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 2021. This conference call is also being webcast on the company's RI website, ri.marcopolo.com.br, simultaneously in Portuguese and English. In there, you'll also find 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 regarding Marcopolo's business outlook, projections, operating and financial goals as well as its potential growth are based on the company's management expectations about the company's future. Forward-looking statements are highly dependent 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 are James Bellini, CEO; Jose Antonio Valiati, CFO and Investor Relations Officer; and Eduardo Willrich, Planning Manager and IR Manager. First, Mr. Valiati will talk about Marcopolo's results for the first quarter 2020 (sic) [ 2021 ], then Mr. Bellini will talk about the company's expectations for the remainder of the year. Now we are going to turn the call to Mr. Valiati. Please, Mr. Valiati, you have the floor.

Good morning, everyone. We would like to thank you all for attending the conference call to release the earnings of the first quarter '20 (sic) [ '21 ] Marcopolo S.A. We are going to start with Slide #4, talking about the company's profile. Marcopolo is one of the largest companies for the body of buses and leader in the Brazilian market and is strongly present in all segments. We have state-of-the-art technology, focused on offering the best products to our products. We have been listed since '78, and in August, we are going to turn 72 years. We are present in 9 countries. And today, we have approximately 10,000 employees in 11 industrial plants. Now we are going to go to the next slide, Slide #5. In the first quarter '21, the Brazilian bus production was 3,065 units, 32.6% below the same period last year. After a year since the first impacts of COVID-19 in the country, the first quarter closes the sight of comparisons of quarters with and without the pandemic. Drop in production reflects a very weak market still, especially affected by the second wave with negative consequences on the intercity and urban buses. If we were to consider the production of Volare that we sell complete with chassis and body, the production drop would be slightly lower, 25.6%. In the quarter, the segment of intercity buses accounted for a drop of 13.3%, urban buses with a drop of 63%, and micro buses showed an increase of 58%. Now we are going to go to the next slide. In the quarter, Marcopolo's production directed to the Brazilian market dropped by 11.4%. As for exports, we had drop of 16%. Altogether, total production in Brazil had a drop of 12%. In the internal markets, production was supported by the charter segment, which benefited with the use of more vehicles to keep social distancing when transporting employees to companies and also volumes that are directed to the federal school program of micro and Volares. In exports, we had a drop in the production of urban buses that had been favored last year because of packages that were directed to the African continent. Part of the volumes to be produced for exports in the first quarter were transferred to the second and third quarters. In external units, we had a drop of 14.2%. The increase of production of urban buses in Argentina was not enough to offset the losses in volumes in other countries. The seasonality that we see in the first quarter of each year was added to different lockdowns in cities, restrictions and increase of COVID cases, affecting the comparison with the first quarter 2020. Let's move on to the next slide now. Net revenues consolidated reached BRL 834 million in the first quarter of '21, BRL 448 million or 54% of the total coming from the domestic market. And BRL 385 million representing the other 46% of the external market. Dropping revenues for exports was 26.7%, with a greater impact in the second wave reflected in those markets. Greater volumes in micro and Volare segments helped us keep revenues in the internal market. As for the devaluation of real led to an almost balance in revenues for external operations. Let's go now to the next slide. In distribution of net revenues by segment, the urban segment accounted for 34.5% of the company's revenues with the greatest activities followed by Volare with 30.2%, and then intercity with almost 20% of our revenues and then micro buses with 7.3%. As a reminder, Volare revenues, that is the full bus with body and chassis is as the whole product. The good timing of momentum of Volare has to do with the sales to the school program in the federal government, together with sales in retail for the micro exports to South America. We would like to let you know that the sale of Volares dilutes our margins considering that the margin of the full product is structurally lower than the margin of the body product considered individually, that is without the chassis. Let's go now to the next slide. In the quarter, the company gross profit was BRL 100.5 million with gross margin of 12%. Gross margin was affected by adjustments that we had in our employees and also the drop of sales in Brazil and the mix of lighter products, especially in intercity with sales concentrated on the charter segment. EBITDA was BRL 23.5 million, negatively affected by lower volumes and revenues, and also the adjustments that we had to do in the number of employees and the lower representativity of exports in the breakdown of our revenues. As well as the lighter mix with buses of lower-added value, also labor clashes and the lowest distribution of the networks in the comparison quarter-on-quarter. The net loss in the quarter was BRL 14.7 million because of the same effects that were explained in the EBITDA above. Now I'm going to turn the call to James that is going to talk about our performance and the prospects for the next months.

