Grupo Traxión, S.A.B. de C.V.

first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Executive President Abby Litston. you may begin.

Thank you for joining. Welcome. As you can see, Traction delivered a strong set of operating and financial results. And once again, Quality Revenues and EBITDA posted record high figures in the company's history. There are several details worth mentioning this period. As always, Rodolfo, Wolf, Antonio will elaborate more in a moment. but I want to share with you some thoughts. First, we are seeing increased activity in the most dynamic markets of the north of the country driven by the nearshoring trend. Tijuana, Juarez, and the Monterrey, Saltillo, Nuevo Laredo corridor are where the most expansion opportunities are emerging. As you know, we have a tremendous presence in such geographies. and plan to continue to expand our operating capabilities to better serve our cross-border clients and those foreign companies seeking proximity to final consumer markets. Tracción has a large logistic footprint and an extensive cargo portfolio to render tailor-made solutions between Mexico and the US. Likewise, the company has the absolute largest and most modern people mobility platform to serve factories and industrial parks. In this segment, we are also finding greater commercial activity, and we are very close to complete our growth plan for 2023, which involves a large portion of our capex. Moving on, fuel costs have normalized. This item increased 10%, which is significantly lower than the growth of the revenues. The path to it effectively reflected this quarter, and the margins of our traditional business segments revealed that. Consolidated EBITDA margin came in at 17.7%, which was mainly driven by the higher contribution of the logistics and technology division, which posted almost 50% growth. Finally, TRAXION made significant advances in ESG terms. Toño will give you more details in a moment. What is important to highlight that we continue to strengthen our sustainability strategy according to our leadership commitment. We think that our current ESG framework is one of the most robust in Latin America. And our ratings and standards are proof of such advanced guidelines. We're very excited about the commercial opportunities we see ahead. Thanks for your attention. I will now hand over to Rodolfo.

Thank you. Welcome, everyone. As I just mentioned, there are significant operating advances that I want to discuss. First, Traxporta. our digital cargo marketplace continues to penetrate and gain market throughout different avenues. This quarter, such application posted more than 82% growth in revenues compared to the same period of last year. Second, we continue developing our pharma and intermodal verticals. In this line, I just want to highlight that we currently operate the absolute best pharmaceutical warehouses in Latin America. and we will leverage such capacities to keep expanding such business. There is a great scarcity value in the pharma supply chain. Interaction is a natural player to properly explode such businesses. Third, our co-operations advance ahead of expectations. Cross-border activity increased mainly by volume derived from nearshoring. We have an expansion of approximately 80 refrigerated trailers, which are mainly fresh produce exportations to the U.S. We like this business very much, basically because of its resilient nature and U.S. dollar exposure. Tracción continues to build up a strong reputation in the Bahia region in this service and to grow its market share and penetration into North America. Moving on to the personnel mobility segment, we continue to absorb great demand for our service in the most important economical regions. This quarter, we started operation with new clients and increased capacity with existing ones, totaling more than 200 new buses. Tracción continues exploring new markets where personnel mobility is still a challenge, and we believe that our solutions have an enormous value added for our clients. Finally, our 3PL logistic division posted a healthy expansion to a strong commercial activity and the incorporation of pharma businesses. All that increased our warehousing area in more than 142,000 square meters, an impressive 23.3% growth. As we always say, technology is the most significant competitive advantage and represents the highest barrier of entry in our sector. This is precisely what will continue to enable Traction to keep seizing opportunities that arise from measuring trends. As you see, it was again a very busy quarter on the commercial and operating arenas. Well, with this, I end my remarks. Wolf, please go ahead.

