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

Morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A., to announce the results of the third quarter of 2023. This conference call is also being transmitted in the Marcopolo's RI website at ri.marcopolo.com.br, simultaneously in Portuguese and English. There, you can also find the presentation. [Operator Instructions] Before continuing the statements made during this conference call about Marcopolo's business prospects, operational and financial projections and goals, and also statements on its growth potential are forecast based on the management's expectations regarding the future of the company. Forward-looking statements are highly dependent on conditions of the domestic market, the overall economic performance of the country and also on international market and therefore, they are subject to change. Today, with that, in [indiscernible], we have Mr. Andre Armaganijan, CEO; José Antonio Valiati, Investor Relations Officer and Eduardo Willrich, Investor Relations and Planning Manager. First, we are going to hear Mr. Valiati to talk about the Marcopolo results for the third quarter of 2023. Then, Armaganijan, is going to talk about the outlook for the rest of the year. Now I would like to give the conference over to Mr. Valiati.

Good morning, everyone. We would like to thank you for attending the third quarter 2023 earnings conference call. Now we can move to Slide #4, where we are going to start with the highlights. In the third quarter, Marcopolo managed to perform well, despite a drop in production volumes and [indiscernible]. After restructuring conducted in recent years, the company has been gradually consolidating a new level of performance, higher than its best historical levels. Now we can move to the next slide. In the first 9 months of 2023, the Brazilian production of bus body has been showing similar volumes to the same period in 2022. In the quarter -- in the first quarter, there was a significant growth in production, while in the second and third quarters, we see the accommodation of volumes generated by the effects of the engine transition from Euro 5 to Euro 6 entered. As well as by the postponement of the bidding for the new phase of the "Road to School" program. Now we can go to the next slide. In the quarter, Marcopolo's production directed to the Brazilian market fell 31.3%. Production for exports from Brazil fell 38.3%, and our international operations, we saw a growth of 16.4%. The company's production in Q3 '23 was affected by the engine transition to the Euro 6 standard, by the lower volume of units exported, as well as by the end of deliveries directed to the federal program, Road to School. In isolation, becoming this all our Road to School program explains the great difference in volumes. In the third quarter of 2022, 1,200 units were produced while only 3Q 2023, only 67 units were manufactured for the program. The absence of relevant packages for urban model and exports also affected the volume of units produced in the quarter. The gradual recovery of the Intercity market in Latin America helped offset the lower volume of urban vehicles. Now moving to the next slide. In the quarter, we achieved net revenues of BRL 1.6 billion, of which BRL 984.3 million came from the domestic market. 60.9% of the total, BRL 180 million exports from Brazil, 11.2% of the 450 million from the company's international operations, 28% of the total. In the third quarter of '23, the increase in revenue compared to 3Q '22, reflect the increased volumes of Intercity vehicles sold, both in Brazil and abroad, especially with the growth in sales of the G8 models. As well as a better sales mix in Brazil, with greater exposure to higher value added Intercity buses. The urban segment in the domestic market also demonstrated good performance offsetting the absence of the Road to School program. Moving to the next slide. In 3Q '23, the company's gross profit was BRL 371 million with a gross margin of 23%. The increase in gross margin reflects the better market environment with an evolution in the sales mix with the increase in volume of higher value-added products, especially in the Intercity segment. The gross income and gross margin also benefited from the recovery of results from the company's international operations. EBITDA was BRL 208 million with a 13% margin, 12.9% to be more specific. EBITDA was positively affected by the factors already highlighted in gross margin. And EBITDA was negatively affected in BRL 19.2 million due to the results of the Canadian affiliate New Flyer. If we were to eliminate the effects of New Flyer in the equity assets, EBITDA margin would reach 14.1%. In the quarter, net income was BRL 161 million with a 10% margin against a result of BRL 46.7 million and a margin of 3.1% in Q3 2022, a growth of 246% quarter-on-quarter. The Industrial segment's net debt represents a 0.4x the EBITDA of the last 12 months. Now I will turn over to Andre, who I will talk about the market scenario and all.

