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 fourth quarter 2020 and the year of 2020. This conference call is also on the company's IR website, ri.marcopolo.com.br, and it's going to be with an webcast in English and in Portuguese where you can also check the presentation. [Operator Instructions] 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 prospects, projections, operating and financial goals as well as about its potential growth are forecast based on the management's expectations with regard to the future of the company. Forward-looking statements depend on market conditions, the general economic performance and international markets and, therefore, are subject to changes. Today with us in Caxias do Sul, Rio Grande 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 performance in the year of 2020. Then Mr. Bellini will talk about the prospects for 2021. We'll now turn the call to Mr. Valiati. Please, Mr. Valiati, you may go on.

Good morning, ladies and gentlemen. We would like to thank you all for attending Marcopolo's conference call to discuss the earnings of the fourth quarter and the year 2020. We are going to start the presentation on Slide #4 with a brief profile of the company. We are one of the largest bus body Brazilian companies, leader in Brazil and a strong presence in all segments. Our products are referencing quality, and we are focused on attaining the best product to our clients. We are in the States since '78. In August, we completed 71 years old. We are present with plants in 9 country. And today, we have approximately 10,000 employees among our industrial plants. Going to the next slide. In 2020, the bus Brazilian production was 13 -- 16,715 units, minus 26% compared to the year of '19. The bus production was highly affected by the pandemic as of the second quarter because of lockdown activities. If we were to consider Volare models that is sold complete with body and chassis, the drop would be slightly lower, 24.9%. In the year, the bus segment had a drop of almost 26%, urban buses with a drop of 34% and micro with a reduction of 3%. Let's go now to the next slide. In the fourth quarter, Marcopolo's production in the Brazilian market dropped by 16.2%. Production for exports had a drop of 22.7%. Consolidated numbers, production of Marcopolo Brazil had a drop of 37.6%. In the internal market, the production was supported by an expressive volume of units directed to the federal program, Caminho da Escola. In exports, the African market showed good performance. In external units, we had a higher drop with 37.6%. The positive operation was Argentina with a substantial increase in volumes in the quarter and in the year. The production for the fourth quarter is basically associated to the incoming of orders in the third quarter of 2020 when company markets were still affected with lockdown activities with the tourism in a halt and a lower number of users in public transportation in addition to uncertainty about the success of vaccines. Let's go to the next slide. In terms of sales, we see the effect of mix in the Brazilian market revenues. We had a drop of 15%, but revenues had a drop of 21%, basically focusing on heavy road buses. The highlight for the quarter was the performance of urban exports basically because of sales to the African continent. In micro and Volares segments, well, that was benefited by the volume sold to the Caminho da Escola program as well to the chartered buses with the replacement of vans with buses, which are more suitable for you to keep social distancing. In external units, the drop of volume also showed a drop in revenues. As in production, also in sales, we see the effect of the pandemic on the bus market with a drop of 25% in the number of units delivered and a drop of 17% in revenues in the quarter. Let's go to the next slide. If we break down our revenues, you see that the urban segment was the one that had the highest share, accounting for 43% of company revenues. And then we have the intercity buses with 20%, followed by Volares with 18%. And remember that revenues in Volare account for the whole bus, that is body and chassis in a single product. The sales of micro buses accounted for 7% of revenues in the quarters and the other segments, 12% of revenues. Now let's go to the next slide. In the quarter, the company's gross profit was 178.4 million -- sorry, 100 -- yes, with a gross margin of 17%, which was benefited by the positive effect of exchange rate in exports, higher efficiency in operations and the optimization of our plants in Brazil. EBITDA was BRL 149 million, which was negatively affected by costs related to costs with personnel with about BRL 60 million. As a counterpart, the company recognized BRL 44 million as results of its sale in -- of its share in Indian TM. The company also recognized a possible -- a positive impact of BRL 50 million, a fruit of the exchange rate variation of Marcopolo Canada. The reduction of capital was possible because of the cash availability of Marcopolo Canada came in from the dividend payout of a New Flyer along the recent quarters. The Indian affiliate had a negative equivalents of BRL 4.8 million, considering the months of October and November. With the confirmation of sales of the share of the joint venture, Marcopolo had positive results of BRL 18.8 million relative to exchange variation in the net equity of Marcopolo according to the investments made. Consolidated net profits in the fourth quarter '20 was BRL 136 million, which enjoyed the financial results, the exchange variation and other effects already mentioned before, particularly the sale of the investments in India. Now I'm going to turn to James that is going to talk about performance and prospects for the coming months.

