Marcopolo S.A. (POMO4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. to discuss the earnings of the first quarter 2020. This conference call is also being simultaneously webcast on Marcopolo's IR website, ri.marcopolo.com.br, in Portuguese and in English. And there, you will also have the presentation available. [Operator Instructions] As a reminder, this conference call is being recorded. Before moving on, I would like to let you know that any statements made during this conference call relative to Marcopolo's business outlook, projections, operating and financial goals as well as about its potential growth are assumptions based on the management's expectations with regard to the future of the company. Forward-looking statements highly depend on the internal market conditions, the country's general economic performance and on international markets and therefore, are subject to changes. Today with us in Caxias do Sul are James Bellini, CEO; José Antonio Valiati, CFO and Investor Relations Officer; and Eduardo Willrich, Planning and IR manager. First, Mr. Valiati will talk about Marcopolo's results for the first quarter '20. Then Mr. Bellini will talk about the company's performance expectations for 2020. Now we will turn the call to Mr. Valiati. Please Mr. Valiati, you have the floor.

Good morning, everyone. We would like to thank you all for joining us in this conference call to discuss the earnings of the first quarter 2020 for Marcopolo S.A. We are going to start on Slide #4. Starting with the history of Brazilian bus production. In the first quarter, we produced in Brazil 4,549 bus chassis, a drop of 13.7% compared to the first quarter '19. In the period, road model accounted for 25% of the production. Urban and micro 60% and 15% of the market, respectively. The highlight is the growth of the intercity buses, an increase of 50% quarter-on-quarter. Brazilian bus production was affected by the COVID-19 pandemic, especially as of the second half of March. Let's go on to the next slide. In Marcopolo, production directed to the domestic market grew by 21.3% quarter-on-quarter. Highlight again is the intercity buses and urban buses. The micro buses dropped by 24.5% in the period and Volares an increase of 5%. Urban production was positively influenced by the manufacturing of those that are directed to exports. As for foreign markets production in our international production, we had a retraction of 23.7% with drops above 56% in intercity, but also drops in urban, micros and Volares. All productions outside Brazil had a reduction in volume. Marcopolo China had a drop of more than 80%. Let's move on to the next slide. In the first quarter 2020, consolidated net revenues of Marcopolo grew 14.2%. Growth of sales in the segment of intercity and urban buses. In exports, we had a contraction of revenues of 19.4%. The external units [Technical Difficulty]

Marcopolo's conference call is back now.

So we are going to resume at Slide #6, where we say that in the first quarter of 2020, consolidated net revenue of Marcopolo grew by 14% with growth of sales in the intercity and urban buses. Export had a contraction of revenues of 19.5%. External units, there was an increase of 6% of revenues connected to the Marcopolo Mexico operation that had an increase of 12% in the first quarter '20. The Brazilian market accounted for 51% of revenues, whereas exports and external units accounted for 23% and 26%, respectively. Now we are going to move on to Slide #7. This is the graphic distribution of our revenue by segment. Intercity continued with the greater share, 38% of the company's revenue. Then we have urban with almost 33%, followed by the Volare segment with 15%. As a reminder, Volare revenue encompasses the full bus with the sale of body and chassis as a single product. Volare and Marcopolo network are separate and independent. Micro buses accounted for 4.6% of revenues in the first quarter, and other businesses 9.5% of the total revenue. We are going to go on to the next slide. In the first quarter '20, the gross profit of the company grew by 8.7% with gross margin of 16.3%. The improve in our gross margin reflects the company's efforts to gradually recover its results in Brazil, improving its sales mix in the domestic market, a higher volume of intercity buses as well as the positive [ reflects ] of the devaluation of the Brazilian real compared to the U.S. dollar in exports. EBITDA reached BRL 101 million with margin of 11%. The result reflects, again, better gross margin added to the [ New Flyer ] performance that added BRL 31 million to the cash equivalent in the period. It's important to point out that in the first quarter '19 we had a negative effect of the close of operations of Metalpar that affected the equivalent results at BRL 28 million at that year. The net profit reached almost BRL 11 million, with net margin of 1.2%. Again, impacted by the negative financial results in BRL 103 million. The financial results was majorly affected by the devaluation of the Brazilian real compared to U.S. dollar in [indiscernible] order portfolio. Remember that as the products are delivered and invoiced, we capture the benefits of the real devaluation in our operating margins. Now I'm going to turn the call to James, that is going to talk about performance and the prospects for the coming months.