Thank you, Valiati. Good morning, everyone. Start talking about the Intercity market, what maintains good performance with sales growth despite the energy transition from Euro 5 to Euro 6. So it's consolidated in higher value-added and practically excluding all G7 models, the tittering sector has also experienced a good time with the pace of deliveries regaining traction after assessing volumes at a post-pandemic. The outlook is positive for the Intercity government of Q4 '23 and Q1 '24. The urban segment has been confirming its growth trajectory when we take out from the comparison with 3Q 2022, [indiscernible] directed to the Road to School program. The low urban renewal over the last 12 months has got the [indiscernible] and the rating these investments at a time of resumption of passenger demand for public transportation. Marcopolo's signed a projection of the second batch of 20 units [indiscernible] Attivi fully electric engine in 3Q '23, while we are developing the basis both regulatory and also in financing for markets in Brazil. In a segment, all of microbuses and Volare the launch, of the "Volare Me Leva safety" marketing campaigns, celebration of the brand's 25th anniversary promoted sales, [ 1175 ] provisional measure also contributed to sales in the Volare segment, and the stock of ready-to-make products could take advantage of the condition of the renewal on October 9, 2023, and there was a bid of the federal program, Road to School, and the company was able to deliver directly or indirectly up to 7,720 additional vehicles [indiscernible] 5,600 microbuses and 2120 Volare buses. Deliveries should start in the beginning of 2024 depending on the [indiscernible] of the result of the bidding process and also on the cities adhering or complying with the contracts of federal government. Next slide on exports. We see distinct movements in different segments. In Intercity transportation, there's a good recovery in volume with sales growth of the G8 model, driven especially by the resumption of regional tourists, while an in urban transportation volumes give way with the absence - for the time being of large elected to [indiscernible]. The company believes in the recovery of exported volumes, considering the progress of negotiations of irrelevant volumes for 2024, and the contribution of the foreign exchange, which remains attractive as international operations. The trend of profitability recovery is being confirmed. It began in the Q2 2023, increasing its contributions in the consolidated results of Marcopolo brand. If we see the third quarter of this year as a whole, the net revenue grow consistently, whenever [indiscernible] of prices after the period of high inflation and actions have been adopted in recent years also continue to bear fruit. And in 3Q 2023 delivered a positive amount of BRL 11 million positive versus a loss of BRL 46 million in Q3 '22. The recovering of the operating results of Metalsur in Argentina, and the sequence of good results of Polomex in Mexico, are the main international highlights of our company. We can move to the next slide. Now, talking a little bit about the performance. We are still confident in June, we had the best months in terms of confirmation of new versus in last year. The availability of [indiscernible] is also back to normal, increasing our productivity, which allowed good manufacturing or factory planning logistics, deliveries and purchasing. Now in October, we also had the bid for the Road to School program with the addition of volumes, and the delivery that's going to start in the first quarter of 2024. So considering these factors, we are positive about the growth of production volumes looking ahead. This allows for a more adequate use of our installed capacity and efficient use of our headcount that received training during the year when we -- production slowdown. In 2020 Marcopolo had inefficiencies associated, low volume of production and excess headcount in Brazilian operations. Now this is the time for us to ramp-up and see greater efficiency. From the restructuring of the industrial complex in recent years. We are managing to concentrate investment in modernization and automation, the development of new processes and products makes it possible to further improve quality [indiscernible] and we go on investing in our factories, process automation, which will also produce operational [ bus ] for the company. Since 2020, we've always had something that prevented us to have a more normal market. [indiscernible] high interest rate, rental component and can change lack of rates. For 2024, we have seen an environment of conductive renewals and in all market segments. All interest rates should also contribute to the recovery of volumes, and we'll have new initiatives starting to bear fruit in the sales. So Marcopolo will be able to consolidate the profitability levels as it's been so in 2023, seeking even greater operational level in 2024. Now we can move to the Q&A session.

Ladies and gentlemen, we are now going to start a question-and-answer session. [Operator Instructions] Our first question comes from Andre Ferreira Bradesco BBI.

