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

[Interpreted] Earnings of the third quarter 2021. This conference call is also being webcast on the company's IR website, ri.marcopolo.com.br, simultaneously in Portuguese and English. And there, you will also find the presentation. [Operator Instructions] As a reminder, this conference call is being recorded. Before moving on, I would like to let you know that any statements made during this conference call about Marcopolo's business outlooks, projections, operating and financial goals and potential growth are assumptions based on the management's expectations with regards to the company's future. Forward-looking statements highly depend on the conditions of the internal market, the country's economic performance and international markets, and therefore, are subject to changes. Today with us in Caxias do Sul are Mr. Jose Antonio Valiati, CFO and IR Officer; and Eduardo Willrich, Planning and Investor Relations Manager. Also on the conference call, we have James Bellini, the company's CEO. First, Mr. Valiati will talk about Marcopolo's general results for the third quarter '21. Then Mr. Bellini will talk about the expectations for the remainder of the year. Now I'm going to turn the call to Mr. Valiati. Please, Mr. Valiati, you may go on.

[Interpreted] Good morning, everyone. I'd like to thank you for joining us on the conference call of the third quarter '21 of Marcopolo. We are going to move on and start the presentation on Slide #4. Here, we show a brief company profile. Marcopolo is one of the largest [indiscernible] Brazilian companies leader in Brazil in all market segments. Our buses are referenced in safety, comfort, quality and technology. We are a public company. We have been so since 1978. And today, we have more than 88,000 shareholders. We have plans directed to domestic productions in 9 countries. And today, we have approximately 8,700 employees. Now we are going to go to the next slide. In the 9 months of 2021 Brazilian bus production was 9,400 units, 23.9% below the same period of 2020. The year has been affected by the reflexes of the second COVID wave. In the quarter, the Brazilian production was strongly affected by the concession of collective vacations in Marcopolo and the absence of produced volumes for the coming [indiscernible] program. The production meant to the Brazilian market dropped by 40.9% quarter -- year-on-year. Whereas the production directed to exports had a drop of 10.4%. Let's go on to the next slide, please. In the quarter, Marcopolo's production for the Brazilian market had a drop of 49.8%. Production for exports had a drop of 54.8%. The drop is associated mostly to the granting of collective vacation in the company's Brazilian plants between the end of August and beginning of September. In external units, production almost doubled in the quarter, an increase of 94.4%. The production increase is related to the partial stop of the production of some of the countries in the second half of 2020, but also related to the economic reopening in these countries. Let's go to the next slide. Net consolidated revenue reached $776.6 million in the quarter, $376 million coming from the internal market, $97 million in exports and 284.7% from external units. In the third quarter '21, the external units benefited from the economic reopening, a weaker comparison base with the third quarter 2020. The highlights were operations in Argentina and South Africa subsidiaries that were affected by the impressed market even before the pandemic. The domestic market and exports, a lower level of revenues would refer to the granting of collective vacation, lower production and consequently, less deliveries in the quarter. Let's go to the next slide now. And the breakdown of net revenue, the urban segment was the 1 that had the highest share accounting for 44.7% of company revenues. With a good momentum with the urban segment in Argentina and Mexico followed by Intercity by -- was 44.4%, Volare with 22.7%, other revenues with 4.9%. And finally, we have the micro buses with 2.9% of the revenues in the quarter. But [ is ] for charter buses continue to concentrate sales in the intercity segment accounting for more than 80% of the revenues in the segment in the domestic market. Now let's go on to the next slide. In the quarter, the total income of the company was BRL 72 million with gross margin of 9.5%. The gross margin was affected by new adjustments in head count, a lower volume of exports, a higher share of the Volares segment, and a lighter mix of products, especially in the intercity segments with sales concentrated on charter buses. EBITDA was BRL 95 million in the third quarter '21 with margin of 12.6%. Also negatively impacted by the adjustments in headcount, a lower revenues from exports and buses with less added value and also labor movements. EBITDA was also positively affected by BRL 67.6 million because of non -- incurrence of revenue status on corporate entity and also the decisions of the Supreme Brazilian court and BRL 33.5 million in successful lawsuits that discussed the no incurrence of income tax on monetary updates related to financial investments. The consolidated net income for the third quarter '21 was BRL 107 million with a net margin of 14%. The result was affected by the same effect described when I mentioned the results from our EBITDA and the financial results that we have in our report. Additionally, the company recognized the reversal of the provision for income tax and social contribution in the amount of BRL 13 million because there was no incurrence of such taxes in the update of the financial investments and other positive impacts that were reflected on our EBITDA. Now I'm going to turn to James that will talk about our performance and the prospects for the coming months.

