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

Good morning, ladies and gentlemen, and thank you for attending the conference call of Marcopolo S.A. to discuss the results of the Third Quarter of 2022. This conference call is also being webcast from the company's IR site at marcopolo.com.br, simultaneously in Portuguese and English. And you can also find the presentation there. [Operator Instructions] Before proceeding, we'd like to clarify that any forward-looking statements that may be made during this conference call on the company's business outlook, projections, operating targets, financial targets and on its growth potential predictions based on the company's management's expectations relative to the company's future. These expectations are highly dependent on internal market conditions, the general performance of the country and on international markets and are therefore subject to change. Today with us in Caxias do Sul and Rio Grande do Sul are Mr. James Bellini, CEO; Jose Antonio Valiati, CFO and IRO; and Eduardo Willrich, Planning Manager and IR Manager. I'll now turn the floor over to Mr. Valiati, who's going to make some comments about Marcopolo's results in Q3 2022. Then Mr. Bellini is going to talk about the expectations for the remainder of the year. We now like to turn the floor over to Mr. Valiati.

Good morning to all. We would like to thank you all for attending this conference call to disclose the results of 2020. We can go straight to Slide 4, where I will give you a brief profile of the company. Marcopolo is a worldwide benchmark company as a body maker of buses and is a leader in all segments of the market. Our buses are known for their safety, comfort, quality and technology. In Q3, Marcopolo posted substantial growth in production, which had to do with the end of the pandemic and the normalization of markets. The production growth resulted in a doubling of the revenue in Q3 2021 and has positively affected all the profitability indicators. We can now move to the next slide. In the 9 months of 2022, Brazilian production of bus bodies was 13,841 units, 46% above the same period in 2021. The growth year-on-year reflects the end of the pandemic with the end of the impacts of the pandemic, which are relevant in our production in Q3 and also a pickup in the volumes sold. We can move on to the next slide, please. In the quarter, Marcopolo's production for the Brazilian market grew by 131.8%. The export production from Brazil grew 154.7% and our international operations saw a decrease by 25.6% in production. The quarter-on-quarter comparison was hurt by the weak base of production in Q3 '21 when the company stopped its activities in Brazil in view of the shortage of certain components, especially semiconductors and chassis. Production in Q3 2022 has gone back to normal with no major impacts in view of [ leaves ], which is a factor which affected the volumes produced in Q1 2022 or the lack of components, which also had a major impact in production in Q1 2022 and in Q2 '22. We expect that volumes will increase, and this should persist until the fourth quarter of 2022. We now move on to Slide 7. In the quarter, our net revenue on a consolidated basis was BRL 1.5 billion, which was a record in a quarter for the company. The Urban segment was the one that accounted for the major share of the net revenue and accounted for 45%. This segment was benefited through the pickup in exports, the recovery of sales in the post-pandemic period in different markets and by the volume for the Caminho da Escola program. The best scenario in the market also benefited the road segment, which has maintained an improvement in the mix with a larger share of heavy-duty bodies, which accounted for 60% of production in the segment in the quarter relative to 11% in Q3 '21. [ Volati ] is still a very positive highlight and accounts for 24% of the revenue. Retail and public bids, maintain traction and are supporting sales. Bodies of micros, chassis, Banco Moneo and parts accounted for the reminder, 8% of our revenue. On Slide 8 now. You see that in Q3 2022, the company's gross income was BRL 232 million with a gross margin of 15.3%. The increase in the gross margin reflects a better market in the post-pandemic period with an improvement in the sales mix with those products with large added value, a recovery of margin through the pass-through of costs and greater operational leverage. Gross income was negatively impacted due to operational difficulties in Metalsur in Argentina and through the delivery of volumes for the Caminho da Escola, which had to do with the bid of 2021, which profitability was decreased due to inflation in the period. EBITDA was BRL 90.5 million with a margin of 6%. EBITDA was negatively affected by the results of the Canadian NFI Group by BRL 26.6 million and by the results of Metalsur in Argentina of BRL 40.8 million. If we adjusted EBITDA margin and cancel out the negative effect of these 2 companies, the EBITDA of Q3 2022 would have been 10.4% or BRL 158 million. The EBITDA in Q3 2021 had benefited from other operational revenues, relating to a lawsuit about the non-charge of IRPJ and CSLL on the monetary updating of tax debts and also in the successful suit relating to IRPJ and CSLL on monetary updating having to do with financial investments. Once these effects hit the adjustment, the margin would have been negative in Q3 '21. I now turn the floor over to James, who's going to talk about the market scenario and the prospects.

