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

Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. to announce the results of the first quarter of 2022. This conference call is also being broadcast at the Investor Relations website of Marcopolo at ri.marcopolo.com.br, simultaneously in Portuguese and English, where the slide deck is available for you to download. [Operator Instructions] You should be reminded that this conference call is being recorded. Before continuing, I would like to clarify that statements made during this conference call about Marcopolo's business prospects, operational and financial projections and goals, and also statements made about its growth potential, are forecast based on the expectations of the company's 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 on international markets, and therefore, are subject to change. Today, with us here in Caxias do Sul, Rio Grande do Sul, we have Mr. James Bellini, CEO; José Antonio Valiati, CFO and Investor Relations Officer; and Eduardo Willrich, Planning and Investor Relations manager. First, we are going to hear Mr. Valiati talk about Marcopolo's performance in the first quarter of 2022. Then we are going to hear Mr. James Bellini to talk about the outlook for the rest of the year. Now I would like to give the conference over to Mr. Valiati. Please, Mr. Valiati, you may start.

Good morning, everyone. We would like to thank you very much for your attendance of our conference call for the first quarter of 2022. Now going to Slide #4, where we are going to give you a brief overview of the company's profile. Marcopolo is a global reference as a bus body builder with operations in all market segments. Our buses are acknowledged for their safety, comfort, quality and in built technology. We are -- we have been a publicly-traded company since 1978, and we have more than 70,000 shareholders today. We are present with 11 manufacturing plants in 9 countries in 5 different continents, and we have more than 10,000 employees. On the first quarter of 2022, the Brazilian production for bus bodies was 4,000 units 32.3% higher than in the first quarter of 2021. The growth in a comparison year-on-year shows that would reflect the pandemic and the recovering of the manufacturing industry. The production meant for the domestic market has grown, whereas the production for exports has increased 76.2%. Now moving to the next slide. In the quarter, Marcopolo's production meant for the Brazilian market has shrunk 4.3%. The production for exports from Brazil has grown 62.8%. And our external units, we have witnessed a reduction of 14.2% in production. The production was negatively affected both in Brazil and internationally by employees who were on leaves because of the Omicron variant in January, as also for the shortage of parts. The company is prepared to produce more than we did in the first quarter of '22, and we have accelerated the manufacturing ramp-up after March. The more consistent increase in production levels depends right now on an improvement on the supply of parts, especially frames. The consolidated net revenue has reached BRL 958.6 million in the quarter, BRL 588.5 million come from the Brazilian market, BRL 172.9 million comes from exports and BRL 192 million (sic) [ BRL 197 million ] comes from our operations overseas. The highlight of the quarter was the increase in revenue in the domestic market. And despite a small drop in the number of units, this is a consequence of transfers of cost, prices and a better sales mix. Exports revenue was negatively affected by the variation, whereas international operations suffered from the drop in deliveries associated to Omicron variant in January and a shortage of frames along the entire quarter. The revenue distribution in the segment of intercity buses accounted for 31.3% of the company's revenues, thereby reversing the trend of concentration in urban buses that was the most prevalent during the pandemic. The better mix have benefited this segment. Volares remains as a positive highlight with 30.3% of our revenues. And retail and bids are still strong as it has been along the past 2 years, and they support our sales. Urbans also had a good share of our revenues, getting close to historical levels with 28.8% share of our revenues. And then bodies and frames and parts accounted for the rest of the remaining shares of the revenue. Now moving to the next slide. In the quarter, the company's gross profit was BRL 112.3 million and the gross margin was 11.7%. You should be reminded that seasonally, the first quarter is usually the most difficult every year. And as operations pick up after the pandemic, we are likely to see this repeating. The gross margin was positively affected by transfers of costs in prices and also by a better sales mix, both in Brazil and export. However, these effects were negatively offset by the appreciation of the BRL in our deliveries to the international markets and by inefficiencies generated by the shortage of parts and frames. The EBITDA of BRL 51.3 million with a margin of 5.4%. It was positively affected by the better sales mix, better margins after the price recomposition, higher dilution due to the results of the equity. And EBITDA suffered a negative impact by labor provisions, by the appreciation of the BRL as compared to the dollar and inefficiencies generated by the shortage of parts and frames. If we were to adjust the EBITDA margin by the FX rate when the sales were done, the EBITDA margin in Q1 '22 would be 7%. The net -- the consolidated net income in the first quarter of 2022 was BRL 98 million, with a net margin of 10.2%. The result was positively impacted by the variations in the FX rates, the appreciation of the BRL over the dollar, considering the portfolio of dollars -- of orders in dollar. So this was affected by the FX rate when orders were placed and confirmed. And the effect of the valuation or devaluation of the BRL are computed in the operational margin or in the financial result as it was the case in Q1 '22. This impact is operational, and it is a consequence of exports from Brazil. Now I would like to turn the conference over to James, who's going to talk about the market scenario and our prospects.

