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

Good morning, ladies and gentlemen. Welcome to the conference call where we are going to announce the Results of the Fourth Quarter of 2021 of Marcopolo. This conference call is also being transmitted on Marcopolo's Investor Relations website at ri.marcopolo.com.br and it is being simultaneously interpreted into English. [Operator Instructions] As a reminder, this conference call is being recorded. Before continuing, the statements made during this conference call about business prospects of Marcopolo operation and financial projections and goals, regarding its growth potential, they are forward-looking statements based on expectations of the management regarding the future of the company. Forward-looking statements are highly dependent on the conditions of the domestic market, the overall economic performance of the country, and of the international markets, and therefore they are subject to change. Today in Caxias do Sul we have Mr. James Bellini, CEO; Jose Antonio Valiati, CFO and IRO; and Eduardo Willrich, Financial Planning and Investor Relations Manager. Mr. Valiati is first going to talk about the highlights of Marcopolo for the year of 2021, then Mr. Bellini will talk about the outlook for 2022. Now I would like to turn the conference over to Mr. Valiati. Mr. Valiati, please, the floor is yours.

Good morning, everyone. I would like to thank you for the participation in our conference call of the fourth quarter of 2021. Now I'm going to Slide 4. We're going to start with a brief profile of the company. Marcopolo is a global reference as a manufacturer of bus bodies, a leader in the market, and in all market segments our buses are acknowledged for their safety, comfort, quality, and technology. We are a publicly-traded company, and we have been so since 1978. We are present with 11 manufacturing plants in 9 different countries in 5 different continents, and today we have approximately 9,700 employees. After 2 years of limitations to circulation and social isolation measures, we are reaffirming our purpose which is to bring people closer together, though the message is also a way for us to go back to our bonds to a scenery of recovery in a landscape that is still affected by the pandemic. Now, we may move to the next slide. In 2021, the Brazilian production of bus frames was at 12,700 units. And 2020 has been a difficult year. The numbers show the impact of the second wave of the pandemic in Brazil, the worst time in terms of lethality of the disease. The bus industry, which is deeply related to the circulation of people has been suffering ever since March 2020. The last time the annual production of bus bodies was so low was in 1999 with 12,098 units that had also been a year of crisis. In 2021 the production meant for the domestic market dropped 25.6% while the production for exports went down by 17.4%. In the quarter, the production of Marcopolo meant for the Brazilian market went down by 19% while the production for exports dropped 21%. The drop in production in the fourth quarter of 2021 as compared to the same quarter in 2020 is explained by the influence of the pandemic on the sales on the third quarter of '21, a lower volume of production because of the federal program and the Road to School and also because of the lack of certain parts, especially semiconductors and frames, which are also affecting their production in the first quarter of 2022. The positive highlight is our external units more than doubling the production in the quarter. The increase explained by the recovery of light bus market in Mexico and the ramp up of production in Argentina. In spite of the retraction in comparison with the fourth quarter of 2020, the production in Q4 '21 represents a growth of 36.7% as compared to the production in the third quarter of 2021, thereby marking a change in volumes. As a reminder, the company did not give collective vacation in December 2021 neither in 2022 as we usually do. Now moving to the next slide. The consolidated net revenue has reached BRL 1.084 billion in the quarter and BRL 499 million came from the domestic market, BRL 248 million came from exports, and BRL 336 million coming from international production. The highlight is related to our international operations with a growth of more than 40% when we compare a quarter on quarter and almost 28% if we compare year on year. Practically all operations presented a significant growth in sales. In our domestic market and in exports, the lower revenue accompanies the drop in volumes, which is explained by the still adverse sales scenario still affected by the pandemic, and the sales in the fourth quarter were strongly influenced by the businesses that had been closed before in the second and third quarters the peak of the pandemic in Brazil and in most markets to where our company exports. Now on Slide# 8 you can see the breakdown of the revenue. Urban buses has the largest share accounting for 36% of the company's revenue with a good time in urban buses in Argentina and Mexico and the beginning of deliveries for the Road to School program followed by intercity buses with 26.6 [ Volares ], with 27% also having the benefit of the Road to School program other revenues with 5.7%, and finally we have microbuses with 3% of the revenues. In the quarter chartering, freighting concentrates the sales in the intercity accounted for more than 70% of the revenues of these segments in the domestic market; however, with a gradual replacement bias for heavier kinds of vehicles. In the quarter the growth of income of the company was BRL 123 million with a gross margin of 11%. The gross margin was affected by the lower volume of exports, by the higher share of a Volares revenues, and by a lighter mix of products. The lack of frames in a volume that was enough also affected the efficiency of Brazilian plants that were sized in terms of people for a faster ramp up in production and delivery meant to the Road to School program. The EBITDA was BRL 74 million in the fourth quarter of 2021 with a margin of 6.9%. The EBITDA was negatively affected by the constitution of provisions for bad debt amounting to BRL 17 million associated to exports of a traditional customer from Central America, which is still having difficulties in its activities because of the impact of the pandemic in the country. We expect to go on collecting this credit and we hope we will be able to reverse that along the year of 2022. EBITDA was also affected by the problems that we have mentioned in the gross margin as well as by the labor provisions in the line of other operational expenses. On the whole, the result was impacted by the lack of certain parts with a postponement of deliveries, which reflects the lower dilution of fixed costs and the use of existing labor. Lastly, EBITDA was affected positively by BRL 29.7 million as a result of the sale of the property of Marcopolo and Rio, the consolidated net income for the fourth quarter '21 was BRL 65 million with a 6% margin. The result was affected by the same effects that affected EBITDA and the investment income. Now we'll turn the conference over to James who's going to talk about the market scenario and the outlook for 2022.

