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

Good morning, ladies and gentlemen. Welcome to the APIMEC Sao Paulo meeting of Marcopolo S.A., to announce the results of the second quarter of 2022 as well as the outlook for the rest of the year. The audio of this meeting is being transmitted to Marcopolo, Investor Relations website, ri.marcopolo.com.br simultaneously in Portuguese and English, where the presentation is available for the download. [Operator Instructions] Before continuing, statements made during this conference call about Marcopolo's business prospects, operational and financial projections and goals, about its growth potential, they are forecasts based on the management's expectations regarding the future of the company. Forward-looking statements are highly dependent on the conditions of the internal -- the market, the overall economic performance of the country and international markets and, therefore, they are subject to change. Today at APIMEC Sao Paulo meeting, we have Mr. Jose Antonio Valiati, CFO and IRO; and Eduardo Willrich, Planning and Investor Relations Manager. [Operator Instructions]

Good morning, everyone. It's a pleasure to be here. I am Lucy Sousa. I am the Executive CEO of APIMEC Brazil, it's a result of the regions. We are here in Sao Paulo, we are very happy to be back to in-person events and at the same time, connected to the Internet so that everyone can join us. So we have introduced our panel. I would just like to mention Valiati and to thank the presence of investor analysts and other professionals present in person here and those of you who are seeing us over the Internet. Now I would like to give the floor to Valiati to open our session. So I hope we have a good morning here.