Hello, everyone, congratulations on your strong results. I have 2 questions to ask. The first one is once again praising you to go into the second batch of Attivi and there are many cities migrating to an electric carbon tools. What do you see more opportunities for Attivi in Brazil and in other markets, too? And if you could give us details of where it is at a more advanced stage in terms of approval, both in Brazil and abroad? And the second question is for the large volume of deliveries to the market as a whole for the new Road to School program, can this be translated into a gain in market share for Marcopolo?

Thank you for your question, Andre. About electric vehicles, the movement has been very positive, more recent deal with many cities that want to buy those products. Obviously, the main discussion is still funding. And now we have started to see state funds taking part in this process. And also the charging infrastructure. We are in many Brazilian cities in the entire south and southeast of the country and many cities in the North and even in the north. Of course, São Paulo is the first city that is very much related to this, 2,600 buses by the end of 2024. And when we have a major presence at just, for example, [indiscernible] with 70 buses being renewed in 2024 and some projects and some tests in cities in the north. You mustn't project that we are not talking about the full activity, but we are already had [ deal ] with the third-party electrical frames, São José dos Campos and other cities. Of course, the main volume comes from São Paulo, which is the biggest Brazilian market with 13,000 buses circulating, but we see other markets such as Porto Alegre, Curitiba, even Vitória in Espírito Santo, very strongly under renewal of the fleet -- part of it in electrical buses. In terms of approval of the product, this has been approved in many Brazilian cities. And we are also working on the approval for the city of São Paulo. We have made major efforts. We have tested almost everything. There's just one last test missing, but these are almost fully tested and available to be sold in all markets. As to the Road to School program, obviously, we've been working and thinking in the growth in production, we were aware of that, that there would be a significant increase in production, especially in 2024. And that's why in the recent past, we capped the headcount in the company. And we won trained all our employees expecting a higher production capacity in 2024. Obviously, this will make it possible for us to deliver the expected volume of more than the 7,000 units. So part of being '24 and also in 2025, and leave room for us to continue gaining share and working on this segment in the Intercity -- urban segment, sorry, outside the school. So we want to meet demand that is almost twice the current demand for Marcopolo manufacturing. And so we want to take part of the program -- own half of the program. We won almost half of the program with one of our partners, but also have availability to continue manufacturing. For example, in the urban which is still very much warmed up.

Our next question comes from Lucas Laghi from XP Investments.

Good morning, Andre, Valiati, Eduardo, congratulations on our very strong results. So there are 2 things that I would like to mention to you. Thinking especially in terms of price and profitability. When we look at the evolution of revenues and we compare to the second quarter, we see an evolution of 10% in terms of price increases and 7% in terms of [ build ] volumes. So could you explain a little bit better [indiscernible] volume of 10%? I know that there are many different factors. I think that interest is growing, and in urban, we have higher value-added products, and it's difficult to look on my number of units manufacturers, but we have 10% of sequential increased. Can you explain that in terms of [indiscernible] -- was there any price increase within this subcategory. So I would like you to give more color on the price dynamics. And also a question on profitability. Also, as a consequence of price increases, can we think of Intercity that is with a profitability higher than other segments? Or are the other segments more equalized and more similar to Intercity buses, especially when we think of double deck buses. Can we think of a higher dilution of fixed costs and even wider margins towards the end of the year? Or is there any other effects that we should consider to assume this evolution in profitability? So these are my 2 questions. Thank you so much and congratulations once again.