[Interpreted] Good morning, everyone. Well -- so here we are in our conference call. I will start talking about the performance and prospects for the domestic market. In the third quarter, deliveries in Brazil concentrated on intercity buses of lighter bodies and also micro and Volares buses. The concerns with the pandemic continue to demand the urban segment. Both light urbans and others had additional demand and kept the performance that we saw throughout the crisis. However, we see an increase on the request for heavy intercity buses. And also another factor that contributes to this movement is the economic recovery. For urbans, we are going to have a slower recovery. We also have the restrictions imposed on public transport, but we have sustained fleet [ renewal ] projects that sustain volumes in the segment. In the road-to-school program, the company has no deliveries. The new auction has already taken place, and the company has been authorized to supply directly 3,900 units. We have already started production and have a very positive expectation for the last quarter '21 and first quarter of '22 due to a high number of cities that joined the program. Marcopolo continue to be the leader in the market in the third quarter '21. If we added the Volare production, our market share would go up substantially. Now we are going to go to the next slide. Now we are going to talk about the performance of Volare and the foreign market. We are still affected by the current scenario. The most heated market continued to be Chile and Mexico recovering -- this -- in this quarter. The main positive aspect is the exchange rate that helps in companies' competitiveness. Basically foreign market was the highlight for this market. we have accelerated the action of urban buses, and we expect to have an increase for the fourth quarter of '21. In the third quarter '21, Marcopolo Australia reached an important achievement for the supply of 341 units in Melbourne for the coming years with a robust portfolio of orders for the fourth quarter of '21 and '22. The operation has also been standing out with alternative solutions. Marcopolo South Africa managed to edge the breakeven point after restructuring the operation with also good prospects for the coming quarters. In Mexico, the sale mix continues concentrated in urban buses with lower EBIT value, which affects the corporation's profitability and is not showing a relevant recovery in the short term. Marcopolo China shows a gradual resumption of sales and is also opening new markets, reducing its operational losses. The Colombia affiliate Superpolo maintained positive results despite the drop in volumes, with very good prospects for the coming quarter. Now we are going to go on to the next slide. Here, we see the market environment. The company believes the fourth quarter of '21 is going to be one with a positive inflection of volumes in the coming months because we have a loss in COVID cases. We have longer trips and reopening of cities as well as at classes at schools and universities. We see that we are having more orders for sales and volumes of the coming program also ensure a healthy production of micros and Volares for the plants in Brazil. You know that Marcopolo went through a major restructuring in this difficult period of pandemic. Basically, we started that in the second quarter of 2020. And we have this yet another [ straight ] in the third quarter '21. We are not projecting new reductions of significant impacts for the fourth quarter, and we are going back to hiring personnel for our production plans. Mechanisms as collective vacation and layoffs will probably not be made use of in the fourth quarter '21. And important initiatives such as plant optimization, restructuring of operations and cost reductions, which really affected the results are now generating good results. Even during the pandemic, the company had strategic investments that allowed for gains in efficiency, quality and the launch of innovative products, including the exploration of new modes such as Marcopolo's rail and Generation 8. And we believe volumes will pick up, which is already happening because we had a halt of orders between '20 and '21. Now we have a possible advance of purchases due to a change in the rules for '22 and the back of the coming [indiscernible] program, which really shows something that is basically back to the levels of 2019. Now we are going on to the Q&A session.

