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

[Audio Gap] growth margin was affected by adjustments in personnel, a higher revenues index market and also the volatility of the Volare segment, the evaluation of real over dollar and a higher mix of products, especially on the Road segment with sales on freight. EBITDA was BRL 140 million, positively affected by the recognition of ICMS processes and the exclusion of ICMS and COFINS with an impact of BRL 182 million. The consolidated net income in the second quarter '21 was BRL 200 million with margin of 24%, benefiting not only by the games, I mentioned, recognized in the line of other operating revenues but also the reflects of processes in the financial results in result of the monetary update and the exclusion of ICMS of PIS and COFINS, positive impact of BRL 163 million. Now I'm going to turn to James, that is going to talk about the performance and the outlook for the coming months.

Good morning, everyone I would like to welcome you all and thank, right now, your attendance today. We are going to start talking about the performance and outlook for the domestic market. On the Road segment, we continue to see the strength of the freight segment that accounted for 73% of the quarter. Traditionally, the sector would account for 20% to 30% of the Road segment but because of social distancing and the possibility of passenger buses for company employees that increased. Now the pickup of heavier buses, Marcopolo announced the launch of Generation 8. Generation 7 has been a hit in sales for 12 years and still shows a model that is ahead of its time with the launch of G8, we further consolidate gains in performance, design, security, focusing on our clients, users and drivers demand. G7 and G8 will live together thinking of the application of the products in segments with higher or lesser value-added. Luciano will talk about the characteristics of the new generation further on. In urban buses, the recovery is continuing to be slower... [Audio Gap] more about coming to this call and the bids that we have ongoing. We continue to have the buses in a share of 58% in the quarter. If added to the quarter, the share would be 64.3. Now we are going to go to the next slide. The market scenario will continue quite challenging in the third quarter. The maturity of sales took place in the second half -- in the second place. And we are not going to have the Road to School program. The mix will continue like in the coming months. And we expect a higher recovery only in the fourth quarter after consolidation of vaccination and the definitive opening of all markets. This reality is going to be true both in Brazil and in the external market as well. To adapt to this new reality, we continue to make adjustments of our staff and using tools as the flexibility of work shifts. They, in fact, have a negative effect on the short term, but we believe this is extremely necessary to bring Marcopolo to today's reality. In addition to G8, we also launched the new Volare family and also routes buses for freight use. All these launches focus on the innovative strength of Marcopolo that is focused on bringing solutions to our clients and more comfort and safety to our users. Basically, all these launches are going to let us leave the pandemic with a refreshed line of products. Now we are going to turn to Andre, our International Operations Officer that is going to talk about the outlook for the external market.