Good morning, everyone. Welcome to our conference call. So first, we are going to talk about the performance and prospects for the Brazilian market. The Brazilian market is already seeing the recovery of heavy intercity buses, and vehicles used for tourism in regular lines of long distance already balance in the portfolio the volumes that were used for the transportation of employees that is so important to support production during the pandemic. Double-deck model, especially Generation 8 of higher added value are, again, occupying our production lines. The sales of heavy intercity buses represented approximately 35% of the volumes delivered to the Brazilian market in contrast with 13% in the first quarter last year. In urbans, demand is still causing a positive surprise. Especially because of the economic reopening after the pandemic, the return of users to application transformation are having a positive impact. So this need is related to allocations by cities in reinforcement of subsidies adopting the best international practices in public policies for public transportation. Delivery to the program, Road to School, are also reinforcing this segment. The micro and Volares market keeps a good performance, with retail bids at stable levels, vis-a-vis a 2021 with great results. The first quarter of '22, the company delivered 816 units to the Road to School program. Of these, 455 are urban and 361 are Volares model. If we add these units to the 399 delivered in Q4 '21, we still have 2,685 units of 2021 bids to be delivered in 2022. A new bid was conducted on April 5, and the company is waiting the approval of the result at any time for the production and delivery of up to 3,850 additional vehicles in the next 10 months. Marcopolo has maintained the leadership in the Brazilian bus market in the first quarter with a market share of 53.4%. Now on Slide 12, exports also show recovery from a weaker performance in 2021 due to the pandemic, in the market with tourism give signs of recovery in important markets in Latin America, especially in Argentina. Urbans to Chile and Africa and chartering have helped in Q1 2022. To adapt profitability after valuation of the BRL, we have cost transfers and updates of the prices in dollars. In the Q1 2022, international operations have suffered from problems similar to those experienced in Brazil, particularly with the effects of Omicron variant in January and the lack of frames throughout the quarter. Our productions and deliveries fell short of the potential of our operations, and the problem should continue in Q2 2022. As a positive highlight, Volgren has firm orders for the entire year of 2022. Marcopolo Argentina, Metalsur, follows the path of recovery of results, working with a mix of noble products based on the recovery of the road market in that country. MAC, Marcopolo China, continues to be challenged by the pandemic and implementation of lockdowns in China, which ends up affecting the purchasing interest of customers in neighboring markets and a supply of parts. Among affiliates, the Colombian Superpolo is expected to maintain good results with the volume recovery in the post-pandemic period. In Canada, the challenge is also the shortage of parts. Now on the next slide, on the prospect for upcoming months. It's important for us to pay attention at the shortage of materials, especially frames that are causing an impact on deliveries. Our deliveries could be 15% to 20% higher in the first quarter were it not for the supply chain issues. We expect these volumes to be normalized after June. And I would like to reinforce that these deliveries or orders are not being canceled, they are just being postponed. As we get closer to the half of the year, we are going to start also feeling the effects of the change in engine caused by ProCom 7 after December, this will accelerate sales coinciding with a positive seasonality of the second half of the year that we expect to go back to normal this year. Another concern permanently monitored by the company are prices or inflation. Despite the transfers of prices, we could not drive margins back to normal levels. We are seeking alternative sources and we are working to offset higher costs by increasing efficiency until we go back to sustainable levels of profitability. This problem is something that is not happening just in Brazil. It's also happening in our international operations. Lastly, we should also mention the benefits that we are now reaping from the restructuring operations that we have had over the past 2 years. Despite the impact of the pandemic on results, we have kept a healthy financial status. We have developed or invested in the development and launch of G8 that is being acknowledged by our customers. Also, Marcopolo electric bus active and also the new Marcopolo business division. We believe that we will be able to recover results even if volumes does not go back to our best historical volumes. And this is due to our capacity and courage to make Marcopolo in the last 3 years in a much leaner and agile and efficient company. Now we can move to our question-and-answer session.

