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

Good afternoon, ladies and gentlemen. Welcome to Marcopolo S.A. [ APIMEC ] Meeting to discuss the results of the second quarter 2020 as well as the prospects for the remainder of the year. This meeting is being webcast live by YouTube and Marcopolo's IR site. Before going on, I would like to let you know that any statements made during this meeting about Marcopolo's business outlook, projections, operating and financial goals about its potential growth are assumptions based on the company's expectations with regards to the company's future. Forward-looking statements depend on the internal market conditions, the general economic performance and on international markets and therefore, are subject to changes. Today with us are José Antonio Valiati, CFO and Investor Relations Officer; and Eduardo Willrich, Planning and Investor Relations Manager. We would like to inform you that participation on Marcopolo's IR website is in listen-only mode, and that you cannot participate in the Q&A. You can send your questions on YouTube. Please Mr. Eduardo Willrich, you may go on. Okay. Yes. I'm sorry, we are not going -- we are not being able to capture the company's audio.

Good afternoon, everyone. For those of you that are following on the Internet and on the phone, I am a representative of [ APIMEC ] and it is my pleasure to hold the meeting with Marcopolo S.A. to discuss the results of the second Q '20. Today with us are Mr. José Antonio Valiati, CFO and Investor Relations Director; and Eduardo Willrich, IR and Planning Manager. We are going to start now with the company's presentation. And if you have questions, please forward them on our chat, so that we can answer them in the investor presentation. So without any further ado, we are going to start Marcopolo's presentation with Mr. Valiati.

Good afternoon, everyone. It's our pleasure to welcome all of you who are attending this video conference to discuss our earnings for the second quarter 2020. Before starting our presentation, I'd like to inform you that our CEO should be with us together. But unfortunately, since yesterday, he was not feeling well. He's okay. He's at home. But because of the medical recommendation, he is supposed to stay home. That's why myself and Eduardo are going to make the presentation. So I'm going to turn to Eduardo for the first part of the presentation about the company's results in the second quarter 2020.

Good afternoon, everyone. It's a pleasure to have you on YouTube and also connected on the phone to listen to our presentation. Well, we start the presentation with a brief profile of the company, then we go to the results of the second quarter, and then I'll turn the floor back to Valiati. Well, you know that Marcopolo is an international company, leader in bus body Brazilian market and a strong presence in all segments. The company was founded in 1949. Our first export to date back 1961. Our IPO was in 1978. And since the 2002, we are in the second level of corporate governance. We have 14 industrial plants in 10 different countries. And today, we have more than 15,000 employees. The [ commercial service expertise ] has set Marcopolo apart from the competition and makes it well -- world known recognized, is the state-of-the-art technology it used and also the expertise of building bodies on any chassis model, including electric buses. Our engineering teams are quite experienced and divided by products. And our products are customized according to customers' needs. Marcopolo, as I mentioned, is an