Good morning, everyone. Welcome to our conference call. I'm going to start talking about the performance and prospects for the domestic market. In the first quarter 2020, we had a demand of intercity buses that recovered over a low base of the first quarter of '19. That quarter had been affected by the new accessibility norms with the installation of elevators in all the models. In the end of the quarter, especially as of the second half of March, new orders had a sharp drop in the segment with a reduction of trade, tourism and regular line activities. There was a slight recovery of orders in the end of April, but it is insufficient to keep the intercity production [indiscernible] production as before the crisis. To continue with 50% utilization of labor, we are also manufacturing heavy urbans in the plant. The urban segment is also being affected with restrictions of movements in the main cities in the country. The sector was improving, but now it sees the drop in passengers. The orders also went down, but we have an important portfolio of urban to the Caminho da Escola and exports. The highlight was the volume of production we reaching at São Mateus, with 218 urban buses produced to the Caminho da Escola program. As for micro and Volares, well, it cuts down like the others with drop in orders. Likewise, we saw in the intercity and urban segments, we have also a very healthy portfolio for the Caminho da Escola program. Right now, we are at 4,000 units compared to the 4,800 units that Marcopolo agreed to supply directly or indirectly. We keep market leaders with 57% in the first quarter. Again, the highlight is the urban segment where we are leaders. Let's go to the next slide. Talking about our exports and international operations. Exports continue to show difficulties in South American markets. We're still feeling the effect of political crisis and the economic crisis that started in '19. Locomotion restrictions should also affect exports to the region. The good news is the closing of important orders directed to Africa, that should help us in the remainder of the year. We expect exports to keep better volumes than the internal market base on these orders. Lower volumes have been partially offset in results by the devaluation of the Brazilian real exchange rate, that's reflecting better operating margins, as Valiati mentioned. In international operations, the main impact we're experiencing in Marcopolo China with a drop of more than 80% in volume and Marcopolo Mexico. It was negatively affected by the devaluation of the Mexican peso, which is the subsidiary's functional currency. We are going to go now to the next slide talking about the effects of the pandemic and the operation of each plant. Well, you see this table on the side of this slide, each of our plants and international operations. The current labor regime shows if the plant is in partial or nonoperation because of restrictions of demand or government restrictions. Labor force in activity shows the number of employees in each operation compared to the pre-COVID program and also a proportional reduction in the number of units. And also suspended production time, we have the time in which each operation was or will be completely stopped. We are currently permanently monitoring the scenario and suiting our plans to reality. We cannot say when we are going to resume normal production. Now our units in Brazil, employees that are working are generally with suspended work contract and will probably start taking turns coming back to work in June and just taking turns with those that are operating today normally. All employees, including management and operating staff are taking turns, when this can maybe extended up to 4 months until August. We also had collective vacations, extended vacation, flexibilization, suspension of work in our operations in different formats. The distribution of masks and sanitizers, additional things, more room between the production line, transportation of employees, conferences, manuals to prevention are all included in preventive measures against COVID-19 that were promoted by the company. Marcopolo also works to reduce its costs and preserve its cash, reducing nonmandatory expenses and making use of cost reduction instruments and stable, restricting investments, canceling new stages for the profit sharing program, renegotiating payment terms, paying double attention in accounts payable and receivable. Inventory ready finished products and raw materials are also being adapted to new market reality. Low indebtedness, a health cash position and a lean fixed cost structure of the company help us to make the necessary adjustments. Marcopolo has been working daily to overcome the current scenario using the tool that has available to keep its results at healthy levels. Now we are going to go on to the Q&A session.

[Operator Instructions] Lucas Marquiori from BTG Pactual.