Good morning, everyone. I'm going to start talking about the company performance and the prospects for the domestic market. Well, resumed sales in the intercity market, basically, that was interrupted by the second wave of the pandemic, which made clients not go into new sales. That basically, we had historically a seasonality. But we believe that we are going to have a more consistent increase of volumes for the second half of '21. The recovery basically is going to be fostered by the strengths of regional tourism and passengers going back to buses. In the urban market, the companies see that the recovery is going to be a little slower. This segment depends on the economic performance of the country. Micros and Volares buses continue with a positive highlight. Remember that vans are being replaced by smaller buses, especially in charter buses. Also the Caminho da Escola, the Road to School, program continues with positive volumes. In the fourth quarter, the company delivered 938 units: 261 urban, 454 micro and 223 Volares. We have a portfolio of about 3,500 units for the program, and there is going to be a new auction that we expect to be posted in the coming weeks. Marcopolo was leader in bus bodies with a share of 48% in the fourth quarter. The next slide talks about our performance and prospects in exports and international operations. Different from other cycles in which geographic dispersion helped us with the adverse scenario of Brazil, the pandemic affected all our markets. Despite the drop in volumes, exports are going to show better performance compared to the Brazilian market in the first quarter '21, especially because of the exchange devaluation. We expect a recovery in volume in the main markets of South America. Africa will continue to show good performance in the beginning of '21. Controlled companies continue with their movement affected by the pandemic, but probably the best highlight is going to be Argentina. It's a robust portfolio due to repressed demand in recent year. Gradually, we are going to recur volumes in Mexico, South Africa and China as the pandemic settles down. As for the Colombian operations, Superpolo, it will continue to report good results with relevant order of bodies for electric buses, also positive prospects for a New Flyer with the pandemic going down in North America. Let's go on to the next slide. In the fourth quarter '20, the company made use of the suspension of labor contracts with a cost of BRL 15.7 million. If this were to be excluded, the gross margin would have been 19.7%. The most important tool along 2020 enabled us to adjust labor according to sales recovery. In the beginning of '21, Marcopolo continues to make use of these resources, flexibilizing work hours and giving collective vacations to its people. In addition, the company continued with its internal reorganization plan, which is very important to adjust expenses to revenues. Costs with termination represented a nonrecurrent expense of almost BRL 16 million in the fourth quarter '20. Those adjustments are related to the termination of operations in Marcopolo Rio. Also this personnel adjustment in the fourth quarter makes a difference in the results of the fourth quarter, but will give us better results for the future with better operational leverage as volumes return to normal. In 2020, we also accelerate our moves because of drop of volume, optimizing our resources and our plans. With that, we have a breakeven in the plant of São Mateus that is reducing costs and adding efficiency in other operations. We also had lots of properties to be sold. In the last quarter 2020, we also sold our stake in our Indian affiliate of $13.5 million. The company wanted to have a restructuring of its business model in India, and that was a good opportunity for both parties, keeping the brand Marcopolo upon the payment of royalties. With the results in the fourth quarter, the company's Board of Director approved the payment of interest on capital at BRL 0.02 per share. The shares were traded ex interest as of December 23. The dividends payment on a quarterly basis is still frozen because we still don't know what the pandemic will bring. We continue to curb our costs. And the idea is to have more efficient processes and more innovative projects. Even during the pandemic, Marcopolo shows that it wants to recover its operating margins, basically going towards its [indiscernible] targets. For '21, the company will continue to have initiatives towards their customers to offer the best alternatives, adding technology, comfort, efficiency and design. We'll now start the Q&A session.

[Operator Instructions] Our first question comes from Victor Mizusaki from Bradesco BBI.