Good morning, everyone. You're all most welcome to our conference call for this quarter. So start talking about performance and outlook for the domestic markets and exports going out from Brazil. The fourth quarter deliveries from Brazil show the gradual change in profile, changing from lighter to heavier buses. In spite of the major concentration in chartering, the trend of reversing with heavy vehicles to have a backlog. And then we believe the acceleration of this movement for buses with higher value added. In terms of urban buses, we are having a good surprise with demand. Many cities have been granting or discussing some type of subsidy to the industry. At the same time, users are again using public transportation as the pandemic goes down. So the Road to School program is going to help our segment of urban buses at least until half of the year. The segment of micro and Volares is still going well, benefiting from the flexibility of this type of vehicle. In fourth quarter, 399 units were delivered for the Road to School program. Considering the bid [indiscernible] and another 3,022 units will be delivered in 2022, so we delivered 1,558 units of 517 and 782 Volare models. And the new tender to bid has been published, and we are waiting for a new bid that will open shortly. exports have been intensely affected by the absence of any major packages, but it is showing good signs of recovery with sales for the African country and the renewal of the freight -- the fleet rather in Chile, and then the Brazilian market of bus bodies in Q4 '21. If we add up, Volare market share has reached 53.3%. And to international operations. We have a positive outlook for 2022 with a recovery of the market in every geography, showing better results based on the recovery of volumes. Volgren recent bids for urban buses and a recovery of the market will make it possible for us to recover the synergies that we gain in terms of scale. For Marcopolo Argentina, we are expecting continuing with good volumes which you already saw in 2021 with a recovery of intercity buses. We have the challenge of producing intercity and urban buses in our plant in Rosario. Marcopolo South Africa has keeping its good results and outlook. So we are projecting a positive year based on the growth of volume in a post-pandemic period. In our operation in Mexico, we still believe in the recovery of the intercity segment that became very frail because of the pandemic, but in this recovery, we'll have a strong production of urban buses. MAC in China has suffered of new limitations to locomotions that were implemented in the main market. As a reminder, MAC does not sell to the internal market in China, but it exports to countries in Asia, Africa, and Australia. It's going through a deep restructuring process management showing a recovery in sales already in the end of 2021 and in early '22. So Superpolo in Colombia has a positive outlook, very much in line of recovery of the bus markets associated to the end of the pandemic. This is also related to New Flyer that we believe will also benefit by the going back to normal in North America. Even during the difficult year of 2021, Marcopolo continued making strategic investments with a highlight with the launch of G8. In 2022, it's not going to be any different when other models of this family will be made available. So G8 is demonstrating good results and customers may choose between products the ones that need the best or the best suited to their operations. And so orders are already 50%-50% divided, for example, heavy intercity buses. We are expecting new models to be made available once tourism goes back to normal and also for long distance intercity buses. Also, in terms of investments that are prototype of electric buses fully built by Marcopolo are already on the roads in Brazil demonstrating the strength of capacity of our engineering. Almost 100 electric buses with Marcopolo bodies have been delivered in the country and there are more than 400 in the world -- in the roads of Latin America, Asia, and Oceania. After 2 days of slowdown on the market, Marcopolo is adjusted and ready to grow. So with the slowdown of the pandemic, we have a good part in the Road to School program, we are changing from Euro VI -- Euro V to Euro VI. In terms of mobility with innovations, thinking of reduction of emissions, new electrical buses, vehicles for rail transportation, always with added comfort and technology onboard, Marcopolo is renewing itself to do what we like the most at the moment of recovery, to bring people closer together. Now we may move to the Q&A session.

[Operator Instructions] Our first question comes from Andre Ferreira from Bradesco BBI.

Can you give us a little bit more color in terms of orders that you're getting from other countries, what are the main markets, products, and I have a second question about prices of the competition as compared to Marcopolo. And one last question if you allow me. What about your backlog? How long is your backlog of orders?

