Grupo Traxión, S.A.B. de C.V.

Greetings, welcome to the Traxion 4Q23 and 2023 earnings call. At this time, all participants are in a listen-only mode and the floor will be open for questions following the 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 Avi Lichain, Executive President of Traxion. You may begin.

Thank you. Good morning. Welcome again. I'm very pleased to share another quarter of extraordinary outcome, both financial and operational. The company has posted record high figures consistently, and this quarter was not an exception. As usual, I want to share with you some very significant milestones. First, Fracciona exceeded again its growth expectations. Consolidated revenue was 22% higher than last year, which is more than 38% above what we got in the market exactly one year ago. One of the main reasons for such expansion was the logistics and technology division, our asset light arm, which posted a growth of almost 42% in 2023. and contributed with a third of total revenues in line with our plans. We have always said that this is the highest growth segment within the company, and we expect this division to be more significant portion of our business over time. Moving on, we continue to see strong demand for the people mobility segment. As we say through the year, Tracción ended 2023 with 8,000 buses in operation within such division. We expect the new short-term trend to continue presenting us with very attractive road opportunities, especially in the northern regions and the Bajio. Logistics and mobility services have been boosted, and our goal is to capitalize on those opportunities profitably. In that line, Traction is well prepared to face such expansion. We have a very strong balance, a great commercial Moscow, the most advanced IT platforms, and an extensive operational infrastructure. All of that will enable Traction to continue to be the leading player in our industry. Moving on, please be aware of our guidance for the year. Management expect to grow top line at around 19% while maintaining the same margin levels as in 2023 and to deploy approximately 4.2 billion pesos in capex. mainly to fund organic growth of the people, mobility fleet, and the renovation program of the cargo division. With all of that, and considering the M&A activities, we expect to remain below 2.5 times net debt to EBITDA. Finally, we have been one of the very few Mexican companies to tap the equity markets in recent years. In that line, Traction already deployed 50% of the proceeds of its recent follow-on. and has already signed contracts to deploy the rest within the first half of this year. These are very good news, as we are disposing such resources in half the time we originally planned. Thanks for your attention. I will now hand over to Rodolfo for a deeper dive into operational details. Please, Rodolfo.

Thank you, Avi, and thanks everyone for your attention today. As Avi said, At the end of 2023, Traction was now operating more than 8,000 buses in mobility of people, which is slightly different than the reported figure. Please remember that we report average units, not total. These represent a growth of more than 1,300 buses in the year. Again, in absolute terms, not average. Having clarified that, let's move on with more details. Demand level keeps coming strong, mainly driven by new clients starting operations and current clients expanding their existing ones. All of that being driven by new shoring. Tracción carries on expanding organically in this segment with great momentum. The sheer size of our infrastructure together with our high quality services are attributes that place Tracción in a very special niche. where the company is one of the very few players able to serve large clients with extensive and complex mobility needs. We help our clients to design and plan well in advance their needs for mobility, which grows more complex as the nearshoring continues to penetrate and industrial parks are developed farther away from urban areas. On the other hand, our fleet reconfiguration program is right on track. We have been shifting our fleet to operate more cross-border circuits and other specialized cargo formats that typically bear higher economics. As a result, revenue per kilometer grew 19.8%, which indeed is a very remarkable figure. In this division, if you move down the bottom line, you will see some interesting details. First, operating income grew more than 124% in the quarter and 85% in the year. And second, EBITDA expanded more than 36% in the quarter, posting a very healthy 22.9% of margin. But most relevant is the spread between revenues and cost per kilometer, which is higher than in the past periods. And it's further proof of becoming more efficient on a per unit basis. Shifting gears, In the contract logistic division, our 3PL warehouse expanded more than 155,000 square meters in this quarter, which represents a 22.8% growth in light with our plans, and mainly driven by the operation of the pharma division, which, by the way, posted a healthy revenue growth in the year. Traxporta continues growing as per our plans, reaching the $100 million revenue mark. a very significant milestone indeed, and the future expectations look equally positive. As you can see, it was a very busy year with many challenges, but with strong growth and a compelling story. Thank you for your attention. With this, I end my remarks. Please, Wolf, go ahead.