Good morning, everyone. First of all, I would like to welcome everyone who's here in person and also those who are listening to us over the Internet. I would like to thank APIMEC Brazil here represented by its CEO, Lucy, who always welcomes, and it's a great pleasure for us to be here right now. We are going to divide our presentation in 3 parts. I'm going to deliver the first part of the presentation, then Eduardo Willrich will talk about the outlook or prospects. And we'll talk about the performance and what expects us, especially in the second half of the year, and then we will be available for questions and answers. So I would also like to -- unfortunately, our CEO, Mr. James Bellini, was supposed to be here, but due to other reasons could not be here with us, but -- and we'll try to make the presentation in the best way possible and at the end we'll be available to answer any questions you may have to ask us. So starting our presentation about our performance. As you all know, Marcopolo is a leader in the global market of buses and a reference in technology in bodies and a leader in the Brazilian market. The main highlights in terms of the company's competitiveness are the wide scope of its product line encompassing all segments from most sophisticated and complex, buses to minibuses and especially in a segment of Volares. Marcopolo was founded in 1949. And next Friday, it will be 73 years old, dedicated to the manufacturing of buses for the global market. Nowhere else in the world -- or rather we have partners and manufacturers all over the world and every other know Marcopolo. Because of our history and quality of our products, we are a well-known and renowned company at global level. The number of employees that we currently have are 11,000 that produce 10,000 buses per year, taking mobility and economic and environmental sustainability to millions of users of our products. Now talking a little bit about the highlights of the second quarter of 2022. We had a growth in manufacturing of units of 14.2%, and this starts to demonstrate the recovery of the bus market and effectively. We think that the worst of the pandemic and the slowdown in the market is behind us, and we are starting a new cycle. The growth in revenue was 39.8%, almost 40%. We had -- our net revenue for our international operations grew 57.7%. The growth in the gross margin as compared to the same quarter last year was 4 percentage points, and this is significant. And our EBITDA compared to the previous quarter EBITDA ex nonrecurring events, especially in regards to our tax recoveries due to lawsuits. Our growth was 4.5%. And so we -- was 4.5% positive as compared to an EBITDA adjusted for the same period of last year before of minus 5%. In investments, we had BRL 18 million, an amount which is lower to the depreciation in the same period. So now I really like this chart, and I think it's very enlightening because it demonstrates and it shows what happened and what has been going on in the market. So there is what happens in the Brazilian bus market. If we look at the dark line below it shows the Brazilian manufacturing of buses. So the dark part shows the Brazilian manufacturing of buses, the number of units that were exported. And if you note there is about 4,000 or 4,500 to 5,000 units, but it's between 4,500 and 5,000 units. And in 2021 because of the pandemic which had a global effect, exports also slowed down. But the importance is to see the behavior of the Brazilian market of bus bodies. Now going back in a chart to previous years. You can see that the regular -- the Brazilian regular bus market is about 25,000 buses more or less. And in 2010 to 2014, practically this market had an increase that was artificial, so incentivized sales due to a lower cost of financing. So you must remember the famous PSI when many customers bought sometimes even what they didn't need. This created an artificial market demand that was really great. And if we were to regulate or to calculate the excess demand over the period and then '11, '13, '14 -- and '14 would be at the normal level to 25,000 units. So the surplus in this period was missing in the following year. So there was a mismatch that ended up compensating and this generated the difficulty in the Brazilian bus market where -- and we got to 13,000 in 2015, 9,000 in '16 and '17. In 2018, we were almost at 15,000 and almost 18,000 in 2019, would go back to regular levels in '20 and 2021, but then we had the pandemic, and I would say that if it weren't for the pandemic, the demand would offset the lower demand, the higher demand of previous years. And in 2020, well, needless to say, we had the pandemic that had a profound impact in our industry, transportation of people both in terms of operators and the manufacturers had a deep impact, and we spent 2 years going back to very, very low demand. In 2020, the Brazilian market was 13,000 and in 2021, 20,000 -- 12,000 units, rather. So if we compare it to the first half of 2021 to the first quarter of 2022, you can already see a growth, both of the domestic market and also exports. It is important to emphasize that this volume could have been even higher if it weren't for the shortage of parts, especially frames. Builders suffered from the shortage of electronic items and this is now being regularized after the second