Thanks, James. Good morning, everyone. It's a pleasure to talk about our operations in the international markets. Marcopolo, as you know, is a global company. And here, we show the countries to which we sell on a recurrent basis. This number is growing year after year. And our goal has really scattered our presence in the international market. Our share in most of these countries is about 30% to 40%. And our focus is to continue to grow in the markets where we have strong presence as Latin America with more than 40% share in Australia, but also go to countries and regions in which we still have a low share. There are several actions that are going on [ for this ] to succeed and 2 projects should be highlighted. One is the Asia project. We still have little presence in this market. I'm going to talk more about the project on the next slide; and the U.S. project, the mature markets in terms of volume and in which we are going in to have a Marcopolo product launched in the market. In recent years, we have built a team to grow externally, as I mentioned, with sales teams, export teams, regional teams, all working for us to increase our global footprint to meet market needs as well as possible. And the unification of Marc -- our brands was very important. Today, we are working for each one of the markets. Now let's talk about the current situation of markets. The pandemic really affected our industry. You have seen that in the market, there was a retraction in the use of buses and fleet, the financial situation of our clients deteriorated -- funds from local banks as well. In some markets, we have still high inventory, which affects the renewal of fleet. But we use this downtime to focus on markets that we believe that were more appealing. That had some movement regardless of the pandemic. And here, I talk about freight buses for the mining segment. So we focused on the segment and that's why we have had a growth in the international structure. So today, 77% of what is produced in Brazil is exported with the Marcopolo brand. All focus on trying to think of which the active segments are and also have a higher footprint in the international market. The positive note is that vaccination is going on. It started very slow in the main countries to which we sell, but it picked up, and we see that countries that started first with vaccination like Chile, Uruguay are already starting to show signs of recovery. And when we talk to our main operators, there is the beginning of optimism for recovery in the fourth quarter this year. Of course, we talk about passengers coming back from summer vacations. This is the case of Chile and the prospects of Argentina. Of course, it takes time for us to recover fleet numbers, but we are start -- ready to show an interesting movement. And there is a sign that markets are starting to quote new products. We also had the virtual launch and face-to-face launch of G8. Luciano is going to talk about that. But clients have reacted very positively, and we are sure this product is going to be a watershed, a product that will place us in a higher level in terms of product and functionalities. Our focus on exports is to continue to grow, extending our targets, and this is what we are working for. If we go to the next slide, and talk about international operations, the countries in which we have planned, we had an important restructuring in recent years, growing share in more profitable operations as in the case of Australia, back there and Argentina where we increased share leads less profitable operations. We did that in Russia in the past and more recently in India. So we are always paying attention to opportunities of growth to meet our global strategy. We changed 4 of the 6 CEOs in international operations. And now we have a more cohesive stronger team, more focused on the results. We have had good gains in the restructuring. We used the crisis to do our homework and our companies are almost doubling their operational efficiency. Of course, the markets are still affected, but we are going to see in the bottom line gains reflected when the market comes back. We are also reviewing our operations strategically. So our objective has really raised the power of our companies. There's lots of good work being performed and you should see results as markets start to recover. So we've really taken the company to the next level. Talking about our 6 most important operations: Argentina, the urban segment continues active. It has a need for renewal and that's why we have been tracking our operations to be stronger in the segment. We consolidated 2 plants and 1 in the past, and our focus is to increase our daily bus production. We have been able to do so. In June, we produced almost double of what we had in previous quarters, and we are focusing on gaining efficiency in an accelerated manner. Road buses continue, again, vaccination a pickup of the market in the fourth quarter that is showing, and so we see positive results for the operation. Colombia also showed an interesting improvement. The number of operators start to increase. We are very much focused on the market with very strong presence in the main businesses that take place in Bogota, Cali and Medellin. We closed a package for more than 400 electric cars for the transportation system. We started production this month. And that is going to give us very good utilization of the plants in the coming months. We have a difficult period of demonstrations in the country that was not for the company, it was a general strike in the country. But even with this, we see a very good prospect for the year. Mexico industry continues to be quite retracted. The market dropped 50% from 2019 to 2020 from '20 to '21. It should not grow more than 10%. So the number of units sold is much lower than what we had in 2019 and a very light mix. Today, we have the freight buses, Road segment is very important intercity. We know, again, G8 can be a watershed for the segment as it is in the whole Marcopolo. We understand that the lighter mix has tighter margins. So we are using this moment to focus on internal action, things that we can control, focus on operational efficiency, optimizing costs, new products, G8, as I mentioned, but also buses for freight use and exports, again, to improve profitability. And therefore, we believe that we are going to have more competitiveness to go into international markets. South Africa also retracted but various entrances are opening. We have a very important structuring in the operation in recent years with actions of operational efficiency gains in market share. We gained important transactions in the beginning of the year that have helped us with our results, improving our competitiveness and focusing on exports. We had a very important presence in the external market in South Africa. And now with the recovery, we see more opportunities to go back to good profitability in the export's market. We are diversifying our businesses, establishing partnerships that we are going to disclose more about the future, but we really want to take the operation to the next level. In Australia, we are starting to enjoy the results of our focus on better operations with the exchange of CEOs, many of you know Thiago, we changed the whole leadership team in recent years. Now the team is more together, competitive, younger, really bringing Marcopolo to the game. And again, the situation is the same. The market is still retracted, but we do believe that we are going to show good results. Australia is a mature market. They start to talk a lot about the electric buses, and we are positioned to grow in the segment. China is an operation that is going through important restructuring time. We don't want to be away from this market. We also changed the key people in this operation. We really want to grow in a very differentiated manner. And we believe that in a few months, we are going to start to show very good news to you about the market. About international operations, this is what I had. So I would like to thank you, and I'm going to turn to [ Jean Paulo ] that is going to talk about Volare.