international company. And it has a profile of a company that is located internationally. That is the -- we have a global footprint on the different continents. Our main headquarters is Ana Rech, in Caxias do Sul. We have other 3 plants, San Marino for Neobus, Marcopolo Rio in Rio de Janeiro and São Mateus in Espírito Santo. We also have a plant in Argentina, Metalsur, where we have 70% share. We have a joint venture that is called Superpolo in Colombia with a 50% share. We have Polomex, which is Marcopolo Mexico, with a 74% share. Then MAC -- MASA, which is our subsidiary, 100% owned in South Africa. MAC in China. And Volgren in Australia. We are also the highest -- the largest shareholder of a company called New Flyer with [ 10.57 ] share and New Flyer is a market leader in both the U.S. and Canada. In the first quarter of 2020, Brazil produced 7,844 bodies. For the internal market, the domestic market, [6,184 and dropped 1,660] The pandemic led to an expressive drop, especially the second quarter, and year-to-date, a drop of minus 29.2%. When we translate the drop to Marcopolo we see a drop in production of 45%, this is more than 45%. If Brazil exports with minus 44.5% and other units 47.1% altogether. As we have mentioned the previous meeting, the highlight was Australia because it was less affected, so to speak through the pandemic, so we have a lower drop of about 14%. The average units show a drop that are similar to the volumes that we see in Brazil. When we go into the different segments, we see that the road bus -- the urban segment, I'm sorry. I'm sorry, Intercity buses with the highest drop, 68%; Urbans, 35.8%; Micro buses, 45.6%; and Volares, 35.2%. That's in the domestic market. When we talk about the export markets or those that are produced by our external units, we had a drop of 68% in intercity, 4.9% in Urban, versus 90% in Micro buses and 80% in Volares. Now looking at our sales results. Just a second because we do have a bit of delay in our transmission. But the Brazilian market had a drop in sales of 36.6%, dropped to 1,799 units with net revenues up BRL 356 million. In exports, 524 units to a drop of 18% and a growth of revenues of 3.9%, which translates a bit the BRL devaluation, our currency devaluation that helps the company in the second quarter. In our controlled external units, 304 units sold with a 20% increase. But you see that altogether, a minus 36%. When we look at our revenue per segment, we have an idea of the relevance of each segment in our quarter. So you see each one of our products and their share in the total. So you see Intercity with 23.8% share in revenues; Urban buses, 46.3%; Micro buses, 5.4%; Volares, 13.6%; Chassi, 6.3%; and 4.6% are Others. The most representative of which in Others is the Moneo Bank and Parts. So in terms of results for the second quarter, we have results in the second Q of BRL 798 million. And then you see domestic revenues, exports and abroad. Talking a bit about gross income. We closed the second quarter with BRL 130.5 million of gross income; gross margin of 16.3%, which is quite equivalent to the margins that we had in the first quarter of 2020; EBITDA of BRL 40.9 million, a drop of 61.3% compared to the second quarter '19; and an EBITDA margin of 5.1%. Again, the results were quite impacted not only on revenues, but in the total of the year because of the COVID effect. Net profit was BRL 1.3 million and margin of 0.2% in the period. Now I'm going to turn to Valiati, and he's is going to talk a bit about our performance and prospects for the coming quarter.