half. And so June was better, August too, and we are expecting, just like OEMs that the shortage of supply of electronic parts that caused the shortage of frames will be normalized. So here, we have a chart showing the Marcopolo production in the second half as compared to the same quarter last year in Brazil, we had a growth of 13.6%. In exports, the growth was 11.5%. And in our international units, we had 19% of growth. In South Africa, we had a reduction of 41% caused especially because of the shortage of frames. And we had -- so our South Africa unit operates with ready-to-deliver units. Currently, we have no inventory, and we had severe problems in availability. And so we had sales, but we are short of frames. And this is going to regular in the second half. In Australia, Eduardo is going to talk after. But it's any -- already for 2023 also suffered from a shortage in frames. China's strategic unit is Marcopolo's position in China, especially for electric buses segment. The leading manufacturers of electrical vehicles, especially in terms of buses, they are all in China. And for this reason, and others, Marcopolo keeps this operation as a strategic operation. The Mexican market is also recovering, resuming its usual operation. It suffered greatly with the pandemic, especially the segment of road buses. In Argentina, we had operational problems resulting from the impossibility of Brazilian employees going for the ramp-up of the units. So we consolidated 2 units in Buenos Aires and Rosario. We merged them into a single unit, and we had ramp-up problems, especially for the manufacturing of urbans, where there was a high demand in the market, but because of lack of experience in urbans and now our Rosario, we had performance problems, and we are correcting this -- we will be correcting this in the second half of the year. The distribution of net revenue, so we have road buses growing from 25% to 28.8%. And the important thing to say here is that in the second quarter and also in the second half of this year, we are having a very high demand of heavy road buses, which is the product where Marcopolo stands out -- really stands out in a bus market. Urban buses account for 36.4% of our revenue, Volare accounts for 25.3%, microbuses 2.3%, frames 0.8%. So revenues from Banco Moneo, parts and others 6.5%. In terms of results, we had a growth of total net revenue of 39.8% as previously announced, in Brazil, that growth was 39%. The revenue from exports was 15.9%, and the revenue from foreign units -- from international units was BRL 341 million with a growth of 57.7%. This growth was partly due to higher volumes and partly due especially to the transfer of costs that we had in prices. And this was a very important fact to assure and protect the future profitability of the unit. Gross profit grew 4 percentage points as compared to the same quarter in the year before with [ 11.4 ]. It's still far away from our objective and our historical goals. And we believe that we are and will recover little by little, this profitability starting on the first quarter of 2022. And we have positive prospects here. EBITDA was 4.5%, very low. But when we compare to the adjusted EBITDA of the same quarter in the year before, we would go from a negative EBITDA of 5% to 4.5%. Obviously, we are not happy with this EBITDA, and we are working to make it better, and we are going to have better numbers we believe in this. We cannot say for sure, but very much likely we are going to have much better numbers starting in the third quarter this year. And the net income for the quarter was BRL 26.8 million, and it is important to emphasize that in the first quarter of this year was favored by gains in the FX rate as compared to losses in FX rate related to export orders. As Marcopolo locks the FX rate at the moment of sale for the order portfolio, when the FX rate goes down as it happened in the first quarter, we had significant gains related to FX variation. And once the foreign exchange rate went back to its levels in the second quarter so part of the gains that were booked in the first quarter were returned in the second quarter. So the best analysis would be for us to analyze year-to-date numbers and adjusting this discrepancy between quarter 1 and 2. So also in terms of net income and operational income too, it's important for us to analyze or to consider in the analysis, extraordinary effects that impacted last year's performance. We had significantly positive results that were necessary and they were related to the recovery of tax. This demonstrates that the company is paying attention and very careful in terms of seeking its rights and the main effect that we had last year, was the recovery or the booking of the exclusion of ICMS from the calculation basis of PIS and COFINS and many Brazilian companies had the same effect, and our effect was booked last year. That's why when we compare this year's performance to last year, we need to bear this in mind because otherwise, we can't look here to -- would be looking at a worse performance this year when actually the year before was very much favored due to extraordinary effects. So these were my comments to make. And afterwards, I will be available for questions and answers. Now I will give the floor to Eduardo Willrich for the second part of the presentation.

