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

[Interpreted] Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. to discuss the earnings of the third quarter 2020. This conference call is also being simultaneously webcast on the company's IR website address, ri.marcopolo.com.br, simultaneously in Portuguese and in English. And there, you also have the presentation available. [Operator Instructions] As a reminder, this conference call is being recorded. Before moving on, we would like to let you know that any statements made during this conference call about 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 company's future. Forward-looking statements highly depend on the conditions of the domestic market, the country's general economic performance and on international markets. And therefore, are subject to changes. Today with us in Caxias do Sul -- Rio Grande do Sul are James Bellini, CEO; Jose 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 third quarter '20. Then Mr. Bellini will talk about the performance and expectations for the remainder of the year. Now we are going to turn the call to Mr. Valiati. Please, Mr. Valiati, you may go on.

[Interpreted] Good morning. We would like to thank you all for taking part in the conference call of our earnings release for the third quarter 2020. We are going to move on to Slide #4, where we are going to give you a brief company profile. Marcopolo is one of the largest body bus -- bus body market player in Brazil, and we are strongly present in all segments. We have been listed in the stock market since 1974. And in August, we turned already 12 years. We have top staff and employees spread throughout our industrial plants, 13 altogether. Let's go on to the next slide. In the first 9 months of 2020, the proceed in bus production was approximately 2,000 units, 27% below the same period last year, strongly affected by the COVID-19 pandemic since the end of the first quarter. In the year, the intercity segment had a drop as well as the urban segment and micro with a reduction of 19%. So let's go to the next slide. In the second quarter, the production had a drop of 9%. And in exports, we had an increase of 4%. Altogether, the total production had a decrease of 7% against a 24% drop compared to the total Brazilian production. In external units, the drop was even further with a drop of 43%. The positive highlight is our Argentinian operation with a substantial increase in volumes after the stops that we had in the second quarter that our industrial operations came to a halt then. Total production in[ Marcopolo ] had a drop of 12.8% in the third quarter, however, with a substantial increase of 46% compared to the second quarter when we had the collective vacations and sanitary restrictions that impacted [indiscernible] industry, starting a gradual recovery for the segment. Let's go to the next slide. Here, we have a breakdown of our production mix. We see a deeper drop in the intercity segment with a retraction of 44% in the domestic market and 35% in the export market. Urbans had a drop of 9.3% in the domestic market and was stable in the export market, whereas the microbuses segment had an increase of 66% in volumes for the domestic market and a drop of 86% in the export market. Finally, in the Volares business, we had a gross in volume for the export market with an important export operation in the quarter vis-a-vis 13% drop in the domestic market. Let's go now to the next slide. Now when we take a look at our sales, we see the effect of our mix in the revenue of Brazilian market with a drop of 8% in volumes, but revenue, a drop of 21% because of a less representation or less share of intercity buses. Likewise, even with a lighter mix, exports had an increase in revenues, especially because of the exchange effect. In external units, with the drop in volume also represented a drop in revenue. And exchange rate also contributing positively to our revenues. As in production, also in sales, we saw the effect of the pandemic in the bus market with a drop of 14% in the number of unit sold and a drop of 30% in the revenues of the quarter. Let's go to the next slide. Here the breakdown of our net revenue, the intercity, last to urban of the segment with a higher share, almost 34% of company revenues. Next, we come intercity with almost 30% revenues and then with the Volare business with 23%. As a reminder, we would like to let you note that Volare revenues is the full bus that is body and changes as a single product. Sales for micro buses accounted for 8.4% revenues in the quarter. And other businesses accounted for 5% of our revenues. Let's go to the next slide. In the quarter, the total gross profit of the company has a drop of 6.3% with gross margin of 16%. Gross margin benefited for -- by the positive exchange rate in export, better efficiency in our operations, and also the plant optimization process for the plants that are located in Brazil. EBITDA was negative by BRL 23.8 million. EBITDA was mostly affected by costs related to adjustment in headcount and also the result of New Flyer with the impact of BRL 43 million. If we do not consider nonrecurring costs to the termination of contracts in Brazil. And also wage compensation because of the freeze of work contracts in COVID-19 and the network equivalence of New Flyer, our adjusted EBITDA would be BRL 72 million with a margin of 8.7%. The consolidated net loss in the third quarter was BRL 57 million. Worsening net margin is explained by the same factors that we already explained in the EBITDA. Now I'm going to turn the call to James that is going to talk about our performance and prospects for the coming months.