Thank you, Eduardo. Well, based on the numbers that Eduardo presented, we can see the impact that the pandemic has caused on our clients and consequently, on our core activity and performance. Just to break down effects by segment. In the Intercity bus segment, basically, if we isolate the block of products, we see that those buses that are directed to the tourist sector were the ones that were most affected by the pandemic. Since March, everything that is connected to tourism has come to a halt, what we have realized is that how purchases are showing a reaction. But in terms of tourist activity, that has been quite impacted and our expectation that it will take some time for it to really pick up. As for Urban, regular interstate line, we had a drop of about 35% to 40% -- I'm sorry, we're operating at 35% to 40%. That is a drop of 60% to 65% of activity. Some states is still are in lockdown, for example, the state of Santa Catarina. As states starts to open up, then companies are going to go back to operation. In Intercity buses, some products, especially those that are used to charter, right, had a very low activity. And the level of demand for products related to this activity is similar to the pre-COVID. Remember that we have many more demand in terms of distancing from passenger to passenger. So there is more demand for buses, that is more buses to transport the same amount of people. So we do see a consistent demand with regard to this segment. Likewise, in Micro and Volares buses, also we see a demand that is recovering. I would say that we are at about 60% to 70% of what would be considered normal market conditions, but we do see some growth month after month for the service. And we believe that the market is going to get back to normal, perhaps, better than other segments. We are operating also at 60%, 70% in terms of our seat capacity. But again, the volume of passengers is below 50%. As it is start again to open lockdowns and stop restrictions, probably the Urban segment is also going to go back to normal. One segment that is very important for our activity is the road to school program. As we have mentioned before, we still have the bid for the delivery of 4,000 units approximately in the segment. And fortunately, we continue to having orders placed right now. We already delivered 1,347 units of the total of 4,800 units that we bid. And we expect to deliver in the year, something closer to the 4,000 units. We had 620 in the first quarter, 724 in the second quarter, and we still have 2,650 units that we expect to deliver in the third and fourth quarters of the year. Another aspect that is positive are exports are differently -- or perhaps less impacted than the domestic market, or just to the foreign markets have shown a better behavior than that of the domestic market. What we expect is that we are able to deliver approximately 70% of our normal volumes that we operated pre-COVID. But even at the lower level, considering the exchange rate in terms of the revenues in Brazilian real, the amount should be very close to a period of normal operations. As for the performance of our controlled companies, the positive highlight, as Eduardo mentioned, is our Australian operation. That was only interrupted for 10 days in terms of interrupted production. And basically, if you consider that they did have a holiday there, the interruption was just 3 to 4 days. On the other hand, Marcopolo Mexico and South Africa were affected by the suspension of activities throughout the month of April and a reduction in production similar to what we had in Brazil. So as of May, they are operating at about 50% of their capacity. And our Argentinian company basically, it had its operations closed for the entire quarter. But it started to resume activities as of July, and we expect to start recovering results in the third quarter. As for our affiliates, our Superpolo operation in Colombia had a very good result last year. It continues to perform well, slightly below the previous year. But because of the demand that we have in Bogotá, it is going to continue to deliver consistent results for the whole of 2020. We did have an impact in our results, especially from the New Flyer operations that did have a negative results, about BRL 39 million related to nonrecurring events. As for the post-COVID containment measures, since March, Marcopolo has spared no efforts to have contingencies in costs and expenses using all its tools to suspend contracts, decrease work hours, so best we can have some balance in the difficult periods we are going through, especially as of mid-March until today. Also as measures, the company has been keeping just the investments that were already contracted before the pandemic. Others were delayed or canceled with the exception of initiatives that are related to Marcopolo BioSafe. and other products that the company has already agreed to make but quite judiciously. Another thing that the company has been doing is to reduce its working capital, establishing cash generation through the release of working capital and challenging it's general goals. We know that the road to school program is very beneficial for the period, especially when we're having low demand from the backlog market, but it also consumes a considerable amount and total some exports to -- some exposure to exports and also has a longer financial cycle with BNDES and others in terms of our accounts receivables. So the company is really focusing on this aspect to try again to reduce our working capital. And we hope both in the third quarter, second half of the month to recover a substantial amount by reducing our working capital. Also, we are keeping the payout of dividend suspended. We had approved in February to go back to the dividend payout. We paid the first installment. The second and third were canceled. And we're going to wait for the pandemic to develop better to try to establish what is going to be done with this regard until we have better visibility of results. In this period of difficulty, Marcopolo has placed much attention to seek good conditions and mechanisms to try and help our clients resume their operations with safety. And in this aspect, we created Marcopolo BioSafe. This is a platform with several initiatives that were implemented to give people more -- a safe return to transportation activity. So on the screen, you can see some of these initiatives. Chairs sat with one by one and not to double seat, so you have 2 corridors with a larger distance between chair, also protection for drivers and collectors. We have the fogging place technology just to sanitize environment, ultraviolet light also to sanitize the toilet and air through the air condition unit, individual curtains between passengers, gel, sanitizers, and most activation of the reading lights. Finally, we would like to tell you that what we saw effectively is that we went through a very hard period. We all know that this segment was quite impacted at public transportation. Collective transportation in general, quite affected. But we can say that the way we see it, we've been through the worst already. And orders are coming back, not in the amount that we would desire, but they are improving. And we hope, as soon as things get back to normal, we can go back to giving you better and more satisfactory results. And now we are going to open for your questions.