Thanks, Rodol. Hello, everyone. There are many financial highlights we're mentioning today. First, Operating income grew significantly, posting a 58.9% expansion compared with the same period of 2022. This was mainly driven by two things. A strong advance in consolidated revenues, together with an efficiency in cost that was pushed by an effective fuel price pass-through in our traditional business lines, among other futures. Second, the general expense line shows a much normalized level compared to the fourth quarter of 2022. Please bear in mind that the last year, in an effort to offset the effect of higher fuel costs, the company decided to reduce some operating expenses and other provisions. Thus, both quarters are not fully comparable in those terms. However, this quarter, the expense level is consistent with other 2023 periods. Third, in terms of net cash flow from operating activities, there is a 21.4% expansion, mainly driven by a growth in operating income. and efficiencies in the working capital cycle during the quarter. Please remember that 2023 was a high-growth year for Tracción, and such activities require working capital needs. In that line, we advise that Tracción was able to deploy approximately half of the follow-on proceeds within the last months of 2023. You will be able to see the impact of those investments in the first quarters of 2024. At the end of 2023, net debt showed a marginal increase However, the interest expense was a 64 million pesos increase driven by a higher interest rate environment. Moving on, our CAPEX guidance for 2024 is roughly 4.2 billion pesos. This figure is in line with our growth plans, which have been comprehensively communicated to the market since our recent equity follow-on. The bulk of such CAPEX will be used to fund organic growth of the People Mobility Division, which continues to present us with strong expansion opportunities mainly related to the nearshoring trend and to advance with our fleet renovation program of the company. Moreover, to reach such levels of capex and growth, we plan to keep the balance on a healthy levels of leverage below 2.5 times net debt to EBITDA, which as you know, is our self-imposed limit. Part of our business model is to keep financial discipline with our prudent use of debt. It is important to remember that there is a lag between the CAPEX exercise and when the company actually captures the benefit of such investments in terms of revenue and evident contribution. With this, I end my remarks. Please, Toño, go ahead.

Thanks, Wolf. Hi, everyone. I will provide some very interesting ESG milestones we achieved during the year. As you know, our commitment in such matters is to be the leader in the sector as we are in our business across the board. We have pioneered and spearheaded many efforts on sustainability in the transportation and logistics industry in Mexico. And management's plan is to continue to improve and develop other relevant metrics, indicators, and ratings. For example, in February of 2023, Tracción was awarded the Best Corporate Sustainability Strategy for Mexico by the annual Global Banking and Finance Awards. Indeed, a very significant milestone as we continue to climb the ladder toward the best positions both in Mexico and globally. In terms of the carbon disclosure project, more precisely in climate change matters, that action increased its rating from C to B, which is four notches above the media of the transportation companies globally, with the special highlight that management is taking coordinated action on climate issues, which is yet another very significant upgrade. Moving on to the Standard & Poor's Corporate Sustainability Assessment, the CSA, Tracción is positioned within the 11th percentile of top rated companies worldwide, which is 26 points above the average. Most relevant is that all of our cargo subsidiaries were granted either best or excellent environmental performance recognition by the Environment and Natural Resources Ministry of Mexico by reducing the equivalent of 23% of total emissions in the year. We continue to run trials with electric vehicles. and have added some units to our last mile fleet, while we keep mapping availability and technical feasibility for alternative fuels, especially biomethane and hydrogen. In terms of gender equality, during the third quarter of 2023, Tracción started a program to increase the number of women in operated positions, while addressing current challenges in each and every stage of the process to ensure appropriate talent attraction, retention, and development. As you can see, it has been a very busy quarter in every front with very relevant milestones at every business division and at the corporate level. Thanks for your attention. With this, I wrap up management remarks and we'll open the floor to Q&A.

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. Anyone using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please hold a moment whilst we poll for questions. Thank you. Your first question is coming from Julia Orsi of JP Morgan. Julia, your line is live.

Hey everyone, thank you for your time. So we have two questions on our side. The first one is how should we think of this 4.2 billion capex deployment throughout the year and how fast should it actually translate into growth going forward? And our second question is mostly related to the inorganic growth. So can you provide more details on the inorganic growth pipeline? So on the last call, you mentioned that you were focusing on custom agency brokers, for example, and a deal size between $50 and $70 million. So just wondering if it's still the case or if something changed.

Thank you.

Julia, can you repeat the first question, please?

Yeah, of course. So it's a follow-up on the CAPEX guidance. How should we think of this CAPEX deployment throughout the year, and how fast should it translate into growth going forward?

Hi, Julia. Thank you. This is Tonio. Good morning.

Thanks for your questions. You should think about the CAPEX, the CAPEX deployment throughout the year as we did in 2023. We are seeing something very similar to that in that matter. And the benefits, you start to see the benefits of the CAPEX between 1.5 and two quarters after the CAPEX is conducted. That's the regular lag between the CAPEX and when that CAPEX starts kicking in the revenues of the company. And the second question in terms of inorganic growth, we have been communicating to the market for some time now that our interest right now is to see only asset light driven companies that could add to the supply chain of the nearshoring into the United States or companies that contribute with better technologies that can boost our platforms in some way. We are not interested in acquiring asset-based companies in Mexico at this time because we think that we have the scale and the service offering that we need.