Good morning to all. We start by speaking about the road segment. The market for road buses has been improving its mix with a larger concentration of sales in more value-added models. Tourism has picked up and also long distance has pick up, which is promoting a renewal of the fleet with the consolidation of double deck models, Generation 8. The segment has -- is heating up, and the heavy-duty models are now more representative than the lighter models in Q4 2022. G8 has been launched internationally. Exports have been benefiting from the new family of buses. The urban segment has good prospects with direct investments made by the public government, and we are now selling more value-added models, including articulated and electrical buses. Caminho da Escola is also boosting the urban segment with the beginning of the deliveries in Q3 2022. Exports of urban buses to Chile and Africa were also the highlights. Our Volare business is gaining share in the segment of micro in retail and also in public bids. In Q3 2022, the company delivered 1,221 units for the Caminho da Escola program, of which 736 and 293 Volare buses in relation to the bid of 2021 and 87 urban, 52 and 53 Volares for the 2022 bid. The company should deliver remainder volume for the 2021 bid in Q4, and with the deliveries in 2022 gaining traction. We have maintained our leadership in the Brazilian market of buses in Q1 with a market share of 53%. On the next slide, you see our exports, which have improved in Q3 2022. The exchange rate benefit sales, but economic and political factors locally impact new businesses in important markets such as Chile and Argentina, thus limiting our growth. International operations, production and sales suffer as the impacts of inflation and the shortage of components are felt. Metalsur had its results impacted by operational difficulties in the ramp-up of production and had to delay deliveries, which has brought the negative effect of cost inflation, a long portfolio of orders with old prices is translating into losses. But we -- the renewal of the prices for new prices, we should recover the results. Marcopolo Mexico is changing the mix of sales and high volumes of urbans are being replaced by road buses. The G8 line is now contributing to a more balanced result of operations, and the prospect is good for the rest of the year. Marcopolo Australia has seen better results through the increase of volumes. We continue to look for efficiency gains and synergies and a longer portfolio of orders for Q4 2022. New Flyer is seeing problems with impacts in the supply chain and delay in deliveries. On the next slide, you see that we had no significant delays in our Brazilian operations in view of the lack of chassis, but the problem has not been completely solved in international operations. The scenario has been improving and other operations will go back to normal in terms of chassis in Q4 2022. In Q3, we tried to achieve better production levels, which was only possible as of September, especially in view of the need for training people in the last few months. We started producing the electric bus, a TV and 30 units are now under production. The company continues to work to obtain the approval of the model in different markets. Investments have been made and are being made to train people and prepare the plant for producing electrical vehicles. Marcopolo is ready to meet demand, which should be growing as of 2023. In terms of the market, if we consider our very healthy portfolio of orders, the recovery of markets, which had been affected by the pandemic, we believe that 2023 will see further growth. The mix of orders is moving towards models of more value add. The inflation has been also giving away in the shorter term, which may improve the cost of funding our products in the future thus improving the demand in 2023. We may now move to the Q&A session.

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

Could you give us a little bit more color about the reminder units for Caminho da Escola. Is there any risk of you not being able to deliver these units? And if I may ask a second question, we saw an increase in the inventory of finished products. What is going to happen in Q4?

Relative to Caminho da Escola, normally, there is a difference between what we confirm in the public bid and what we effectively deliver. Usually a 5% or 10% difference in terms of volumes. So there would be 5% or 10% different, and this is something that we wouldn't deliver relative to the bid in 2022. It doesn't have to do with the delivery terms, but it's because of the contract that we have with the federal government in terms of these orders. So we expect the same thing to happen as is always the case with the Caminho da Escola program. The second question has to do with the growing inventory of finished products. We do have more finished products, but this has to do with having more products available for the end of the year. And for meeting the demand of Caminho da Escola, we don't want to run the risk of not having the buses ready once we have the authorization to deliver the buses. We expect the inventory of finished products to decrease by year-end or in the beginning of Q1 2023.