Thanks, Andre. Good morning, everyone. For those of you who are attending us. So very briefly, I'm going to talk about the Volare business in the year of 2021 and also to talk about the next level of the [ Caminho da Escola ] program. It's impossible to talk about Volare without talking about the microbuses segment in Brazil. After a very difficult years for this segment, 2016 was the worst year for the microbuses segment but then we started to recover. And basically, the market is growing. Last year, we had 37% of the total licenses that were provided and now '21, probably this is going to go to 40%. This is great for Volare because it's enjoying this time in the industry. And it is one of the segments that is really driving the recovery. And the Freight segment, especially in the agri business, mining that has been a very positive surprise that has been showing good results. And also, when I talk about signal public bids, not only the Road to School program, but also other bids, individual purchases that city administrations have for their health departments, education of departments and others. In 2020, we had a year that was very much impacted by the crisis, but we have good performance. We grew market share in the segment in recent years. In 2020, we were at 59% share in the segment. And when we talk about market share, we are talking about this retail sales. We are not talking about the Road to School program. When we include the Road to School program, Volare market share would be almost 40%. So we see the micro segment very favorable, and we continue with very good prospects for '21 in Freight segment's agri business and also a recovery of the Road to School program as schools start to go back to face-to-face classes as well as tourism. Until June 21, we had a market share of 63%, and in addition, I would like to talk about Volare share in the new license plates in Brazil, about 18% of total sales of buses in Brazil altogether. And in the pandemic, we did not stand still. We continue to develop new products. We recently launched as James mentioned, a new Volare family that we call the New Attack that is really a successful family. We have more than 300 units sold in the last 90 days. So we see the second half of '21 very positively. We have good opportunities for public bids, not only major federal programs, but also add to city and state levels. We see that the public sector is starting to pick up and also the agri business and mining segments showing very good recovery. With that, Volare is going to have the best performance in recent years, and we are very happy about that. If you don't know Volare very well, this is a segment in which we have very particular strength. We have a very diversified scattered network with lots of points of sales in Brazil and abroad. We have the largest portfolio in the market in the segment, and we generally work with the coverage of products with ready-to-deliver to really meet the needs of our clients, a very flexible line of products that can be used in different applications. And also, we see that Volare is enjoying this increase in the Microbus segment and providing a better social distancing in the category of the smaller buses. Talking about the Road to School program. In mid-'21, we completed Phase 9 of the program. That was a huge success. We had about BRL 717 million in revenues in the program, 4,800 units to be provided. We already delivered 4,612 vehicles, and it is possible that we have new units being licensed. We know that there is a delay sometimes that can vary up to 70 to 90 days for the bus to be licensed after its delivery. 1,579 of the microbus that we built together with Volkswagen; 732 in the ORE 1 product, our full Volare product at 1,612 of ORE 3, in the category of 20 tons with Volkswagen. 304 of [ ORE 4 ] complete product and 385 of the microbus high deck with Volkswagen as well. You know very well, and you saw the results of Phase 10 public bids that took place about 60 days ago, and we're enabled to deliver 3,900 units with potential net revenues for the next months of BRL 870 million. These 3 products, again, we have 1,000 of ORE 1; 2,500 of ORE 3; 11 again in a partnership with Volkswagen and 400 with the load back unit, our full product Volare. So we see very good prospects and scenarios for Phase 10. And we are in a final project of certification together with the hiring agency. And we do have expectations in the fourth quarter to produce about 800 units. And I think this is a very positive note that along '22, we are probably going to have the capacity of delivering the whole 3,900 units in the program. Well, this is what I had to say. I thank you very much for attending. And now I turn over to our next speaker.

Thank you, [ Jean Paulo ]. Now Luciano is going to take the floor.