Good morning, everyone. I'm going to start talking about our performance and prospects for the domestic market. Well, the company continues to say that a more consistent growth in the domestic market in urban buses will start with the second quarter. Passengers are coming back to regular lines and later on to tourism. Considering that the effects of the pandemic will stay for longer, Marcopolo is getting stronger in the charter segment, suiting products and gaining competitiveness in buses with lower value added. For the urban segment, the resume of operations will take a bit longer. And we know that the segment is being very much affected. And we are also being affected with the increase of costs and having difficulty to pass on these costs to our fees for us to have good economic financial balance. In the micro and Volares segments, we continue to see a positive highlight, again helped by charter buses. And also sales to the government continue very well, especially the Road to School program. In the first quarter of '21, the company delivered 761 units for the program: 30 -- 397 micro buses, 40 urban buses and 354 Volare buses. We are going to continue sales in the second quarter, and we believe that we are going to get close to what we sold in the previous year of about 4,800. We have a new bid that is going to be announced for '22 at any time now. We continue to be leader in the body market with a stake of 56% in the quarter. Added to Volare, our market share goes up to 64%. Now we are going to go to the next slide, Slide #12. Here we talk a bit about our international operations that continue to be affected by COVID like Brazil and depend on the vaccination continuing to the open of cities and frontiers to consistently recover volumes in external markets. Exports were very much affected by the second wave of COVID with a drop in sales and a [ stuck ] of ongoing business. There the exchange rate helps, but the market is more cautious, waiting for the pandemic. For example, although we are continuing to advance in Chile, vaccination was not enough to put a stop to the number of cases in COVID, and therefore, affecting a more consistent recovery in the first quarter. We continue to negotiate new packages to the African country with deliveries expected to the second and third quarters. Controlled companies continue to improve some of the results despite the local market conditions. The highlights are Marcopolo Argentina, that continues to increase urban productions. Remember, this plant only work with intercity buses in 2020. And Marcopolo Australia that, despite the drop in volumes, could sustain good results because of its cost-reduction initiatives. As for our affiliates, Superpolo will continue to show good profitability even with the drop in volumes, represented by the end of the new renewal of fleets in Bogota. Also New Flyer seems to be good results after 3 quarters of consecutive losses. Now we are going to go to the next slide. In the first quarter, the company kept a strategy to reduce costs, adapting to a scenario of lower volumes because of the second wave of COVID in Brazil and also what's going on in external markets that penalizes short-term results and costs like labor provisions. But we are going to have a lighter strategy being more competitive for the future. Extraordinary costs represented BRL 8.9 million -- I mean nonrecurring costs. And also, we are going to have additional adjustments in the second quarter with savings of approximately BRL 60 million a year. Part of the savings are already being captured. However, we are going to fully perceive gains as volumes return to pre-COVID levels. We still cannot know when we are going to have a more aggressive expansion of volumes. But as of April, we are going to have a weaker annual base, although we are not really seeing a back to normal yet. With that, the company is holding expenses, investing, mitigating increases of cost caused by inflation with gains of efficiency and passing on prices. We reinforced our work of operational excellence, trying to be more competitive and think of actions that were possible after the optimization of our plants, for instance, the charter of products where we were not as exposed in the past. Short-term results will continue to be affected because of our sales mix, which is lighter compared to our normal deliveries. As cities start to open up, tourism recovers, we believe that also our sales of heavier buses will pick up. We have a repressed demand. We have older fleets. We have a reduction in the sale of used cars, and we have also investments that were postponed. That will all reflect in sales in the future. We know that this moment will be overcome. And therefore, Marcopolo continues to focus on its clients and users to be stronger in the future to capture the opportunities postpandemic. Now we are going to go on to the Q&A session.

[Operator Instructions] Our first question comes from Gabriel Rezende from Itau BBA.

I have two questions on my side. With regards to new adjustments that are programmed to happen in the second quarter, can we expect something in line with the first quarter? Do you think you're going to have higher increases? This is the first question. Second question. Thinking of the Road to School program and the delay of information of new round for this year and perhaps even higher delays, do you think that all that could lead to more price adjustments? Would you try to offset the delay with new adjustments for the second half of the year?

Thanks, Gabriel, for your questions. When you talk about price adjustments or increases, we understand you're talking about our products. And we'll always adjust our prices based on the costs that we have and also the potentials of the market, always considering that we have to be efficient in our operations. So to answer your questions, we are going to see if there is a need to increase prices and see what the market can absorb because we know that we are in a very delicate position in terms of demand. So both your questions, first and second regarding to prices, have to do with that. With regard to the Road to School program, specifically, of course, that a delay in the program leads when the bid starts a new price level. And that is an open process. Of course, it will depend on each one of the bidders that are going to price their products accordingly.

Okay, Eduardo. Yes, perhaps I was not very clear. I was thinking of adjustments of operations because you recorded nonrecurring expenses in this quarter. So adjustments in your operations, if you think the adjustments that you're going to have in the operation, not in crisis, that was my mistake, happened in the second quarter.