Our next question comes from Mr. Lucas Laghi from XP Investments.

James, Eduardo, Valiati, I have 3 points that I would like your comments on. I would like to understand the 41 impact on EBITDA coming from Metalsur. And also if there is room for improvement and what the time frame is. So we have inflationary cost pressures, and we have volumes, which have been impacted by the economic situation. And also, would it be possible to have an EBITDA breakeven, just taking into account the matching between costs and the pass-through of revenue for EBITDA to achieve a breakeven? Or would we still need to see a recovery in volumes? And then the second point has to do with the road mix. We saw this within the Rodoviarios, the intercity with heavy-duty buses. But this category accounts less than it used to relative to the history, it was 23% relative to 40% in historic levels before the pandemic. So do you think this share will be structurally show going forward? Or -- and if this is the case, will consolidated profitability be less? Or are the other segments going to make up for this loss of profitability? And the third point is a follow-up of the following of the last question.

So to answer your first question relative to the impacts of the operation in Argentina, we had the combination of 2 factors, 2 negative factors, sales volume that was smaller. The sales in that unit are in dollars. The prices are established in dollars, but the volume of sales was very large, but the impact of the cost of inputs and the operational difficulties in terms of ramp-up, ended up having a negative impact on the company's results there. In Q3, we are still seeing some impacts, and we have taken all necessary measures. We sent a team to assist them at the operational and financial level to try and reverse the situation. And we have repositioned the sales prices to a level that will bring good results to that operation. It was a setback in Argentina, we also had difficulties during the pandemic. It was difficult for us to send technicians and professionals because of the lockdown. And all of these factors together account for the losses, which were pretty hefty. But once we sort out all of these problems, there are import restrictions. Argentina has problems relative to imports. So we expect that we will have good results from the Argentine operation. Relative to the second question, Lucas, the mix -- regarding the mix, there is an offsetting effect in the light segment. So there is less chartering now. This segment was benefited in the pandemic, because buses were running at half capacity. So there was an increase in volumes, and these volumes are now being offset because there are more sales of higher value-add products and heavy-duty buses. We should see also an improvement or a normalization in the chartering market. So the mix between intercity and chartering should go back to 70-30, which is our historical level. And the volume of chartering should grow going forward. In 2022, 2023, the intercity buses should increase and chartering also should improve in terms of volume. So we are going to see revenues reaching the levels which are closer to our historic levels with intercity accounting for 40%, 45% of the revenue. This process is in the beginning, we are beginning to see this recovery. In terms of profitability, you saw adjustments in the EBITDA margin. If we exclude Metalsur and New Flyer, you will see that the result is as healthy as we last saw in 2013. So in our current sales mix, we are positioned to see a profitability that we hadn't seen in the company for a long time, even though the products are lighter, they are at a price level that allows us to have this level of profitability.

Okay. And just to add something relating to Caminho da Escola, do you expect continuity of this production improvements that you have been seeing in Q3 in 2023 as well. Once you have delivered all the products under the Caminho da Escola program, will you be able to replace the revenue from this program with revenue from elsewhere? To ensure a different -- the same level in terms of production that you now see.

Caminho da Escola, all it accounts for relevant volumes. We are not expecting any disruption in that program. We will continue to see, we think, relevant volumes in 2023. There should be a bid out for 2023. So we shouldn't see any drop in volumes. It's a consolidated program as students now depend on the program for transportation. So we don't see any prospect of decrease, and we expect the volumes to remain what they are.

Our next question is from Mr. Rezende from Itaú BBA.

I have 2 questions. The first one, and this was talked about the impact from the Argentine operations, could you give us a little bit more color about New Flyer and what the prospects are for the medium and short-term, so there was a negative impact in Q3? And what do you expect for Q4 and the beginning of 2023. We have New Flyer, Marcopolo book. So what is the trend for the next few months? And the second point is, going forward, and thinking about James' comment about the prospect in the longer-term, could you comment on opportunities in view of electrification trends? The city of Sao Paulo has just disclosed a very ambitious target, which might be difficult to achieve, but they want to limit the fleet within the city to electrical vehicles. This seems to be a global trend that should foster a very fast renewal of the fleet. So what is Marcopolo's exposure to that? And can you benefit from those trends?