I have 2 questions on my side to discuss with you. The first, we're trying to think about opportunities that might come up post COVID. I would like to understand how the company can seize the opportunity of the crisis to somehow expedite its program to re-suit its asset bases. That was happening even before the crisis. So adjusted level of capacity vis-à-vis the new level of demand, what is it going to be like? Or are you going to tweak the plan to reduce capacity? This is the first question. Second question, also thinking of a post crisis demand, how can the company use a devalued Brazilian real in the exports market? We know that many markets, Argentina, Chile, have a repressed demand. Do you think there is opportunity to explore new markets, new partners in Africa? I don't know. Talk a bit about your export vertical. Last 2 questions.

Well, thank you, Lucas, for your question. I'm going to answer the first part, which is to work with our asset base. And then James is going to talk about prospects of exports using the Brazilian real devaluation. You're right. More than ever, we are speeding up our asset base to be a bit more suitable. The Planalto unit is practically closed, deactivated, we completed the stage and now we have São Mateus unit also with loads of possibilities of the -- due to the verticalization of our production, we are strongly working to complete this process for us to optimize our asset base. So we are paying attention to that. More than that, we are doing whatever we have to do seizing the opportunity of this low activity period to complete the process.

As for exports, Lucas, what we see is that most countries, especially in South America, which is one of our main exports markets are still not talking about new purchases, with one exception in Argentina, and there we might have an opportunity. You see that our clients that are very much interested in buying new cars. Because of their exchange rate devaluation, they fear that the exchange rate devaluation of the peso vis-à-vis the real will consume [indiscernible]. So they are considering buying some of them. But that will depend on how much the government will make restrictions more flexible. And restrictions, I mean by traveling restrictions and others. We know that restrictions are very heavy. So we are waiting with some optimism, but the whole situation is not really much different than Brazil.

Gabriel Rezende from Bradesco BBI.

I would like to understand based on your release, you recognized in revenues 2,200 units against a production of 2,500 units. My first question is about the delta of 300 units. Have them already been delivered? And also, if you could break down your cancellations for the second quarter now and from now on? Second question is about the Caminho da Escola program. You talked about 4,000 units that were confirmed. But I would like to understand what you think the program is going to behave vis-à-vis the COVID-19 pandemic. Schools are closed because of restrictions of our people to move around. And even we have the elections in October, that might affect your agenda. So I would like to know how this will behave because of this COVID-19 and the election.

Gabriel, this is Eduardo speaking. Thanks for your questions. As for the first and second quarter, there was some effect of what we had as the plant stopped because of the collective vacations and we are working very much for the units to be delivered in the second half. And we're also increasing the production of Caminho da Escola, that speeded up as of March for us to have stronger deliveries in the second quarter. So our expectation is to balance this number and have a production level that is very similar to planned. As for specifically the Caminho da Escola program, we have good news for the program. We are increasing the number of the city administrations adhering to the program at a better level than we expected. We are getting to a level of 4,000 buses, which is a higher volume than what we projected for the time being. So quite the opposite it seems that instead of cancellations of units, we are going to have more people joining the program. As for cancellations per se in our portfolio, we did not have cancellations, very little for urban buses and very -- also a little was postponed once we distribute the volume with a lower production because we are using also less labor, we naturally postpone a bit the delivery, but we did not have important cancellations or postponements from clients.

[Operator Instructions] [ Andrea de Souza ], shareholder.

My question is to James Bellini. With the extinction of the Executive Committee and these actions the company is adopting to reduce cost and other expenses because of COVID-19, I would like to know if there's any forecast or any decision to revisit the compensation of managers, considering the facts that I just mentioned?

Well, this has already been done Andrea. All company managers, especially the main executives and Board members reduced their compensation by half. It's not that we are expecting to do that in the future. This has already been done.

Okay. So what we expect is in the next results released compared to '19, we should see this action reflected in balance sheet?

Yes, this is obvious. This is a joint effort. All executives and the Board of Directors and the Audit Committee made a spontaneous decision and considered to reduce their compensation. So the company at all levels is doing its best and contributing for us to have a contingent of cost for us to go through a difficult period. Not only for Marcopolo, but for the world as a whole, we are all contributing and doing our share for the company.