[Interpreted] Good morning, everyone. You're most welcome to our conference of the third quarter. Now I'm going to talk about the performance and prospects for the domestic market. Well, the pandemic continues to affect new buses and to tourism activities, also for urban transportation and school transportation. However, markets show a slight recovery, signaling that we have come through the worst already. Freight buses have been positively surprising us with increase in sales because of the demand from our social distancing in the transportation of employees. In addition to charter flights, the Caminho da Escola sales were very relevant for the quarter. We delivered almost 1,200 units for the program. The pace of delivery is going to continue strong in the fourth quarter. And new municipalities are adhering to more purchases for the next half of 2021 almost to the top of the limit of the units. We are going to keep our market leadership with a share of 55.7% of the market. And the highlight here is for the urban segment in which we continue to be leaders. Let's go on to the next slide. As for exports, well, we continue to show a better performance compared to the domestic market, especially due to the exchange rate devaluation. South America is going to resume operations with positive results to sales in Chile, Argentina and Peru. The African market also continues to be important for the fourth quarter '20 and the first quarter '21. Our controlled operations overseas continues impacted by the pandemic. Individual performance, negatively affected by the conditions in the local market. Argentina Metalsur returned to work partially offsetting the volumes that were no longer produced due to lock down extended until the end of June. The expectation is positive for the last month of the year. Marcopolo Mexico, China and South Africa, did suffer from a lower demand in their respective markets, but there is a prospect for recovery as of 2021. As for our affiliates, we have Superpolo, our Colombia operation that continues to benefit from an extensive order backlog in addition to the renew of Bogota's fleet. In turn, the engine affiliate TMML continues to experience difficulties with the growth in the pandemic cases. In the third quarter, New Flyer brought a negative result... Ladies and gentlemen, please remain connected. We are going to resume the call shortly. We will now return to the call. So moving on with our affiliates. So we are talking about New Flyer that brought the negative result similar to what we had in the second quarter with a prospect to recover results in the fourth quarter and normalization of our operations in 2021. Now let's go to the next slide. In the third quarter of '20, the company had adjustment in its headcount with nonrecurring expenses of contract termination of BRL 37.2 million. Although that affects the results of this quarter, it enabled us to adapt our cost to the drop in volumes. In the fourth quarter, we are going to recognize the additional expenses because of other terminations, especially because of the closing of Marcopolo's Rio's plant. The company continues to work to reduce expenses and revisiting investments. With regard to cash, the company continues to have aggressive targets with -- in terms of working capital. The idea is to have cash generation for the fourth quarter, that is going to be around BRL 150 million. In the next slide, on October 20, we completed our project, plant optimization. We closed 3 plants in Rio de Janeiro. We increased capacity in the remaining plants, and we also remanaged our activities. With the completion of our projects, we have 3 plants in Brazil, one in Caxias do Sul and -- there are 2 plants in Brazil, I'm sorry, one in Caxias do Sul and the other in Sao Mateus. The project has helped the company to have record levels of plant efficiency and cost reductions. Some of the results include the turnaround of the San Marino, the Neobus operation in 2018 and Sao Mateus in 2020, reversing a negative result in last year and with profit for 2020, with positive prospects for 2021. In addition to that, the end of the project will enable us to sell 3 properties regarding the plants that had their activities closed. We will now go to the Q&A.

[Interpreted] [Operator Instructions] Our first question comes from Gabriel Rezende from Bradesco.

[Interpreted] I was disconnected during the call, but I heard about nonrecurrent expenses. Could you talk a bit more about the BRL 37 million? And what they represented for the closing of the plant in January? And perhaps you have other expenses with other operations, other plants, just to know the breakdown of this amount in Marcopolo plants? And the second question is about the Caminho da Escola program. I would like to know the company's prospect with regard to deliveries in the fourth quarter and the units that you are already expecting for the beginning of '21. And what kind of conversations are you having for a new bid for the program in '21? If you have any idea with regards to auctions, bids or anything of the kind.

[Interpreted] Gabriel, thanks for your question. I'm going to start with the first question. The adjustments that we had in our cost by BRL 37 million that were completed in the third quarter. These are adjustments basically for the unit of Caxias do Sul. We did have something for Rio de Janeiro as well. As James mentioned, we are going to have a further adjustment with the closing of our unit in Rio. And in the fourth quarter, we are going probably -- just going to have an impact between BRL 11 million to BRL 12 million in nonrecurring costs for the termination of the employees that were still operating in that unit. For the Caminho da Escola program, we, this year, should deliver almost the whole of the 4,800 units that we won. And then we are going to have probably about 1,100 for the next year. All the others, we should complete delivery until the end of this year. As for prospects of new bids, well, we are very positive. And we believe that something is going to happen with volumes similar to this year, probably by the beginning of the first half of 2021.

[Interpreted] Our next question comes from [ Ade Araújo ], a shareholder.

[Interpreted] I have a question to Mr. Bellini about the future of the company. What are the priorities? What would you say are your top priorities for the future, those with regards to administration, the Board of Directors and also the new CEO that is to be trained coming from the company's talent?

[Interpreted] I did not get your second question. [ Andre ], could you please repeat?

[Interpreted] So the first is top priorities of the company's Board of administration and management. And the second the new CEO that is to be trained amongst the company's talents, as it was mentioned before in your call.

[Interpreted] Well, [ Andre ], thanks for your questions. Well, with regard to priorities, first, we have been working quite hard on restructuring the company, resuiting our structure to be able to cope with possibly smaller markets next year. So this is one of the priorities. A second priority, on which we also have been working very hard, is for the Marcopolo for the future. We are working with new fronts, especially in transportation and advancing a lot with Marcopolo [indiscernible], but it's probably going to be a spinoff next -- for next year. And basically, these are the major priorities on which we are working right now. As for the CEO succession, well, given the unexpected crisis that we had, I will possibly will continue as CEO for a while now. So this is not -- that is going to be a transition in the short term.

[Interpreted] Our next question comes from Luiz Henrique Wickert Solidus Brokerage Company.

[Interpreted] My first question is a follow-up of Gabriel's question. The market dynamics or the urban buses in the short term, do you think that it's continuing -- going to continue favorable because of the demand of the Caminho da Escola program? And then probably the recovery of demand from the different municipalities? And also with regards to the market, if you could talk a bit about the intercity market, when do you think you're going to start recovering volumes and share?