Thank you, Valiati. We are casting this new platform and the idea now is to have a Q&A session on the YouTube chat box. I'm going to select some questions. I'm going to read them out loud. And those that are following us on the phone and are listening to the conference call in English can also listen to the questions. So I'm going to pick some questions. And then myself and Valiati are going to answer them. The first question that comes is, if so far, we have any review in terms of revenues. So basically, what is our revenue forecast for the remainder of the year? Well, so we had some initiatives in progress. So since June, we are already receiving orders. And there are lots of things ongoing. All the initiatives that Valiati mentioned are all that going on. So we are already working with the parts. We are already using the sanitization, not only in buses, but also in establishments and adapting our used buses to new conditions that are demanded. So these are initiatives that are already generating revenues. Of course, we are just beginning the process. And we believe that this will depend a lot on how long the pandemic will last. And some initiatives, we believe, that will stay and they are going to be our new normal. But the answer is that, we already have lots of initiatives in place. Someone asking, if the presentation is going to be available? And answer is yes, both on YouTube and on the company's website. Guilherme is asking a question about charter buses in the intercity buses segment. This is a very complicated question because when we think of shares, it does fluctuate a lot depending on the economic cycle that you're talking about. This segment already accounted for 50% of the share of intercity buses, but not anymore because, again, tourism is a segment that is practically at a hold. So it wasn't as represented as in the past. But this year, as Valiati mentioned, it did gain some relevance because of complete slowdown in other activities. There's this 1 question Andre is asking. What are you going to do to be able to suit or reduce your structure or downsize your structure as of now? Well, Andre thanks for your question. First, of course, the company is permanently adapting to market conditions. In the presentation, you saw that we are using all the tools that we have available to suspend and reduce contract. But effectively, as we also mentioned, we are paying close attention to any risks, and we are going to make any changes that might be necessary in due time. I have a question here from Fernando about the month of July in urban buses. We still cannot say. We cannot break down the information yet. But as it was mentioned before, we've seen some improvement as of mid-July, yes. As I mentioned in the end of my presentation, we believe that the worst -- we've been through the worst. Of course, we are still going to have some pressures. But we already see that the fourth quarter is showing -- is going to show some improvement, especially in terms of orders, export orders, especially to Africa. Another question here is about bus production in Brazil, historical levels, and when we expect it to go back to the levels of 2010, 2011. Well, the chart that Eduardo shows in the beginning of the presentation is quite illustrative because it does show the level of protection that we have in the best periods of the company: 2010, '11, '12. Then we had a steep drop in '16, '17. And what we see today is that 2020 should also see a period with low demand. In fact, it's already being a period of low demand. We supposed that the Brazilian market is not going back to the levels of 2010 in the short term. But perhaps, 20 -- between 21,000 to 23,000 units is going to be the new normal in Brazil. Gabriel is asking, if you expect to have lower sales in 2021? Well, from what we see is that there is going to be a new bid for the current road-to-school program. And it seems that the bid is going to be basically the same volume that was bid in the end of 2019 and whose deliveries are taking place in 2020. Another question from Gabriel about, the margins that you have is similar to a normal bus? Yes, it is. There's definitely margin is similar just a regular Marcopolo bus. A question from [ Rafael ]. If Marcopolo can benefit from increased exports in case of devaluation of our currencies? Well, this is something that is helping our results this year, currency devaluation. The more devalue to the currency is the best to exporters. And Marcopolo, as a large exporter, certainly benefits from a devalued currency. Lucas is asking, about our -- the results of New Flyer? Well, we are considering those results as nonrecurrent, 100%. All the impact was because of 2 pending issues in the intercity bus operation, and they had to be readjusted to present value. So what we see in terms of New Flyer on Marcopolo's results are nonrecurrent. There is a question from Luiz. If we could talk a bit about the loss of market share in intercity buses. I think intercity buses, I don't know if you had a chance to take a look at our release, but we did have a drop in market share. And this drop can be explained because Marcopolo had a collective vacation in April. And when we came back from the collective vacations, we had approximately 50% of our labor working in our plant. And this deduction of production was not followed by all the competition. One competitor continued to work as if there were no drop in demand. And because they decided to continue producing normally, Marcopolo, because we had a reduction of 50% in production, we did see a drop in market share. But we expect to go back to historical levels or even above as these choices are going to show in the future. If you haven't reduced production today, you have to reduce it tomorrow because we know that there is a market impact in terms of reduction in the number of orders. If you don't know, Marcopolo, remember, that buses are made on demand. So there is about 60 days between the placing of orders and the delivery of products. And if you are over producing now, it will take time for you to sell.