[Operator Instructions] Our first question comes from [ Allini June ] from BTG.

I have 2 questions here. The first one, in the Caminho da Escola bid in April, are you also going to deliver urbans? And how many of the 3,800 units are going to be urban? And the second question is about the timing for the regularization of the supply of semiconductors and frames. So you think that this problem is going to get better after June? And do you think it would be solved both for frames and semiconductors? And after June, could we expect this problem to make it possible for you to deliver this 15% to 20% more that you claim that have been affected by the shortage in materials?

Thank you, [ Allini ] for your questions. And I am going to answer the issue of the Road to School. So we have about 500. So yes, we have urban frames as part of that package. As to semiconductors, the idea would be to grow or potentially even more than 15% to 20% were it not for the lack of those parts in the very short term. So when we look at April or May, the trend is to produce even more than 15%, considering the ramp-up that we are having after a seasonally weaker first quarter. So we can almost say that 15%, if we had normal supply, would be the minimum growth that we should expect.

Our next question comes from Luiz Capistrano from ItauBBA.

Congratulations on your performance. We have 2 questions. Number one is related to what can we expect in margin in the second quarter considering that we are seeing inflation in raw materials, but demand seems to be very high for you, which could permit a transfer along the quarter in order to offset or to -- this problem or to bring margins back to normal. How do you see the 2 forces balancing out during the quarter? Regarding the second round of Road to School program of 3,500 new buses, and when should we expect this approval? And once it's approved, once the bid is approved, how many of those units should we expect to be delivered still in 2022?

Thank you very much for your question, Luiz. As to margins, in fact, when demand goes up, there's always more room for us to recover margins. It's not as simple and easy as it may sound to transfer prices. There is resistance and difficulties with that respect. Our expectation, and this might not happen this year, is for us to be able a long time to recover our historical margins and to seek an EBITDA and operational margin that we have historically had at Marcopolo, even to levels before the pandemic. As to the Road to School program, and the expectation of when this is going -- the results of the bid are going to be approved, well, at any time. So in practice, it can be approved at any time. We think that this is going to happen in the next few weeks, and we are waiting. As to volume, it depends very much on the normalization of delivery of frames. Potentially Road to School, the usual time frame is 1 year and we have that time to deliver these 3,850 units. So this time would go until March '23, considering that we should deliver the frame by December, then build the bodies by March '23. Within that logic, we wouldn't have the whole year. But potentially, yes, we could deliver the 3,850 units. It will depend on the compliance of cities with this contract with the federal government. But the overall picture is that, yes, we could deliver all these 3,850 units.

Great, Eduardo. Just one last question, a follow-up. Assuming that in fact, cities will have good compliance and that they confirm the 100% units of the bid, part of it will be delivered in 2023, right?

Yes. Right.

Our next question comes from Marcelo Motta from JPMorgan.