Thank you.

Thank you very much. Your next question is coming from Luis Yanz of Santander. Luis, your line is live.

Great. Hi guys. Thanks for taking my questions and congrats on the results. A couple of questions on my side. I mean, your guidance points to another strong year in terms of growth and margin. So can you walk us through the main assumptions in terms of revenue growth and margins, you know, for each divisions? And I guess, you know, given the 4.2 billion in CapEx, how does that translate in terms of units? for both the personnel but also warehousing area. If you could give us some color on that, that would be helpful. Thanks.

Hi, Luis. This is Antonio. Thanks for your question again. Let me walk you through our rationale behind the CAPEX and how we plan each business division. In logistics and technology, we are planning a growth, a top-line growth of approximately 25%. with a margin of 8%, very similar to what you saw in 2023. That's going to be driven basically by TraxPorta and the contract logistics segment. In mobility of people, we plan a growth at least of 20%, very similar to what you saw in 2023, with a margin of at least or above 25%. Remember that this is a high margin division. And then mobility of cargo, we are planning to grow in the low teams. No high single digits as last year, but low teams this year with margins approximately 22%. Remember that in this segment, we are becoming much more profitable on a per unit basis. It's driven by more profitable circuits. We are deploying more of our fleet consistently into the cross-border service, which is typically bears much better economics. And can you repeat the second part of the question, Luis?

Yeah, I mean, it was just on the CapEx side. If you're able to deploy the $4.2 billion, as your guidance suggests, how does that translate in terms of growth in units? Is it going to be another year where on the personal side you could add another 1,000 units, or how should we think about that?

Hi, Luis. How are you? This is Wolf. In terms of units for this 2024, we're expecting to acquire around 1,200 units for the mobility of people division and also a small portion also for the cargo division, more in the specialized services. So this will be mainly the capex for this 2024. besides the renewal capex in the cargo fleet.

Great. Thanks, Wolf, Antonio. And then on the margin side, you've been able to sustain consolidated margins above 18% on a consolidated basis, despite the fact that you're probably incurring on very high pre-operating expenses as you're growing the business very fast. So my question is, is this 18% to perhaps 19% kind of a normalized margin level of margins that we should think of while while you continue to grow at fast rates or or do you still see opportunities uh to spend margins further either by i don't know moving more cargo to cross border and specialized cargo or at some point spending margins in in the logistics sector hi this is toño again thanks uh yeah as you said the company is growing very very strong

But we are bearing healthy margins, still between 18% and 19%. But yeah, you're right. Once such growth normalizes, margins could potentially expand. And not because we move from cargo to logistics or back and forth. It would be when economies of scale arise. Those should be seen and we can expand our margins. But since we are in a very fast-growing mode, accelerated growth, margins should remain between 18% and 19% for the short to medium term.

Great. Thanks, Tonio. My last question on M&A, and just a follow-up to the previous question. I mean, you gave some color on the type of assets that you might be looking for. Just to get a sense on the timing and the magnitude, of the announcements. How much should we think about in terms of, you know, potential deployment of cash towards M&A this year?

Hi, Luis. This is Javi.

So we are still working on the process. And then, as we said, so the size of the transactions or the transaction could be between $20 to $70 million. I know it's a big range, but we are looking at different opportunities. We expect this to happen in the second half of the year. And part of this price will be paid also with stocks. So at the end, we believe that we can achieve the organic growth that we guide to the market and the M&A and finish the year below 2.5 times net debt to FTA.

Great. Thanks, Avi and Antonio Wolf. Congrats again on the results. Thank you.

Thank you very much. Your next question is coming from Jay Singh of Citi. Jay, your line is live.

Hey, just Jay calling in from Stephen Trent's team. I just have two questions on my end. The first one is truck drivers have recently complained about lack of security on Mexican highways. I just want to get some color on how this has affected Traccion. Have there been any disruptions from delays? And the second question is, how are you guys sourcing your truck fleet? Are you like sort of buying all of them or leasing it? And, you know, what's the process for your maintenance?

Hi, Jay.

Let me start by answering the second one. We don't lease the trucks. We own them. We source them basically from three OEMs, which is Kenworth, International, and Freightliner. And we run our own maintenance programs that are certified by the OEM.

And talking about safety, so Taccion has many processes and technology in place, which allow us to have or to offer a very secure service to our clients. So at the end, the way I see it is most of our expenses in security is what we pay to the insurance company. which is maybe around 1% of our revenues. And in that 1%, it covers everything related to safety and security.