And just to add to what you said, Eduardo, we believe that this was very -- it was the right decision. We were able to leverage the orders that were placed before the pandemic and then we've reduced work hours. And with that, we have a balance of our plant and labor and while we wait for the results of the pandemic to start to win. We know that this competitor has not stopped. But if you think of the -- for other order, basically, what they did is that, they delivered everything that they had in their backlog. And we, in a way, take this out because of the restrictions that we had from public authorities. And because of the market place in the city of Caxias do Sul, our plant is operating at 50% of this.

[ Geron ] was asking about the road-to-school program. If we expect a bid as big as 2019 for 2020? We obviously answered that. We need to also think about the resumption of our activity for the second half. And basically, remember that, so we are working at basically 50% of our labor and the reduction of workforce. And this is going to be kept until -- this is going to be kept until the end of the year. Well, we are working with those tools as needed. Today, in Caxias do Sul, we have this flexibility of working with a bid more than 50%. But we are managing that according to demand and according to our best estimates. So our backlog shows that we are probably going to work with a volume above the 50% in the coming months, but not at capacity. And in this period, we are going to be gauging our backlog and doing whatever we can to balance our numbers and improving company performance. We have a question here about default, customer default rates, if we see customers in delinquency. And also, if we are getting paid for the road-to-school programs. I'm going to start with the last question. The road-to-school program has the cycle of payment. In the beginning, it was a bit different than it is today. We should have received in March, in April, in amidst the pandemic, the things were a bit more complicated. But today, we have already received substantial amounts regarding the products delivered. And we expect the months of August to September to be months where we are going to receive substantial sums from the Caminho da Escola, the road-to-school program going slightly back to normal. With regard to delinquency. We have some operations -- in fact, what we are having are payments that are having a slightly longer cycle basically, it's because they are connected to projects and so naturally it will take a bit more time. And despite the situation that we had, the pandemic and difficulty that our customers are going through, we are having very good tools. We have possibilities to extend contract maturities basically that are made -- being made available by BNDES. And with that, we had many customers that made use of this possibility to try to keep their cash flows, and this expansion took place in March and April for 6 months. Not all clients asked for the extension. But those who did, most of them were payment in time. And we are monitoring that from close, but we believe that we are going -- we are not going to have major problems in terms of delinquency. We might have something, but -- and of course, we are paying attention to that, but we are being quite positive because it seems it's not going to be a problem. And in fact, because we learned from previous crisis, we limit our exposure to this to a certain levels. And therefore, we are somehow protected against problems with delinquency because we are quite well distributed in terms of risk exposure. And basically, for the third and fourth quarters, we don't expect to be too open to delinquencies. The first question we have about Chassi. Eduardo, if we work with them all? And we do. Yes, all bus chain. And very clear that the numbers are public, and Marcopolo releases the numbers every quarter. As per BioSafe demand, post-pandemic, if we consider this project as one-off initiative or it will be -- mix -- this is going to stay? Well, we think that habits are going to change in terms of users of public transportation. People are going to be more concerned with sanitization and others. There are things that's connected to the BioSafe initiative that translates into comfort, curtains in between seats, automatic lights. So these are things that are not necessarily connected to sanitization. So it seems that these initiatives are here to stay in the new normal, regardless of the pandemic. We have a question here about increased costs. Because of the currency devaluation, if we are feeling increases of costs? Well, our procurement area is managing that. There are some increases from suppliers. We might have some impact. So far, we have been able to negotiate them quite well. But remember that any impacts are going to be passed on to process, but we don't expect them to be relevant. As for the North American market, there's a question of how you see the dynamics in the U.S.? Quite slightly different than the Brazilian market, because most of their sales are government sales. So it's a different dynamic, and therefore, it is a more resilient market. They have -- it would be the equivalence to the road-to-school program, which somehow supports our revenues not only for this year but also for next year. And also, you have a much higher predictability, even more than 1, 1.5 years to the future. So somehow you don't feel as much the drop in volume. Finally, you have Andre's question, talking about the positive effect of the Marcopolo [indiscernible] and also the sale that is still in process. And we are still to release amounts with regard to that. These were the questions that we had. If I forgot something, please contact us and we are open to any of your questions. And now we are closing our meeting, and we are going to get the floor back to APIMEC.

Well Valiati, Eduardo, we would like to thank you very much for the partnership. It was a pleasure to hear you today. And we thank those that followed the meetings both on YouTube and on the phone. And we are now closing the meeting. On behalf of APIMEC, we thank you all for attending, and we congratulate Marcopolo on your results. Valiati, if you have any final remarks to make?

Well, thank you very much. I also would like to thank you for attending our video conference and to tell you that Marcopolo is always with its doors open and ready to have any of your questions or provide any clarifications that might be necessary. The periods that we are going through is quite challenging. But as I mentioned, we believe that we've been through the worst. Of course, we have to be cautious. We still have to watch out. The pandemic is not over yet. The public transportation is a segment that was highly affected. But with hard work, dedication, curiousness and engagement, both the company and its employees, together with the trust of investors is -- we are going to go through that and better days will come. Thank you very much. I wish you all the best, and thank you, we'll see for the opportunity and for the attention that APIMEC always gives us. Thank you very much.

Thank you very much. And we wish all the best Valiati. Good afternoon.

APIMEC's meeting on Marcopolo S.A. results is now closed. We thank you very much for your attendance and wish you a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]