Good morning, everyone. I'm going to go back a little bit in Valiati's presentation, to show -- to go back to this chart to illustrate the year of 2021. So if you don't understand how difficult the pandemic was for us, you don't have the perspective of Marcopolo. We had a drastic drop in volume from a very high period in 2015 to 2017 and buses were still going down in volumes. There was a strong adjustment in structure in 2014. We were prepared for very high volumes. We had just opened a new manufacturing plant in Sao Mateus, and we were working with a volume growth logic. After 2015, we started adjusting the company. And as of 2018, we are growing again to try and go back to normal manufacturing levels. And once that was supposed to happen, we were frustrated because of the pandemic. When 2021 was very difficult historically, I went to the trouble to try and find when we made so few buses in Brazil and we go back to 1998, and '97, and '96, 20,000, '95, '94. Brazil had never manufactured so few buses. '98 had been a bad year. So the last year, when we had seen such poor production of buses in Brazil was a very bad year in 1998. Historically, we go back to the 1980s to find such a bad year. So just for you to understand how difficult the pandemic was for us. And how much strong recovery is lying ahead of us, and this is the vision that I would like to share with you. So we need to recover to go back to usual production. So we are not thinking of going back to the 33,000, 28,000 of 2014 just overnight. There's still a strong recovery to come, and it has started with the 28% that we saw in the first quarter -- or in the first half of the year more specifically. How is recovery happening? And how is this going to happen? In road buses, which was the most affected by the pandemic and this is kind of hidden in the numbers because when you see volumes of road buses, it looks like it did very well. But actually, the road buses we call chartering people transportation from home to work and from work to home. This segment grew because we needed 2 buses for the transportation of the same number of people because of social distancing. So there was a higher volume in chartering, but heavy road buses that are used in regular long-distance lines and towards coming back. But one thing is not yet offsetting the other. There's a higher volume of chartering, but in terms of revenue, this is already equivalent. Why is it so? The average price added values in heavy buses is higher than chartering. This recovery is already going on. This is reflected in the quarter's revenue, and this is going to accelerate from now on charter is going to grow, but heavy road buses continues to grow. So today, our production of double-deck -- of double deckers is at levels that we haven't seen since 2018. That was a very special year for us in terms of production of buses. G8 was a success during -- in it's launch during the pandemic in June. It was very well decided. We had an easier ramp-up with a new generation of products, more modern buses available in the market today. And it's a highlight even international trade shows that -- where we participated. So if you have a chance there was an exhibit and there was a Marcopolo Day on June 7 in a G8 meeting those of you that could visit our plant using G8. This is a great bus and we are launching all models in terms of road buses. And we also have a specific sector that you've been following. And as road transportation gains in competitiveness as compared to air tickets. So those who had migrated to airplanes now can go back to road transportation. So we hear our customers talking about this very frequently. And as prices keep on going up, the alternative for road buses gets even stronger. For urban buses, we have a problem that is previous to the crisis of 2015, 2019. So sales of urban buses have been adjusted below what they should or needed to be. This problem, believe it or not started to be solved during the pandemic. Why? Because then, because of high inflation and people going back to public transportation, it was necessary to find an equation that would work in terms of cost transfer. And then what's happening is that more and more cities are granting subsidies to bus fares as what we saw in Rio de Janeiro where the city bought buses directly. So this is because the mode of buses are going back because Uber stole many of our customers over the years and sometimes it's more difficult. So this is going back to public transportation, and this creates demand for carriers and a city that needs to renew the fleet. So there are many urban buses in the segment of urbans and the recovery of urbans takes place because of that. And for micro and Volares, we have delivered another 1,000 units this quarter. So you're still bidding for 2021. We have another 1,600 buses to deliver, probably not all of them are going to be delivered something like 1,400 will be delivered. And the new Phase 11 bid -- and we started to work to manufacture those vehicles, 3,000 units. And we think that about 1,500 will be delivered this year with another 1,500 to be delivered next year. So this is our market share evolution. So historically, if you go back and start with 2007, '06, '05, Marcopolo has always been the Brazilian leader in the bus market since 3 years. We kept the leadership in all segments of micros, urban buses and road buses. Marcopolo in 2021 was the market leader, and we keep the leadership in all market segments also in 2022. This is something which is different, and it shows how strong Marcopolo is in segments that are not so traditional, and we would be more leaders in urban buses too. This chart is reconciling historical levels, including Volare and as Volare shows, this accounts for a large share of the company's revenue. So we wanted to show market share with Volares with a highlight of 53%. I'm not going to talk again about what Valiati said about each one of the operations, but all of them have gone through deep restructuring during the pandemic when we took advantage of the drop in volume. So many of them suffered quite intense adjustments. One of the main highlights is