Good morning, I'm going to talk about G8. You talked about the new generation, that shows our capacity to innovate. And again, to go to the next level in intercity transportation. We have more than 140 new features in this vehicle, with 60 patents in development with focus on safety, passenger comfort, reliability in application and operational costs. In terms of comfort, as you can see in the images, we developed a new generation of modular seats. And therefore, they can be used not only in intercity buses, but also micro buses, as [ Jean Paulo ] showed. So innovation, comfort, design, colors, fabrics, in a constant office space that ensures comfort in between cities. And then the highlight is the new interior design, greater room with a gain of 3% of space. And also, we focused on the drivers. You see the image of our cockpit. Again, focus on comfort, ergonomics and connectivity. In the center, you see our head unit. We integrated an electronic solution in embarked in -- on the buses. And in addition to connectivity, it gives the capacity to monitor an anomaly on the bus, which make the lives of drivers easier. Control settings are much easier with just a click, they can configure several features of the bus and also they can connect to the garage showing information to our operators about location, distance, occupancy of seats, if seats are fastened. So real innovation about embarked intelligence, which is unique on the segment. On the next slide, I highlight our headlights. We have a full LED headlights. You see the comparison between Generation 7 and 8, we gained lots of visibility and reach compared to the competition, 3.5x higher. So that, again, brings safety visibility when driving during the night and certainly avoiding accidents in the future. So again, an important differentiator for G8, reliability, integrity of headlights. In addition, there are several other items in terms of external safety. We changed the fully -- structure of -- the metal structure of the vehicle, which again, generates greater site seeing to passengers, new features that all together bring to all, greater visibility, greater safety, new windshields, new back -- rear mirrors, again, bringing safety and comfort to all. I'd like to highlight that one of the main features, as I mentioned, more than 114 new features which translates in profitability to our operators. G8 brings games not only in an appealing design but also in its aerodynamics that is very optimized compared to G7. Well, G7 was already with a very high level in terms of aerodynamics. But G8 goes even further. We had gains of 11% in the aerodynamics coefficient, which really makes us stand out in the market, almost closer to a car now. On the next slide, that translates in savings in fuel, not only because of aerodynamics, but also weight. We use alternative lighter materials. We worked with materials that are 100% recycled and also lighter materials, like [ BCPT ], which is 20% lighter than fiberglass and also has a better thermal performance, so for the air conditioning to be more efficient as well. So we see savings in fuel and also from 3% to 5% in energy as a whole. If we translate that into numbers for operators that use the buses 800,000 kilometers a year. You're talking about BRL 10,000 of savings a year per vehicle, which really is going to be a differentiator for our clients. Important to say, in addition to the fantastic product, innovative design, safety, comfort, we also worked a lot on our manufacturing processes with gains in efficiency. We are automating more and more our processes. We see the new line here dedicated to G8, also with G7. And they are more and more with independent processes, welding machines that are the most modern with gains in the consumption of electric energy of 60% online monitoring. We increased our automation process more than tenfold compared to the previous generation, so we worked very much on the seats. Here, you see our assembling line for the seats completely automated. And here, again, we used the G8 in this modular concept of seats that can be used in all our vehicles, not only intercity, but also freight, microbuses and others. So this is a process that really increased from 30% to 90% our automation levels in the assembly of seats. We also innovated and there are several safety tests. Here, this is a test that we conducted in a double deck that was really unique. This is not required in the domestic or international markets but we decided to do that to bring more safety to our passengers. In addition to online test, we also had face-to-face in-person tests with fantastic results and really excelling and expectations when we have any kind of drop down. Another unique test is a consequence of our very strong work for the safety of drivers and passengers. So we conducted tests to validate this safety with front end crash producing buses well- equipped with the new features and the other not. We also had simulated rescue operations with the fire department and the test really brought us a huge differentiation to Marcopolo in terms of safety to drivers and passengers. I'm going to show you the video that shows the crash, and that was conducted in a test field. [Presentation]

Next slide, please. It's important to say that we also, as I mentioned, work together with the fire department just to simulate rescue operations and the gains were significant in terms of number of survival rates and the -- also the time of rescue was much diminished. And also important to say that with the stats, we're able to validate our methodologies of simulation. So in addition to prove physical results, from now on, we have the numeric methodology to conduct simulations much faster, not only on intercity buses, but in our full line, which shows an innovation of our processes able to use virtual technology more and more. This is an image of the vehicle that crashed and you see clearly the integrity that was provided to the driver. You see probably not a scratch, not really anything invading their space, and again, providing free access to passengers and drivers. So we do believe this is a major differentiator in the market, safety to our drivers. Next slide, please. Well, this is all I had for you. These are just some features of the 140 that were developed, and I'm going to be open to your questions. Thank you, and I'm going to turn now to Eduardo.