Thanks, Rodolfo. Hello, everyone, and welcome. There are many interesting details worth mentioning for this quarter. First, There is a healthy double-digit growth in our three business segments that was driven by both price and volume, as the fuel impact of the fuel pass-through kicked in this quarter and the logistic and technology division brought an almost 50% growth in revenue. This year, we expect additional growth coming in the following quarters. Traction has made significant investments that have not yet shown their full potential and contribution to the top lines. Let us also bear in mind that usually the first square is the soften in terms of activity. So there is an expectation of increased volumes with higher prices in 2023. Moving on, I want to discuss the recent refinancing we obtained. It is a 6 billion peso credit facility. The plan was to refinance and prepay the outstanding line at the end of March and to strengthen the company's leverage strategy according to our commitment to optimize overall financial profile. The spread of this facility is 50 basis points lower on average compared to the previous credit. As always, we seek for the best alternatives in terms of both cost and maturity. Moreover, there is an increase in comprehensive financial results that was mainly driven by a growth of approximately 3 billion pesos in gross debt compared to the same period of last year and the hike of interest rates that basically doubled the company's interest expense. However, Our leverage ratio remains in the same level as in the past quarter, and we expect to lower it progressively throughout 2023. In terms of CAPEX, our program moves according to plan and with no surprises. A large portion of such investment is to grow organically our personal mobility fleet. This business continues to present us with very profitable opportunities as industrial activity expands, partly driven by the nearshoring trend especially in the northern markets. Finally, there is a very good piece of news. In February, we opened our first 3PL facility in Arelo, Texas, that we are managing for an e-commerce client. This represents a great milestone as we start operating logistics in the United States. As you see, there were several good news this quarter. This year started with strong activity in line with our guidance expectations. With this, I end my remarks. Thanks for your attention, and I will hand over to Tonio.

Thank you, Wolf. I just want to briefly highlight some more important financial and ESG matters. First, fuel cost has normalized. We successfully conducted the pass-through to our clients, and we are now observing a margin inflection point in our traditional business lines. Our asset line division is running efficiently as expected, and overall growth was more driven by price rather than volume, reflecting increased fares. Both are very good news. Third, operating cash flow decreased 205 million pesos, was mainly driven by two things. First, the increase in pre-operating costs and expenses required to start new business, mainly in terms of working capital. And second, a higher interest expense compared to the same period of last year. Earlier in the quarter, we announced that we will cancel up to 35 million shares that Tracción has in the repurchase fund. which is approximately 6.4% of shares outstanding. Management will propose the matter during the next shareholders meeting later this week in order to proceed with such cancellation. This initiative is indeed very good news as well and reinforces our commitment of long-term value creation. Furthermore, net income came in lower than expected and was mainly due to a mixture of higher interest and pre-operating costs and expenses for new business that are not contributing yet to the bottom line. However, we expect this effect to be temporary as such business start contributing to the top line. Moving on, Tracción made significant advances in terms of ESG. We expanded our educational program to the states of Mexico and Puerto Rico, and we plan to certify more than 3,500 high school graduates there. We will continue such expansion to another three states by the end of this year. Moreover, Traction was recognized as the company with the best corporate sustainability strategy in 2023 by Global Banking and Finance Review. These are indeed very important achievements that place the company in a higher level in terms of ESG and in line with our leadership commitment. It was a very successful quarter in every front. Traction made significant progress in its overall strategy, and we are very excited about ESG coming this year. With these, I wrap up management remarks and we'll open the floor to Q&A. Thank you.

Thank you. The floor is now open for questions. If you would like to ask a question at this time, you may press star 1 on your telephone keypad to enter the queue. We do ask if listening on speakerphone this morning that you pick up your handset to provide optimal sound quality. Once again, if you would like to ask a question, please press star 1 on your telephone keypad at this time. Please hold a moment while we poll for questions. And the first question is coming from Juan Ponce from Bradesco. Juan, your line is live. Please go ahead.

Hi, good morning, good afternoon, everybody. Thank you for taking my question. I believe you mentioned in the last conference call a potential upside on EBITDA margins this year due to greater contribution of the technology and logistics divisions. Given where we were then relative to what you're seeing on the ground today, could you say you are more optimistic or conservative about the second half of 2023?

Thanks. Hi, Juan. This is Tonio. Good morning. Thanks for your question. Remember that we always said that the logistics and technology margin on a normalized basis, on a long-term basis as well, is on the 10% neighborhood. So this quarter, it was below because mainly of pre-operating expenses and costs that were required to start new operations. We don't expect that to be on a long-term basis, but we do expect some more pre-operating costs in this segment, not on the same proportion, but we also expect the margin of this segment to be more on the 10% neighborhood.

Thank you. The next question today is coming from Alex Dimichelis from NAU Security. Alex, your line is live. Please go ahead.