Awesome. Great color. Thanks, guys.

Thank you very much. Your next question is coming from Daniel Rojas of Bank of America. Daniel, your line is live.

Good morning, gentlemen. Thank you for taking my question. We can drill down a bit on the cost side. If we see fuels, they went down 20%, but at the same time, labor was up 50% in the quarter. Could you talk a little bit more on what you're seeing on these two lines for 2024, and how do you think about fuel? Does it make sense at some point to hedge it if prices are right?

Hi, Daniel. Thanks for your question. This is Tonio. The hedge that we have is precisely the pass-through clause and the fuel surcharge that we do to our clients. That's kind of our hedge. We don't do hedges as airlines do. That's one answer. The second one is yes. The reduction in fuel costs that you see is because of the successful pass-through that we did last year to offset the increase. And then in labor, mainly the labor cost that you see here is driven by pre-operating costs and expenses. We grew more than hundred, more than 155,000 square meters in 3PL. That means that you need at least a thousand people to operate such a large amount of square footage. You have to interview five times that. So you have a cost for hiring people also in the In the personal mobility segment, we commissioned basically 1,000, approximately 1,000 buses. You need at least 1,000 operators. All the labor infrastructure you need in order to put together such large operations and cope with the growth that the company is having has to do with a large labor overhead. However, next quarter, on the first quarter of next year, you should see a more normalized figure in terms of percentage, as a percentage of revenue. The absolute figure should remain the same, but it's going to get normalized because the comparison between 2024 and 2023 is going to kick in. I don't know if I answered your question correctly, Daniel.

Yes, you did, and if I can do another one. The figure you mentioned, the 1,200 additional buses for 2024. I want to get a sense of the demand and supply of buses to the market for buses. If you could Google more, is it a question of capital or is it a question of the industry not having more buses that can be sold into the market? I just want to get a sense of that.

Hi, Daniel. This is Javi.

So, I mean, we can grow some more. It's a matter of different things. So first, to get more contracts, then to buy the bosses. We are buying a big portion of the capacity of the OEMs in Mexico. But at the end, we believe we have space to grow out some more.

So it's a question of if you can get the buses at the right time, and if you see demand, maybe we can see additional growth. In the second half, is that your statement?

Yeah. Yeah, I mean, to get the contract, to get the buses, and I believe we have some space in the balance to grow a little bit more.

Have you thought about procuring these buses in the United States, or are you just procuring them in Mexico?

Could you repeat the question, please?

The buses you are buying, my guess is that you are buying from local production facilities, Mexican buses. Do you buy buses also from the United States, or do you just keep local production?

There are only buses from Mexico, new buses, and this is because of the regulation of the country.

Okay, so you cannot buy buses in the United States.

No, I mean, it's not easy to import buses to Mexico and even more difficult to import new buses.

Okay. Thank you. Thank you for taking the questions.

By regulation, yeah.

Thank you very much. Your next question is coming from Martin Lara of Miranda Global. Martin, your line is live.

Good morning and congratulations for these quality results. I have two questions. The first one is how do you see the growth in tax for this year? And the second one is could you please provide us a capex breakdown by business unit for 2024?

Hi, Martin. How are you?

As you can see, in Traxport also, we are expecting a similar growth than the previous years. As you know, we are almost doubling year by year our digital app business. So we're expecting kind of the same for this 2024. And in terms of the breakdown of the capex and units, as I just mentioned, it will be mainly for the growing the mobility of people division, and we are expecting also to grow in a very small portion the cargo side. Now that we are more stabilized in this particular division, it will be something around 100 trucks for this year.

But as a percentage, it will go maybe to the mobility of personal business, right?

Correct.

And we're talking about growth and the renewal capex. It will be mainly for growth.

It will be typically something around 80% to 85% for growth.

Okay, perfect. And the final question is, what is the tax rate that we should expect in these years?

In a regular basis, it's around 30%.

For this 2023, it was a little bit less than that. but in a regular basis, we're expecting something around 30%.

Okay, thank you very much.

Thank you very much. I would just like to remind anyone who's got any remaining questions, please press star 1 on your phone keypad now. Okay, I'm not seeing any further questions come into queue, so I can now hand back over to Abby for closing remarks.

Thank you. We kicked off 2024 at full speed with strong demand and big plans. As you saw in our guidance, you can expect something similar to what we delivered in 2023 in all fronts. Tracción stands ready for growth and expansion and to tackle opportunities as the leading nearshoring facilitator in Mexico. Technology, balance, commercial force, and infrastructure are right in place to capture growth and continue to create value. Have an excellent week.

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