Gabriel, in relation to New Flyer, it's a very similar movement in different operations. We see the impact of a shortage of components and inflation, and this has been hitting almost all operations. We felt this earlier in Brazil, it was very intense in the middle of 2021. In the previous quarter, we saw a shortage in components. We now see this impact with this kind of effect in the Argentinian operation, we saw this in Australia, in Colombia, Mexican operations went through a similar process, inflation hit us earlier, the portfolio had a shorter time frame. So we could turn on the key and turn around more quickly. But NFI looks very similar to what we saw in other operations, they have a longer portfolio. So it is a bit difficult to do the ramp-up and deliveries because of the shortage of components and the costs are higher as well. It's very similar to what we saw in other operations. But as the portfolio is delivered many are trying to renegotiate prices. And we have been trying to update the prices of the portfolio. And as this is successful, we are going to see more normal results. It's not something that we can turn around very quickly. But in one quarter or 2 quarters, we should see things going back to normal. They will announce the results on the 15, and we were going to have a little bit more color as well relative to their expectations. In terms of the opportunities that electrification is going to bring, we see that in terms of electrical mobility, there is an upside for us next year. Marcopolo today in Brazil is the company that is prepared -- that has prepared the best for this type of move. We have launched a TV Integral in Q3 last year, and we are now producing, achieving not prototypes anymore, it's being produced, the first 30 units are under production. And we have contracted inputs from abroad for another 100 units. Next year, there will be a move in the market, not only in Sao Paulo, but in different cities, even small cities, and these cities are going to put out public bids and RFPs for electrical vehicles. Sao Paulo -- in our opinion, Sao Paulo acted even too fast in terms of announcing that diesel buses may not be bought anymore, and this caused a big move towards electrical. We don't think we are going to see all these volumes in the short-term. But even if they should come, we are ready to meet the demand. We have achieved a Integral and also all the partnerships for electric chassis provided by other suppliers. So yes, Marcopolo is ready to meet this demand. And we believe that as of 2023, this will be an upside for our revenue.

And if you allow me a follow-up about New Flyer. So you expect an improvement in the next few quarters. We should see their results on the 15. And with that, Marcopolo would no longer think about disposing of the stake in New Flyer.

I'll take the first part of your question. The recovery has to do with what we see in other operations. It was the worst moment in history for bus productions -- for bus production all over the world, there was an impact all over the world of the pandemic, and New Flyer saw that as well. So we are seeing now companies leave behind the worst crisis in history because of the pandemic. So it's just natural that we should see a recovery. And the expectation is that not only the results of New Flyer, but the results of Marcopolo and our international operations. It's just natural that they should recover. So we think this recovery will take some time. And relative to the disposal of the stake, there are no plans in that regard. But the possibility exists depending on the price level, there is a possibility that this could happen, though not in the short-term from my point of view.

The next question comes from Jonathan Koutras from JPMorgan.

Congratulations for the results. My first question is about labor law suits. And when should we see the impact in the P&L, you are rehiring? And the other question is the mix of products in South Africa. You say you now have a more balanced mix. So what was this mix like in Q3?

Relative to labor lawsuits contingencies in the balance sheet, we are trying to mitigate against it through concrete actions and with the reduction in dismissals, because of the pandemic, we expect that these numbers will also decrease in the next few quarters, especially next year. So that we can have a more reasonable amount for contingencies, last year, this year and the year before, the amounts were significant. This is an issue we focus a lot on, and we expect these numbers to decrease, particularly as of next year. And relative to the mix in South Africa, we see that the intercity segment is growing, and this is a trend in all of the operations. We are seeing a growth in intercity products. The volumes are growing and we also saw that in different markets. So the mix is now moving towards a greater share of intercity buses.

[Operator Instructions] Since there are no further questions, we now close the Q&A session. I now turn the floor over to Mr. Valiati for his final remarks.

Once again, we would like to thank you all for attending this conference call. Our IR department remains available to provide any clarification you might need. Have a good day, and thank you.

Marcopolo's SA conference call is now ended. We thank you all very much for attending, and have a lovely day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]