 2.5 net debt to EBITDA. We're expecting to be more around 2 to 2.3. So if you see for the next quarter, we think we're going to be in that range. And in terms of the operating expenses, we already put in place almost all the investment that we need for this pharma vertical. So for the next quarter, we can expect, as Antonio mentioned before, we're not expecting to the margins to be below 10%, so we can expect something at least 10% and higher.

Okay. Thank you very much.

Thank you, Martin. Thank you. That concludes our Q&A session. I will now hand the conference back to Antonio Tejido, Vice President, Investor Relations, for closing remarks. Please go ahead.

Currently for us, the name of the game is nearshoring. Traction will continue to capitalize on opportunities brought by such trend with a very strong balance and an aggressive commercial activity. The company has leadership position in several niches that directly serve current and potential clients seeking nearshoring in Mexico. Traction has continued to move forward, and despite current challenges, it has managed to post, once again, record high figures.

Thanks for your attention and have an excellent week.