Argentina with significant volumes and the factory is still going through significant changes. So this is already going on, and you must -- you will be seeing much better results as of the second half of the year. Same thing with very high volumes already in the portfolio in Australia. And so we are suffering to bring this ramp-up to usual levels to the expected efficiency and this will happen -- happen in the second half of the year. And we are going to see a significant change in all operations and all of them have suffered from the shortage offerings. So Marcopolo produces the bodies, and we get the frames from our customers. And right now in the market because of the shortage of electronic parts, we didn't get an offering. So we have a portfolio to deliver, and we are waiting for the frames. But without the frames we can't deliver the buses. So everything that we fail to deliver in the first half of the year, we are going to offset in the second half of the year in some way. We also had the launch, not just in Mexico, but in many countries in Latin America, of G8, we didn't have, so we needed the new model in Brazil. In Brazil we were already fostering sales. And now with the launch, we are seeing exports of the new generation. So for Mexico, Argentina, Peru, Colombia, Bolivia, we are starting to see sales of this model that had not yet been launched in the segment. So here to show you this -- for you to have an idea of the distribution of the international market so that you understand how big each one of our operations are. We can see Australia, Mexico, South Africa, China and Argentina. So what are the highlights for the future? We still have a kind of shortage of components. You're still suffering from the shortage of frames. So we are going to definitely suffer at some point in the third quarter. In July, the impact was not so significant than what we said in the first half of the year that we are failing to manufacture something like 20%, 25% in volumes. It was 5% to 10% in Q2. And we imagine that the impact is not going to be so relevant in the second half of the year. So we are regularizing the performance. But we cannot yet say with 100% certainty because there were things that we expected to be solved. And so we are going to still see some impact in June, and we are really looking forward to that in terms of volume recovery and manufacturing going back to normal levels. So practically from the half of 2021 onwards, we're still increasing our prices on a monthly basis. And we always transfer costs to translate the margins that Marcopolo needs. In seeking levels that will be healthy and sustainable for the company. It's difficult to do this all at once because obviously, customers suffer an impact when they get a new price every time they come to buy something. And there are some customers that are just not buying since the beginning of the pandemic. So when they come back here, the amounts are much higher than what they were used to. So this is something that we have been doing with great discipline and the impact of that is quite obvious in terms of average prices. In terms of the recomposition, you will see that this recovery is usually a transfer from the inflation rather than from significant margin gains. So we are likely to accelerate this or to have a stronger margin recovery as of the second half of the year. As to restructuring, we've talked a lot about this on Marcopolo day, dilution of fixed costs in trying to leverage the cost through operational leverage, and this will be clearer in the second half of the year when we can make the most of the growth in volumes, something that we haven't been seeing since the beginning. And so if we annualize those levels, you can hardly see that there was a very modest growth in the first half. Believe it or not the first half of 2022 was still very difficult in terms of volume because of shortage of the season in the second half of the year because of Omicron. This really affected our customers until February in a very intense way. So when we talk about the pandemic, it feels that it's so far behind. But in February, we were still very much worried about Omicron and customers are still very careful in terms of purchasing. The second half of 2022 was the first quarter when we didn't have any surprises. So it was the first quarter since March 2020 when we didn't see any reactions to the pandemic like customers canceling orders. It didn't happen. And we have portfolio. Today, we have a long portfolio. And when I mentioned the challenge of delivery times, this is very true. So we are contracting volumes and those who came to see us, you saw that our factories are really full and we have the intention of delivering everything as soon as possible within the deadlines that customers are expecting. This is a problem that we really like to have. And I am available for questions and answers. And there's a slide that is not in the printed materials that we have included here for the Marcopolo day to show a little bit about the historical progression of the segment that we have been producing since 2017. We relaunched [ Prospero ] in the Road segment, and we closed the first business for 2022 for the People Mover for the Guarulhos Airport terminal. So we expect it to grow as a new product of Marcopolo. And this sale is especially relevant because of its size of how much it accounts in terms of revenue. But it marks Marcopolo's entry in the market, and it's very important to demonstrate the company's technical ability. It's not enough to have the product, but we need to have products to show to customers and to prove that we can manufacture. And we are working on many projects related, not just to the Brazilian market, but especially to the Latin American market, where there are opportunities in this segment, and we can use our base, our plants, the people, our engineering sources to manufacture these products. This is complementary to Marcopolo. So in 2022, we are not going to see a significant impact, specifically in terms of results, but we are expecting to see good results with us once we sign the first contract. So back to Lucy.