Good morning, gentlemen. A couple of questions be the 1st, 1 is just to follow up on the on the models on logistics and technology. So, so we walk up through how you see these evolution from the 7% that we saw this quarter to the 10% neighborhood that you're talking about. And then within that, could you please. explain how the mechanics are working, because when you acquire Medistick, that business has much higher margins. So try to understand how all of that comes together. That's the first question. And then the second question is, could you please indicate how you see the working capital evolution through the rest of the year? Because obviously there was a big working capital deal this quarter.

Hi, Alejandro. Good morning. This is Walt. In terms of the logistic margins, first, if we talk about the pharma division, as you already mentioned, with Medistic, that's correct, about talking about the margins. But we already started new clients and new contracts over the same division in terms of the pharma vertical. So that is why it's taking us more preoperating expenses in this particular quarter. So this is why the margin is below in this niche. So we are expecting to have like a mature contract in the next quarter. So in that terms, we can raise the 10% area as Tonio just mentioned. And in terms of the second question with the working capital, also this quarter, it's very normal for us. to have that difference. Mainly, we have two different things where we start in the net income. And the second thing, it's also because usually we have a lot of contracts that we have to renew in this first quarter in the year. So it takes a little bit more of time to recover also the collect accounts. So this is mainly what was the impact. In terms of the working capital, we expect to be very normal as the previous quarters in the next three quarters of the year.

That's great. And given that you mentioned you started operations from the logistics side in the US, could you please give us some kind of flavor of how you see that side of the business evolving in terms of growth, in terms of margins? What's the opportunity for you in the US?

Yeah. Hi, Alex. This is Rodolfo. So yes, we're really proud that we just began our first operation cross-border in Varelo in the warehousing business. We began in first of March, and we see a lot of potential of growing this business, of course, in the cross-border section of U.S. and Mexico, but also in a little inside more in the U.S., The margins we are seeing around that, it's the same as the logistic segments, around 10%. 10% to 12% is the margins we're seeing. But we're seeing a lot of potential, and we're looking forward to expanding that business there.

Thank you. The next question is coming from Priscilla Jones from Comcast Group. Priscilla, your line is live. Please go ahead.

Hi. Can you hear me?

Yes, we can hear you. Priscilla, please go ahead.

Okay. So my question is just a little follow-up on the logistics. My understanding is the margin is a little – had a compression due to pre-operating expenses. And once we start to see a more – uh stabilized growth uh we should expect more to attend present but what what are you seeing in terms of when will be will it be a more stabilized um maybe in the next two quarters hi priscilla how are you uh

We expect to normalize a little bit more in the next quarter. So it will be in a softer way, but we have to reach the 10% in the next maybe one or two quarters. So it will depend. Remember that we grow this segment almost 50%, so it takes us a little bit more preoperating in this particular quarter. But as we can mature that contract, we are expecting maybe in the next quarter or maybe one more to be around the 10%. Okay.

Thank you. Thanks.

Thank you. The next question is coming from Sylvie Nielsen from Citi. Sylvie, your line is live. Please go ahead.

Hello. Good morning and good afternoon. Thanks for taking my question, guys. I have two questions on my side. First one is what are you seeing in terms of upside when it comes to return on equity or return on invested capital? over the next five years versus today. So do you see any room for expansion here and what is the level more or less that you expect to reach in the mid to long term? And have you heard any concerns from cargo customers regarding governmental proposals to weaken concession contracts and make it easier for the government to expropriate property. Any color on that would be appreciated. Thank you.

Hi, how are you? Good morning. In terms of the return, the previous year, 2022, it was quite hard because of the fuel cost impact to the company. And we invest a high amount in the previous year. So in terms of what we're looking forward, all the investments that the company made are willing to have more than 20% IRR or ROIC. So the incremental ROIC or all the financial metrics that we're looking for should be going forward and better for the next future. be looking for the middle term, we should see like in a very margins also in the net income and that will be in a very returns in terms of capital.

Hi Silvi, this is Javi. And talking about the government, I mean, we feel very confident and comfortable with Mexico and for investing in Mexico. We have grown here for many years, and we plan to continue growing. And we haven't heard any news that changed our vision for Mexico.

Thank you, guys.

Thank you. The next question is coming from Martin Lara from Miranda Global Research. Martin, your line is live. Please go ahead.