[Interpreted] [Operator Instructions] Our first question comes from [indiscernible] from BTG Pactual.

[Interpreted] I have two questions. The first, I would like to know what you think is -- you're going to have for the Caminho da Escola program? In [indiscernible] you're talking about 800 units. And do you think the estimate remains? The second question is if you could talk a bit more about the collective vacations. You said that this is a relevant impact. And we would like to know about your margins that you were impacted and what we should expect for the fourth quarter? Should we start to go back to seeing the EBITDA margins back to normal?

[Interpreted] Well, first, Caminho da Escola program. Thanks for your question, Fernando. We are going to have a very good performance in the program. Again, we have a high number of cities that joined the program. So we have a very robust portfolio already in the beginning of deliveries for the program. I don't know if we're going to reach the 800 units that were projected. Part of them will possibly be transferred for the first quarter of next year. But it's going to be a very intense pace, perhaps slightly below what we had expected, but quite good. As for the impact of the collective vacation Fernando. Effectively in the quarter because we had 20 days of collective vacations in Caxias do Sul unit, both [ Ana Rech ] and San Maria and 30 days of collective vacations in Sao Mateus. Our production volume and consequently, sales volumes were effectively affected because of lower production volume and consequently, a lower sales volume. Of course, this mechanism not using collective vacations was something that we decided to use because we decided to use the vacation provision, and we advanced an effect that we would have in the first quarter of '22. So basically, we adjusted the operation. And naturally, the result of the quarter was impacted because of a lower production volume and consequently a lower sales volume. Because they were a lower period of operations and of sales.

[Interpreted] Okay. I understand that. But do you think you can have an approximate number due to EBITDA margin impact due to the collective vacations? Do you have a number or -- at least in the ball game?

[Interpreted] Well, the number is not directly measured because when you have a lower production volume, in addition to variable costs that you incur in, you have fixed costs that continue to be valid. So that would be an impact -- I don't know. If I were to try to estimate a number, I would see approximately BRL 15 million perhaps that would be the fixed cost of the quarter.

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

[Interpreted] I have two questions on my side. The first is with regards to the reduction in headcount. We saw Marcopolo implementing this strategy along '21. But as James mentioned, with expectations of a stronger result in the fourth quarter. You are back to hiring people. I would like to understand Marcopolo's productivity a bit better. I don't know if you have a KPI amount of buses per headcount. I don't know exactly if you have a metric for that? And the second question is about the Caminho da Scala program. If we were to compare to the last auction and if you think of effective prices, what would be the price increase that we should see in the results of the fourth quarter?

[Interpreted] Victor, good morning. Well, headcount reduction and how the company controls on average efficiency. We have basically the metric of production hours and available hours or idle hours. Because during the pandemic, we have several adjustments, not only with direct labor, but also contractors to adjust the company to a market reality with a lower demand. We do have expectations of being able to something that we always talk internally, which is growing without growing. That is growing, improving efficiency with our direct labor, but also growing with as much contingency as possible on costs related to contractors or indirect labor. With regards to productivity, we have metrics and targets to grow efficiency in productivity because when demand increases, that is easier than the opposite, where you have more capacity than demand, then you have much difficulty to optimize resources. And what we are experiencing now as of the fourth quarter is exactly that. We have enough demand to occupy the whole of our direct labor. We are hiring some head count, but what we want is to deliver more volumes, to have more sales with the same headcount. And that is what we are seeking. As for prices for the Caminho da Scala program, Victor, well, we made adjustments compared to the cost base of 2019. the increase was about 35% to 45%. And you can see the precise price on the bid platform itself. This is public information. You are going to see the different prices just for you to have an order of magnitude of increases.

[Interpreted] Our next question comes from [ Carlos Zehira ] from [indiscernible]

[Interpreted] I would like to know if you were thinking of launching a buyback program?