So congratulations on your presentation, especially that you are going to the rail segment. Before moving to the Q&A session, I would like to greet Marcopolo for such a long-standing partnership that we have had. It's been 21 years where the company was with APIMEC and now APIMEC Brazil with all our regional offices. So I give it to Valiati, the CEO of -- to celebrate 21 years.

Thank you very much for the partnership. I would also like to take the chance an all associate analysts, our 50th anniversary book where our histories are combined together 50 years now -- 52. So we celebrated 50. Our 50th anniversary was in 2020. So we started operating even before the CDM. So without further ado, congratulations, and let's move to our Q&A session.

I would just like to -- thank you all for being here, our members of Marcopolo's Audit Committee. So just raise your hand and ask 2 questions at a time.

I am Victor from Bradesco BBI. I have 2 questions. Number one, could you talk about your backlog and to show the slide with about 16,000 buses in the road to school were orders based. And the second question in regards the results of Q2. So you booked labor provisions. Can we expect a recovery?

As to backlog, we are different in different segments. So it depends a lot on the model you're talking about. But now the segment is the Urban and Micro, Micro.Volare and also considering the road-to-school Phase 11. So we are getting contracts regarding the Phase 11 and it's a quite long vision almost for the whole year in the segment of buses and microbuses. As you are well aware. So we also manufacture Volares for inventory and to make ready delivery so we have Volares. So for the segment of Volares until the end of the year; for urbans, until November; and road, until the end of November. So today, we are trying to fit orders, ramping up manufacturing to try and have as much as we can during this year. So we want to increase production so that we have a shorter time to meet the demand of customers. And we want times to be shortened. And for the road to school there will be contracts according to our projections to deliver the 1,400 cars that we project that we are going to have contracts to deliver, and we are going to alternate Phases 10 and 11. So we have already started with Phase 11. We are manufacturing Phase 11 already and probably we are going to change to swap them.

Thank you very much for the questions, Victor. And in answering the second part of the questions about labor contingencies that have been booked, not just this year, but in previous years too. This is something that has affected us badly in the first half of the year, we had the approximate number of BRL 24 million that were booked as provisions for those contingencies, and this is -- reflects demand and people who were let go during the pandemic. And most of them. So we are -- we have almost 2 years -- the 2 years that we have to wait to be over. So we still have some impact, but we expect to have less and less impact and we are hiring labor with fewer terminations also because manufacturing has been growing. So all the causes that have led to higher demand, we are addressing them in a very responsible way so that in the future, we may suffer less if we need to let go of our employees and in trying to be objective in the answer, we expect to see a downwards behavior in terms of provisions for 2 reasons: one, because of what we are doing; and the others, because we have a lower volume of terminations.

Gabriel Rezende from Itau BBA. I had a question about margins. So in the second half of the year according to your costs, we saw that margins are below Marcopolo's, but it has been a quarter where we saw an improvement in some numbers as related to the first quarter of the year, interesting volumes, interesting mix. So some factors that would indicate that margins could have been slightly better. So to understand the behavior from now on into the future, what is the main driver for margin expansion? Is it going to come from volume or more predictability in terms of shortage of frames, control of raw materials, the prices -- just for you to -- can see a little bit into the future and what's going to happen in the second half of the year.

Well, the behavior of margins, we expect growing margins. We are not happy with our current margins. This is a result of a bigger context in terms of production volume, and in terms of problems and difficulties of shortage of the frames and also because of price increases when we buy raw materials. We need to consider that right now, market demands are higher, demand is higher than supply. So in this scenario, the recomposition of prices is not so difficult, becomes easier. So we are managing to transfer prices, as Eduardo mentioned in his presentation. The impact level and the level of adjustments that we need to implement, we can't always do it all at once. And we are doing it gradually and sometimes even abruptly transferring prices and impacts of cost increases, obviously, with higher production volume with more noble prices specifically talking about heavy road buses, we can use better our operational and manufacturing resources. We expect to have growing margins, and we want and will manage we can't promise that it's going to be in the third quarter, but maybe in the fourth quarter or even in the future, We are trying to recover our gross margin, our historical EBITDA margins, and we will manage to do that as much as possible. As time passes and in next quarter, we will be able to show better margins. If you look separately, and there have been a few impacts in the consolidated context considering everything that happened in Argentina, manufacturing difficulties in South Africa, also in the colligate in Mexico that were not consolidated affecting our consolidated margins. So we are addressing each one of those operations individually case by case and working so that in a consolidated, we have better results. Another factor which really adversely affected our results in the quarter was the performance of our colligate, New Flyer which also had difficulties with electronic parts in Canada and in the U.S. and had negative equity method results, which affected our EBITDA and our overall performance. So in summary, if we see an improvement in mix, better volumes, better results of our international operations, and each one will show a recovery and better organization for each one of those operations, continuous price transfers, which we continue to do. And then we can balance and overcome additional costs and predictability also makes it possible for us to gain margin and an additional factor that has impacted the quarter. And as the road to school goes on and evolves, the margins are compressed because prices are frozen and as time goes by, costs go up. At the beginning, we had good prices, good margins. And at the end, the margins are not so good. This is all going within expected. This was supposed to be like that and the time for that to happen is Q3. So this set of factors will lead to better margins. There are many factors leading to that.