Good morning and congratulations for these results. I have one question. Do you expect an additional margin improvement in mobility of cargo and mobility of personnel this year?

Hi, Martin. Yes, as I just mentioned also before, We are almost getting the same margins that we have before the impact of the previous year. So, yes, we should expect something better than we're looking in the first quarter. Remember that it's also the soften during the year, the first one, so we should be in the better margins also in the next quarters of the year.

Okay. Thank you very much.

Thank you. Your next question is coming from Douglas Turnbull from Invesco. Douglas, your line is live. Please go ahead. Hey, guys.

I just wanted to double check. I'm kind of looking at the Metastick integration correctly because I think we said historically it did something like 600 million revenue in a year at about a 30% plus EBITDA margin. which would be a run rate of about 45 million of EBITDA per quarter. And yet, if I look at the EBITDA in the logistics and technology year over year, it only grew by 18 million. So I'm just trying to make sure, am I looking at that correctly? Does that mean something else has gone backwards or have we significantly diluted the margin in that in the short term by adding new contracts? I guess I would have expected it to have increased more given that wasn't in the base.

I'm sorry, Douglas. Maybe I couldn't understand well the question. If you can repeat me, please.

Sure. I think historically we said that the Medistick business did a revenue of about 600 million in a year at about a 30% EBITDA margin, which would assume that it would add about 45 million of EBITDA per quarter. Given that isn't in the base for the first quarter of 2022, I would have expected a bigger jump in the EBITDA number once we've included that in the base for the first quarter of 23. So I wonder if I'm not looking at that correctly, or whether it was the fact the margin declined elsewhere, or did adding new contracts in MediStick in the short term diminish the margin? Why did the EBITDA and logistics and technology not increase more with MediStick being included in the run rate?

Thanks, Arles. Yes, we are starting new operations with big contracts, so in this particular segment. So, this is why the pre-operating expenses that we have to have in this particular quarter are impacting the segment and in terms of margins and also. So, this is why you're not looking that far in terms of the margins about Medistec, but if you see that particular Business and you were saying 600 million pesos in red terms of revenues per year if you make it for the quarter It's late. It's almost less than 10% of the of the revenues of the total Division, so this is why the impact of the pre-operatings are higher than the revenues in terms of just medistic But you will see better better margins When we when we can mature and we have less pre-operating in the next two quarters of this year for this particular division. I

Thank you.

You're welcome.

Thank you. Once again, the floor is open for questions at this time. And if you would like to ask a question, please press star 1 on your telephone keypad to enter the queue. Once again, the floor is now open for questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad to enter the queue. Please hold a moment while we re-poll for questions. And we do have another question coming from Fernanda Repia from VPG. Fernanda, your line is live. Please go ahead.

Hey, guys. Thank you for taking my question. Two questions on my side. The first one is actually a follow-up regarding the logistics, new logistics operations that you're opening in the U.S., If you maybe could provide us some information regarding the size of this operation, if you already have contracts signed with clients. And you also commented about a lot of potential, but is this coming from organic or inorganic moves that you are expecting? And also, my second question is, kind of related to this, but if you could provide us an update of your M&A pipeline, where you're seeing off-target, we could have any news still this year. Thank you.

Hi, Fernanda. This is Rodolfo. So regarding the warehousing business in the U.S., we began this with the business we already had with e-commerce, especially Amazon, bringing all the importations, all the imports that they do from the U.S. to Mexico. So we're now doing also the warehousing there and doing all the fulfillment in the U.S. to do the cross-border in Mexico. So that's the beginning of this business. And yes, the pipeline for saying or the opportunities we see It's mainly from Mexican clients. There are multinational companies that also need this type of service or services in the U.S. that have been contacting us to help us do the service in the U.S.A. So that's what we're seeing of opportunities there. And regarding the second question, Avi, would you?

Hi, Fernanda. And yes, talking of M&A, we should expect to close our first M&A of the year soon.

Thank you. There are no further questions in queue at this time. I would now like to turn the floor back to Abby Lichten for closing remarks.

The new shoring is blowing the wind in our favor. With a very strong footprint in the northern part of Mexico, with more than 1,000 industrial clients, and with the logistics and mobility solutions for them, Tracción is very well positioned to capture this big opportunity. I see a great future for this company. Thank you for joining.

Thank you. 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.