[Interpreted] No, we are not right now, Carlos. This is a period that has not been easy for the company, the whole of the pandemic. And so we are really focusing on preserving cash. So we are not considering a buyback program right now.

[Interpreted] Our next question comes from Jonathan Koutras from JPMorgan.

[Interpreted] My question is about raw material costs, what it is like? And the second question is how global supply is affecting Marcopolo. We know of the silicones. So we would like to understand what is going on with regard to this point.

[Interpreted] Okay, Jonathan, thank you. As for costs, we still see an increase above what we had before the pandemic. So costs there are still at a level that is different from what we saw in the past. But as these costs incur, we try to pass through these costs and the market, obviously, has been more difficult to [ add ] during the pandemic and in recent months. But that is a natural process to pass through costs as we are affected by them. As for the lack of components, particularly at the semiconductors and silicones, this continues to be a concern. We continue to see problems in supply chains that support Marcopolo. And we still do not have an estimate for us to go back to normal that affects the pace of production with possible delays, much more than causes major interruptions. We had a major how to do to the collective vacations. But we also had some breadth to have a bit higher inventory of raw materials for us not to have any interruption in the short term. So today, we don't expect to have any downtime due to the lack of components. But of course, that continues to be a concern.

[Interpreted] Our next question comes from Wagner from [indiscernible]

[Interpreted] My question is just for you to give a bit more detail on your backlog and what you expect for the fourth quarter 2021 and first quarter '22. If you have an improve in the mix of intercity buses, if clients are actually placing orders. And also, I would like to know about the competitive environment, how you see the competition? Do you think they are also having increased prices to pass through costs or if you still see a price war with regard to the other players in the market.

[Interpreted] Okay. As for the backlog, the backlog goes up to the end of January. So we do have orders starting in February. And depending on the product, we have more or less visibility. At Volare and microbuses for instance, due to the requests from Caminho da Scala really gives a very concrete positioning for this product. But overall, we are going up to the end of January. When we see the product mix, we are [ there ] to see the shift that we talked about, about the intercity segment. We already see some movement going towards the charter buses in a position to have your buses. So this movement is already happening. We are monitoring to see when we are going to get to a balance point, but we do see a higher movement of buses directed to the tourist traveling. Considering that the end of the year is going to be more back to normal in terms of passenger flows and traveling. As for the competitive environment, it's always a struggle Wagner, especially when the market has installed capacity more than demand. So the competition is always even fiercer. But due to the pandemic most manufacturers adjusted their production volumes and as the market recovers, the trend is that we are going to have a bit less intense competition. On the other hand, Marcopolo as market leader, has always positioned itself as also leader in marking of prices. And that's what we have been doing. We are trying to recover margins, passing through increases that we are having in our costs. And the competition has no other option. It is very hard perhaps harder than expected, but people will have to follow this move because there are no miracles and the impact on costs is not only for bus manufacturers it is for the whole of the industry. And we have no other option but passing them through.

[Interpreted] Just one comment. You are more and more talking about working on the transportation business even with more presence. When do you think this market is going to be relevant in sales? And what regions would request this kind of transportation?

[Interpreted] Well, the rail topic is very important as we gain experience in the production of products. We gained expertise and manufacturing in thousands. So now we are capturing some orders as we have already mentioned for the [indiscernible] project. And as we gain resilience, we are entering larger projects, both in the domestic and external markets. We are discussing possibilities and Marcopolo has taken active part in several projects. It's still incipient. We cannot tell when this is going to become representative in the allocation of revenues, but it is a movement today to gain experience with this rail product.

[Interpreted] We are now closing the Q&A session. We would like to turn the call back to Mr. Valiati for his final words. Please, Mr. Valiati, you may go on.

[Interpreted] Well, once again, we thank you so much for attending our call. Remember that IR department is available for any further clarifications you may need. I wish you a good day and all the best.

[Interpreted] Marcopolo's conference call is now closed. We thank you very much for joining us and wish you a very good day.