Thanks, Luciano. Now we are going to open for your questions. You have a number available to send your questions on WhatsApp. I'm going to read your questions. If you please want to identify yourselves when you send your questions, do so. And I'm showing the number on the screen. And now we are going to deliver the Marcopolo awards, reaching 21 points. Well, dear colleagues, analysts and other attendees, Marcopolo officers, it is a great satisfaction that Apimec Brazil delivers you see this [ seal ] for 20 years of meetings nonstop. Marcopolo has been with us all these years. It is an honor even last year with the pandemic we had to rethink our model going from in-person to online, but we were able to have the meeting. Marcopolo was one of the first. So congratulations to the company for all these years. And this is the [ platen seal ] that we give you. Thanks, Lucy. I'm going to wait a few minutes to collect the questions. And we'll start. I already have 1 here with me, and we are waiting for your next question. So the first question comes from [ Wagner from Quantico].

And this is an open question. There are 2 questions. I will try to answer them, but we have the whole Marcopolo management here. So whoever wants to add to my answer, please do so. So the first question is new marketplaces such as [indiscernible] focus on reducing prices to end users. Can that increase the use of buses reducing the loss of passengers to other types of vehicles? This is the first question.

So I'm going to start answering, but please, anyone can join me in the answer. Well, there is an answer to your question, but I think that has to do with the characteristics and regulations of market. It depends on how the system is going to mature, especially when you're talking about less inflation to enable these new players in this market. Today, I do not have a final answer to your question because the legal framework is not .

Next question is if we could estimate in recurring numbers, the size of reduction of our fixed costs after the closing of plants, downsizing and restructuring of the company? And how much would that reflect on our margins and ROIC?

So I'm going again to start answering, but please, anyone can add to my answer. We have expressive reductions in fixed costs, more concentrated in the second half of last year but also the first quarter -- at the first and second quarter of this year. I would say that we had a reduction of cost of about BRL 60 million, but these are preliminary numbers. It can even be more than that, considering that we are taking the level of fixed costs to what was similar to the second half of last year. We used tools to suspend work contract, reduced shifts, layoffs. So with these measures and adjustments, we are bringing prices to a differentiated level -- costs, I mean. And we believe that this is a number that we can say today, but certainly other opportunities will come, including the sale of assets.

Just to add to what Eduardo mentioned. Of course, the company is always watching for opportunities and we are always trying to adapt to the market the best way possible. So making all necessary adjustments to keep healthy and be able to go through these times that have been very challenging, as I mentioned in the beginning of my presentation. The bus market was promising a great recovery for 2019 and 2020, but then the pandemic hit. -- and it was really brutal for our segment. Today, if we look for the future with vaccination and all we can see a better base to come. But still, we are going to have a third quarter that is going to be very challenging. And as [ Jean Paulo ] mentioned in the beginning, we do not have in this quarter the Road to School program. This is coming back in the fourth quarter. But we have been making the necessary adjustments. And therefore, we are having less impact on our results, as we mentioned before.