Marcelo Motta from JPMorgan.

I have 2 quick questions. First, if you could talk a little about cost of raw materials. You have 2 pressures. You have the exchange rate devaluation, but you also have a weaker economy? And I would like to know what this equation would be like for your cost. And as for CapEx, you mentioned a need is that you're going to restrict investments as much as possible. But what would be the minimum CapEx or maintenance CapEx of some initiative that you could not stop along the way, just for us to understand what your CapEx level would be throughout the year?

Thanks, Marcelo, for your question. As for costs, well, obviously, we are always paying attention to the [ site ] which is quite relevant. Also, clearly, with the exchange rate devaluation, there was and there is some pressure in the attempt of passing on an increase of costs. But we have been able so far to control that. And we estimate we are going to have some effect in the second half of the year. [ Indebtedly ] especially if the exchange rate is kept at this level, which is always good for Marcopolo because of our exports. But unfortunately, that also impacts us on our costs. We are monitoring that. And certainly, if there is an impact on costs, even with difficulties, we will try to pass them on to prices. As the CapEx, well, we are clearly trying to have as much contingency as possible in terms of expenses with investments. And our target is to make it closer to the amount of the depreciation, a bit more or less, but roughly, this is what we are thinking in this period of contingency.

Lucas Marquiori from BTG Pactual.

Just a quick question, just to understand your view. The coming of new orders in 2 different segments: urban, that we saw a significant reduction in the number of passengers, especially in public transportation. So was it like, you know that there is going to be lots of discussions, but also intercity buses with lower volumes? So fleet owners, are they postponing orders? What are you thinking about new orders for just 2 segments, intercity and urbans?

Well, for urban buses, Lucas, we indeed have a drop in new orders. But the positive point is that we were with a healthier portfolio in this segment. So although we do have a drop, the basis [indiscernible] case, especially in São Mateus, if you compare it better than other plants in -- of Marcopolo Brazil. So it did go down, but think of our portfolio, we do have a production that is okay until the remainder of the year. We have a more comfortable position. And now I'm going to James to talk about intercity.

Well, intercity segment is a bit more complicated. Indeed, most fleet owners stopped, most of them. There was a huge retraction in demand and the actions that we are developing here are very much to help our clients resume their lines. And we are doing that strongly betting on biosafety actions. So we are working very hard to try and bring biosafety actions onboard as we call them. So try and help them to have more passengers on the buses and pickup activities. If we are successful in that, we believe that there is going to be a natural return of passengers to the main intercity segment. And therefore, our activity will be able to pick up gradually. As for fleet, well, especially freight activity, that was a factor that felt much in the beginning of the pandemic. But as companies started to resume activities even partially, the sector also went back to us. So today, in freighted buses, we have approximately 85% of the fleet being used, which is good news to us because at least in this market, we have a certain visibility and even hope of having good news in the medium term.

Thank you, James. If you allow me, just a new follow-up. When you talk about new safety measures for buses, I suppose you are talking about intercity. In airlines, they are talking about new safety measures and how travel is going to change. Are you having this discussion in buses, I don't know, at the [ AMCP ] level. I don't know, having less passengers per bus, having each other seat empty? Are you having those discussions?

Yes, the discussion happens almost daily. And what's happening today, Lucas, is that companies -- few buses that are still driving are driving with half the capacity. So today, we have seats with 2 seats on each side. And we are having just 1 passenger every 2 seats. So what we are trying to do is to help them with these measures. We are working very strongly with biosafety and we believe our actions will yield to good results in the short term.

We are now closing our Q&A session. We are going to turn the call back to Mr. Valiati for his final considerations. Please, Mr. Valiati, you may go on.

Well, once again, we would like to thank you very much for attending the call. Remember, the IR department is at your disposal for any questions you might have. Thank you very much, and I wish you a very good day.

Marcopolo S.A. conference call is now closed. We thank you very much for attending and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]