I have 2 questions. First, could you comment how you're seeing the lag in terms of price transfers? And you said that you cannot transfer 100% of prices this year, but this lag today, how much is it? Is it 5%, 10%, 20%? I would like to understand what is the ideal level of price increase for you to have better margins. And number two is about competition. So you mentioned, obviously, Marcopolo has come out very well from the crisis, the market is recovering, how do you see the competitors in terms of how you are coming out of the crisis?

Marcelo, in terms of price transfers, obviously, Marcopolo seeks to transfer the costs, especially related to supplies, raw materials and materials and everything to the sale -- to transfer it to our sale prices. When we say we cannot transfer everything all at once is because the first impact of the cost increases that we have had since 2021, and we're still are seeing them. We're still seeing price adjustments. So this is a continuing process for many years we have been dealing with. And it's been many years since we last saw such high inflation, especially in the manufacturing industry, as we have seen in the past 2 years. And there is always some resistance from customers to negotiate or not accept all the price transfer that we need. But rest assured that we are doing our math. We are doing our calculations appropriately. And yes, we are transferring the costs that we receive, our cost to our sale prices, even if this will lead us to a small loss in market share. The company is very focused on this. It's not about wanting or not wanting to do it, it has to be done. This is what it is about, and we are doing it.

Marcelo, this is James. As to the competition, I think that this is very much in line with what Valiati said. We have been noticing that the competition is also at a growing pace of price transfers, however, at a pace that's slightly slower than ours or lower than ours. What we've been trying is to seek a balance between good market share, however, giving up businesses that are not so profitable in order to assure our margins. So we are doing our best in seeking this economic balance because it's useless for us to have a very, very high market share at the expense of our margins. So we've been seeking this balance well, thank god. Also to the demand increase, we've been able to reach this balance in a very healthy way.

Our next question comes from Victor Mizusaki from Bradesco BBI.

Congratulations on your results. And I have 2 questions. The first one, I heard some news that Marcopolo signed yesterday a contract for People Mover. Could you talk a little bit about that? How much more revenue this will bring? When we are going to start seeing this in Marcopolo's results. And the second question is about backlog. What is the evolution of Marcopolo's backlog? And the last question, just to clarify the impact of the FX rate in Marcopolo's margins in the second quarter. So as part of this margin in the first quarter affected the financial performance, should we expect in the second quarter this financial impact to go back to the operational margin?

Thank you, Victor. As to People Mover, we cannot -- we are not allowed to tell you -- talk about its share in the revenues, but the results will start to be seen immediately. As to the backlog, depending on the segment, we have a quite long backlog, more than 3 months, especially in urbans, and our manufacturing plants, especially in Brazil and Ciferal, and our factory in São Mateus that we have dedicated capacity for the manufacturing of micros, Volares and urbans. So in these segments, considering micros and Volares and urbans, we have a quite long time. As to the Road to School program, and this will even add more to our portfolio. For heavier buses, we are also longer, with about 2 months of portfolios slightly shorter than the other one, but we see a strong recovery in the area of intercity buses with this change in chartering in countries with heavy intercity buses for long distances reversing the logic that we had during the pandemic with chartering prevailing in volumes. As to the FX rate, as I said before, at Marco Polo, we always try to protect our business. So whenever we close an order, we contract the FX rate in order to assure the profitability of the operation. In Q1, with the low conversion rate of the BRL to dollar -- over dollar, we had significant gains that is reflected in our financials, partly offsetting a lower margin from exports that had already been done in the quarter and partly advancing the results of the deliveries of the portfolio that we still have to deliver in our exports. The important thing is that, as per its policy, Marcopolo tries to assure the profitability of our export operations and the results come either in the financial result line or in the gross margin when we see our sales revenues in terms of our sold products. As a reminder that our sales revenue uses the FX rate on the day of the billing. So there is an offsetting between financial revenue and gross margin.

[Operator Instructions] We are now closing our 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. .

Once again, we thank you very much, everyone, for your attendance. Our Investor Relations department is available to answer any questions that you may need to ask. Thank you very much, and have a good week.

Marcopolo S.A. conference call has now ended. We thank you very much for your attendance. Have a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]