The next question comes from Marcelo Morgan -- Motta from JPMorgan. And he's asking us to talk about raw material costs. Thinking of gross margin. Yes. This has been another element that has that makes our results more difficult. And this is, again, not for Marcopolo, but for the whole of the industry that has been impacted by an increase in raw material costs. And roughly, tighter margins result from the increase of raw material costs and the whole industry is being affected with that. And considering the difficulties in our market -- and again, that is very much affected by the pandemic. In some cases, it is very difficult to pass on prices. When you have a retracted market passing on costs is even more difficult. We always try to do that. But sometimes, you cannot do that immediately, because again, the whole market is very much affected, very much retracted. So we did have an impact on the increase of raw material costs. It seems that this is starting to slow down, but it was certainly one of the factors that contributed for us to have lower gross margins. We have a question now from [indiscernible] asking about the sales of our plants in Planalto, Caxias and [Indiscernible]. Well, the real estate market is starting to show this year a bit more heated. So we do have 3 plants that are on sale; [indiscernible] and Caxias.. We are working with -- on the sales in real, we have very good prospects to complete the sales soon. In [indiscernible] and Planalto, we are still working on the sale. We don't have anything concrete right now to disclose, but we are paying attention to that and the intention is to sell the units. [indiscernible] next question is whether we have any other process to exclude ICMS from the taxation base of ICMS and COFINS or if everything was accounted for? No, everything was accounted for, regardless of not definite answers, but we are still waiting for the final decision of the Supreme Court. But the accounting rule demanded that this should be recognized in our financial statements, and we did so. All the effects have already been accounted for the effects that we had in San Marino and [Indiscernible] [ CA ] Marcopolo, [ Cider ] and Volare, everything already recognized and duly accounted for. What we need now is to monetize these credits to our cash effectively, and we are working towards that. Our next question comes from [ Rafael Mejia ]. And here, has a question to Andre.

Andre, what are the prospects in terms of exports for the second half of 2021? What are exports like, especially to Africa and Latin America?

Well, thanks for your question, [ Rafael ]. Well, we. are taking part of some packages we still need some confirmations, but we can have a very good prospect for the second half. And this is for both Latin America and Africa. And we believe that we are going to have higher volumes with heavier vehicles, and we might have a very good prospect if these are confirmed. The second question, it's about the exposure of sales for road buses in the Brazilian market. He's saying in normal years. So what would be the breakdown between service freight and blood buses and what is it like today? And then there is another question. Well, normal breakdown, and please anyone can add to that. each segment would account for approximately 1/3 of demand. So freight, 1/3, regular lines 1/3, tourist 1/3. And this breakdown to days completely different. What we call heavy intercity buses to pay account for 20% of sales and depending on the months even less. So it's very much concentrated in the freight segment. And in domestic market, even more concentrated. If you take a look at the whole intercity buses in Brazil plus exports and international that helps other models, especially heavier models. But if you take a look at the domestic market alone, it's more than 80% concentrated on freight vessels. Another question of the prospects for the fourth quarter and 2022. Valiati would you like to talk about the prospect for the fourth quarter?

Well, as vaccination advances, the prospect is for the market to start to recover in the fourth quarter. As I mentioned before, we are having a third quarter that is still very hard. But what we expect as the vaccination consolidates, we are going to show a recovery as of the fourth quarter. And the expectations that we should have a year of '22 undoubtedly better than '21. And it's also important to always remember, despite all difficulties, the company continued to invest in new products as our colleague showed before. James mentioned it very well, both in the Volare segment, we had the launch of products in the Freight segment and particularly the launch of Generation 8. And as the market picks up, the company will be very well positioned to meet the demand. And on the other hand, with all adjustments made and that continued to be made, it is always easier to improve results and profitability and gross models when things start to get better as opposed to get worse as we had in these 2 last years. So we have very good prospects. We are always cautious not to fail to do what has to be done for the company to keep healthy.

I would just like to add to this answer to what Valiati mentioned. I think that we, in the last 1.5 year, have been facing the worst of our world, so to speak. We've seen an extremely depressed market especially with regard to heavier intercity buses, which have always been our cash cows. And on the other hand, inflation coming back, that is really pressuring our internal costs, precisely in a time in which the market is depressed. So the only thing that we can do in such a scenario is really our internal costs. And this is what we have been doing quite deliberately in the last 1.5 years. The good news is that all these adjustments are going to place us in a much more competitive level when the market returns. And when it does so, we are going to have a scenario of growth especially when you're talking about regular lines and tourism because we know that no one can stand staying home any longer. So as people resume trust to travel on buses, the traveling segment will come back and that will increase demand. And when demand has increased, it is much easier for us to work to improve our margins. Because, in a scenario of greater demand, we can work also with the prices. So this is just to add. But again, we are expecting the third quarter to be quite poor. We do not see an immediate recovery coming. But based on everything that we said before, we do see a much more promising fourth quarter. And also, we have to remember that fleets are aging people, in the last 2 years, have not renewed their fleet. So this need for renewal will show also as the market recovers.