I have two questions with regard to Marcopolo's gross margin. The first, James, you did mention about the termination of Marcopolo Rio. Do you think it is possible for us to measure how much the plant shutdown contributed to your results in terms of margins? And the second question is related to the Caminho da Escola program. You mentioned that you probably are going to have a higher price because of an increase of raw material and Marcopolo is going to make new deliveries. And I would like to understand these dynamics a bit better if you're going to increase or decrease your margins with these new deliveries.

Good morning, Victor. I'm sorry. We were trying to understand the question that's why it took us a while. Well, improvements related to the shutdown of Marcopolo Rio. You know that we have a plant optimization process. We had 6 plants in Brazil, and we went down to 3. One of the most efficient ways to reduce costs and improve margins is to concentrate production on less sites. And this is what we did. And we certainly counted on that. And margins are going to get a lot better as the demand for buses recovers. And we have a production that is a bit more robust. This was a very interesting movement for us to make. We have been working on that for some time. And in a way, the pandemic enabled us to accelerate this move and complete it in the year of 2020.

Victor, this is Eduardo speaking. Thanks for your question. Your question was very, very low. So we were trying to understand exactly what you're asking. But anyway, the Road to School program, the Caminho da Escola, in the first quarter, these are units that were bid in 2019. So in contracts, we had a total security that we are going to deliver the units. The numbers that we have, we are quite comfortable with. We believe that the order is going to be delivered as planned.

Yes. But when you talk about the increase of raw materials, the newspapers were talking about that recently, the new deliveries of 1,300 buses. Because of the increase of raw materials, do you think your margins can be pressured? Or do you have any kind of hedge for that and you're not going to have a difference in margins?

Okay, Victor. Of course, we do observe the increase in costs, as you mentioned. But again, there were several clauses in contract for us to somehow protect against increases and processes. So that was quite well sized. You remember that whenever there is a bid, you have something similar going on. So we do have some kind of hedging measures to ensure that raw materials are not going to account for too much inflation when we are going to deliver buses because we do project a longer period for delivery, and this is considered in the pricing of the buses when we take part in a bid. Of course, it -- impacts can happen but, generally, not as relevant because of these measures that we take when taking parting in bids.

Our next question comes from [ Andres Sosa ], shareholder.

My question is with regard to two specific aspects. First, if we can expect for '21 any strategic realignment of the company for the future and even in terms of corporate governance since we have the controllers sitting in the management and in the Board of Directors. And the second question is about [ Akenzo ] Company that shows in your financial investments and what is its role in Marcopolo.

With regards to your question, in terms of governance, I don't think there will be any change. We are going to continue managing the company as usual. The Board of Directors is elected until March next year. And until then, we do not expect any movements in this regard. For your next question, I'm going to turn to Eduardo to answer.

Well, thanks for your question, [ Andre ]. [ Akenzo ] is a company that is part of the context that [ Rene ] mentioned in the previous conference call. These are new arms seeking alternatives of investment, especially in segments that are associated to transportation but to things that we don't operate today. So we can work on telematics, monitoring of traveling, which is not something that we do directly today, but it is associated to our core business. So [ Akenzo ] is associated to this kind of initiative. It's still very tiny, but that is what it means within our operations.

Well, if you allow me, if you could talk a bit more about the restructuring of Marcopolo China. You're talking about relevant operations. And how much can that impact in the results of the coming periods?

[ Andre ], well, with regard to our operation in China, this is a relevant market. And Marcopolo now went for a restructuring in that operation, trying to give a bit more attention to that market. That, we know is the largest bus market in the world. We changed the management, and we are restructuring the operation, having in light that Marcopolo understands and is working hard to make the operation even more relevant than it has been. So this is what it is all about. Once again, we have an executive that was selected in the market. And the objective is to conduct a market study for the whole of the region, not only China, but the whole region, and he's already engaged in that. In the beginning, it was very difficult. It takes us -- it took us several months for this executive to be able to go into China. This is an executive that had already lived in China for 20 years. But he was out, and we had to take work permits and everything. But now he's already in China, and I'm sure you're going to have very positive results in the future.

Our next question comes from Luiz Henrique Wickert from [ Simple ].