Okay. We got you now. Well, the company last year when we had the pandemic took all measures using the instruments we had available, suspend contracts, decreased hours until we could understand what we were dealing with. When we realized that the pandemic was going to last much longer than expected, we started to make adjustments that would be compatible to the market reality and the production that we were having at the time. This is something that we did last year. We optimized our plans, which was an effort that was completed last year. And this year, with the second wave of the pandemic, we've realized that we have to have even further adjustments. They took place in the first quarter, and we'll continue to do so, adapting the company to the market reality until the pandemic goes away. And we are not delaying adjustments. We are making adjustments even if we have to suffer with higher costs now, but not also delaying the problem to the future. We don't know exactly what is going to happen in the second quarter, but we really do not believe it is going to be the same level that we had in the first quarter. We are making adjustments with labor costs, variable costs and fixed costs. So the initiative moves on.

Our next question comes from Marcelo Motta from JPMorgan.

My question has to do with the market outlook. You were very clear. We know that the situation depends on vaccination and COVID, but I would like to know if you have any information that really signalizes that the second and third quarter are going to be stronger. Are clients still delaying their orders? So just for us to have a bit more color about orders and backlog for the second quarter and second half of the year.

Thanks, Marcelo, for the question. With the second wave, orders' reduced again, especially in recent times. Although even with the pandemic, we had a very good of orders in the first quarter that are being delivered now. We expect in the second quarter to have a level of production that is similar to the first. And in terms of expectations, well, basically, it's vaccination and really the market recovering to pre-COVID levels. Until then, we have to manage the current scenario, which is quite challenging and hard.

And Marcelo, just to add to the question. This is [ Alessandri ]. Just to add to Valiati's answer, with regards to the signs that we have from clients, we don't have anything concrete to tell you the truth with regard to volumes. But what we see is that the market as a whole is looking forward to the positive effects of vaccination and therefore, possibly leaving home, recovering travels. We see people saying that they can't take any longer. They want to go out on the street. They want to travel again, which, in a way, gives an indication that we are going to have an increase of volumes in the second half. Of course, it all depends on the vaccination. But as soon as those that travel feel safe to go on a bus again, we believe, especially with tourism, that we are going to have a V-shaped recovery. But we still do not have anything concrete from our clients.

Okay. Very clear. And if you allow me with these volumes coming back, you're talking about cost savings, and you're going to see volumes coming back prepandemic, does it make sense to say that your margin after all the restructuring is going to be even above pre-pandemic levels?

That's what we are working for. That's the idea. This is exactly why we're making adjustments. We hope to be quite well prepared for the comeback. And all our efforts are going to pay off in the future.

Our next question comes from Victor Mizusaki from Bradesco BBI.

I have two questions. The first, related to raw material costs with we see expectations of the opening, and we see raw material costs, we see a very important increase, a pressure on costs. Further on, what are Marcopolo measures to try and manage this? Especially on the intercity segment, we see a drop in prices year against year and a drop in market share. So could you talk a bit about these topics, this drop of price and also what you mentioned in terms of competition and the increase of costs? And the second question. We see a expressive reduction in labor costs when we compare to previous quarters. And you have these adjustments that were made in the first quarter. If you could give us a bit of a guidance, what kind of amount are you thinking could be recurrent in this line?

Well, thank you, Victor. Let me answer first the first question, the increase of raw materials and inputs. Marcopolo, not differently from most industries, is being affected by the increase in raw materials. To the extent possible, we are trying to pass on our -- back to our prices. We have a very minute pricing structure that enables us to control impacts and signalizes when we need to pass on prices. On the other hand, we are trying to gain efficiency and improve processes to offset these increases, so offset increases to absorb part of this impact with operational efficiency. Because not only Marcopolo, many industries were affected because of that. I did not understand quite your second question. Yes. But before, I would like to talk about intercity buses' prices. That is very much associated to the mix. And you know that the charter buses are very strong now. But charter buses are much simpler than those intercity buses that are used for tourism or longer distance. And this is a segment in which Marcopolo is very strong, the double decker, for example. So this heavier intercity buses is where Marcopolo has the greatest leadership. In charter buses, our position's somewhat more diluted. And then you have a reduction of average cost, and you also have a drop in market share as you mentioned. But once again, when we compare quarter-on-quarter, we're able to reinforce our market share in intercity buses because we focus on the charter segment. And for -- I don't know if that's what you asked, but for us to adjust our number of employees in the second quarter, I don't know if that was the question. But anyway, possibly, we are going to have more or less what we saw in the first quarter for the second quarter, which is basically to adapt to the volume of sales and production.

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

I'm sorry, just a final question. Along the closing of the plant in Rio, we see that you have a substantial number of properties in Rio. Do you think of, I don't know, having some cash to sell your properties in Rio?

We are working on that. We are still looking into it. We are following the closing of the plants that are environmental analysis. And yes, there is this possibility of us completing negotiations, not only in Rio but in other plants that we have available because we believe that with the plants that we are keeping, we are going to be able to meet the demand postpandemic.

[Operator Instructions] We are now closing the Q&A session. We are going to turn the call to Mr. Valiati for his final remarks. Please, Mr. Valiati, you may go on.

Well, once again, we thank you very much for attending. Remember that our IR department is open for any clarifications that you wish, and we wish you a very good day.

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