Thank you, Andre, for your question. As to international operations, in terms of other revenue, so Australia first. We have a good outlook. We already had a backlog that were cancelled and transferred because of the pandemic, and we hope to go back to those deliveries. So we are expecting the growth of volume in Australia. In Mexico, we also have better prospect, considering the lessening of the pandemic, and we hope to see a growth in volumes. So in Mexico, we are going to expect the intercity. The urban is still good. But intercity volume, especially meant for tourism was very badly affected, and we hope that the intercity market will expand this year. Also, with G8 launch, we already have a few of those buses there -- buses for Mexico. As to Argentina, it's a good time for intercity. We have quite a long backlog for intercity benefit. And the good news for the fourth quarter was the recovery of intercity buses. The production was practically down to 0 and now are back to manufacturing intercity buses in the Argentinian market. In China, we are also seeing prospects of recovery with good deliveries, even though the base is quite weak. So any volume will be significant because we are producing very little. When we look at South Africa, the prospects are also very good. We had already been able to reverse the results in 2021, and we are going to continue grow in 2022. When we look at Superpolo, so the results were affected by the pandemic and in other markets we expect a growth in volumes as the pandemic goes away.

Andre, this is James talking a little bit about competitor pricing. Well, in reality, as you know, we transferred very consistently the prices that we had during the pandemic. And the competition took a little longer to pick up in terms of their reaction, but we are already seeing a reaction in terms of repositioning of prices. On average, we're facing a few problems with some specific businesses where we see that they are slightly more aggressive. But on the average, I think that we may consider that we are already going back to normal where we see the price differences between Marcopolo and the competition respect a certain level, and this level is well accepted by the market. And as to backlog, depending on the model, it's longer or shorter. So we -- for the Road to School, we until the middle of the year for the deliveries of the 3,500 frames that we are supposed to deliver. So this portfolio is longer. In intercity, we have a slightly longer portfolio, but obviously, it depends on the Road to School. At the pace of renewals that we are seeing -- as we have just said in terms of intercity picking up more strongly and there's a recent demand for the opening of cities using other models, and we see this is a good timing in intercity and also in urban, but especially in urban. Now in the intercity, we are seeing chartering going back so intercity is back to balance. So intercity is getting longer and longer with a few months of length because tourism is going back to normal and the regular long-distance roads. All backlogs are getting longer and longer. It's difficult for us to break down exactly because there's also a transition from V to VI, and this will improve the backlog for intercity buses, too.

Our next question is from Jonathan from JPMorgan.

I have 2 quick questions. First is the provision of the BRL 17 million. Is there any other customer in any other geography that could present a similar risk to you? And the second is related to margins. As volumes recover in 2022, are we going to see margins going back to the levels that we had in '19 closer to 15%?

As to provisions, as I said when I was talking, so that our customers in Central America, and we are expecting, and we are sure that we are going to recovery provisions. But because we are very conservative in terms of good accounting practices, we decided to set these provisions. We are not seeing any other similar risks in any other geography. And I would even say that in spite of all difficulties that were imposed by the pandemic, we had few situations of practically the aspect of having to set provisions for bad debts it increased very little, very similar to our usual business businesses in other period. So as to margins going back to 15%, actually we have seen margins that were even higher than that. It will take some time, but we believe and we are working to have appropriate margins close to our historical margins that we had in more normal times. Yes, in the past 5 or 6 years, we have been experiencing a lot of difficulty in terms of volume demand, and in 2019, we were seeing a recovery of volumes, margins were coming back, but then the pandemic hit and it affected us very intensely in the past 2 years. And we hope that as the pandemic goes down, we will go back to our performance and the performance that we are working to make real.

Our next question comes from [ Andre Sousa ].

It's a question to James on governance. We had a difficult year with a strong impact from other revenues in terms of actions and tax. And my first question is there is a positive variation in the payment of directors. And the second question is about the succession program for the CEO. We have talked about this in other conference calls.

Andre, I'm sorry, it was difficult to listen to your first question. I'm going to answer the second one about the succession for the CEO and this new situation when we are going back to normal. We will resume our succession planning process. My term in office goes until the end of March next year and at the right time and during this period, we are going to decide what the company will decide in terms of succession. As to the compensation of the members of the Board of Directors and the C-level executives, the company has a periodical and frequent market researches and compensation is fully aligned with usual market practices. Andre, would you like to repeat your first question?

I think Valiati has answered the first question which is a positive variation in the compensation of the members of the statutory board when the company's performance did not follow the same trend. That was my question.

[Operator Instructions] We are now ending the questions and answer session. I would like to turn the conference back over to Mr. Valiati for his closing remarks. Mr. Valiati, please, the floor is yours.

So once again, we thank everyone for your attendance to our conference call and our Investor Relations Department is available to answer any other questions that you might have. Have a good day and thank you very much once again.

Marcopolo conference call has now ended. We thank you all very much for your participation, and we wish you a good afternoon.