As to the price dynamics, again in the quarterly comparison and showing it as a ticket, this is the result of the maturity that we did in the past. So if we look at our portfolio, it doesn't change from one or to the other and not even in [indiscernible]. So all orders are replaced by new orders - with - [indiscernible], the maturity was not yet fully accomplished and that are new workers that are based. And also, we have a better production mix for urban and Intercity, Road to School. But in each segment, we have higher value added and more comfortable buses to have more comfortable lines that were left aside for almost 2 years after the pandemic and those investments helped us to have the average prices that you are seeing. And as there is inflation, we're transferring the inflation to as possible. But the main thing is related to manufacturing. And manufacturing mix, what we have seen over the last few quarters is urban keeping a high relevance in terms of revenue, but in receiving and regaining leadership. So the same change that we had at 2019 Intercity with the highest share in our revenues. We're seeing this movement coming back and we're now almost back to normal. We still have some room for Intercity buses to grow, and it would be like 45%, 50% going to our old levels. And in the near future, I think we are going to get there. It doesn't mean that we are losing a space for urban buses. We can its gain in share, and we are also seeing higher value-added models being included in the sales mix. As to the margin distribution between segments, now they're more similar now. So there is not such a large difference. The main difference is it with higher value-added and a lower value-added type of vehicles, more sophisticated and simpler vehicles. So that is the main difference in margins. And now if we look to 2024, we're adding mindset of operational leverage. Yes, we do have room for improvement, both in Q4 and in 2024 as compared to 2023. As to the dilution of fixed costs, obviously, with the growth in production and increase in [ billing ] we are certainly going to have a cost dilution that will contribute to a better income. So as I said, we were -- the market was going to recover Intercity buses was we're going to recover, to raise tickets. So while developing as we launched G8, we saw a very simple way of looking into that. If you look at Marcopolo line, through the double-decker line. We had 2, 3 vehicles per day in 2022. And now we are manufacturing 7 double deckers a day. So it has a major impact in the company's bottom line. And they have higher value added. So the company is getting to have products with more and more value added, and this provides good results.

Our next question comes from Fernanda Regu from BTG.

I have 2 questions to ask. The first one is, I would like you to tell me a little bit more about the Road to School program this year. And what is the profitability of the volume that you won in the auction. According to our [indiscernible], it's like 52%, which is [indiscernible] below the numbers we had in the past. So total profitability in the auction kind of offset the lower margin? And should we expect profitability higher than historical margins. And number 2, also regarding the Road to School, how can we see the return of volumes for Road to School options, will be 10,000 or 11,000? Or could the repairs give strong volume as we saw in the last one.

As the profitability, it is similar to what we saw in the last seasons. Volume, obviously, is much bigger. So this is a positive operational leverage effect, which has an impact in our bottom line, but also in line with what we have planned. As the market share Road to School program is very good and it makes it possible for us to explore alternatives in other segments such as urban and microbuses as Andre has just said. As to volume recurrence in -- during the bidding process, the expectation was to kind of change the fleet and to replace the fleet as the cars aged especially if we compare to the beginning of the program. So this will consolidate in a volume that will be higher than what we saw in recent years, some with 4,000 , 7,000 units, and this might not -- we might not have again the 15,000 units of this year, but something around like 9,000, 10,000 or 11,000 units. So we saw some recovery in the size of the fleet.

That's right Fernanda complementing and Eduardo said well. So it was launched in 2007. The annual need for fleet renewal already generate interests in volume. And of course, this program will be expanded to the country and the government is supporting this program.

Our next question comes from Gabriel Rezende from Itaú .

I have 2 questions too. Number one is a follow-up on a question you had about price [indiscernible] profitability. I would just like to [indiscernible] something with you that you made very clear that we are seeing a more favorable mix in each of the product enrolled urban versus what we used to have during the pandemic years, but some more challenging for the industry. What is related to the scenario and what is more structural? So do you think the market is going to converge to a level of units that is more normal? And maybe you may give up the additional profitability. Of course, we expect more dilution of fixed costs in the future with higher operational leverage. Just understanding how much of it is structural and how much of it is [indiscernible]. And the other thing, the Marcopolo today is not a company in debt. You are advancing a surprising way. So you still have positive prospects that you have streamlined some operations in the last 2 years. The company has a idle capacity to be occupied by higher volumes. So what's your strategy for the allocation of marginal capital from now on? Can you do it with the cash you're generating in terms of new investments in your geographies, new products? And so I would appreciate if you could answer this question.

As to the first topic associated to profitability and mix, we do not yet have the ideal mix. We're still in a trajectory to find the ideal mix. And we want to have more Intercity buses -- we are going back to the mix that used to have in 2019 in terms of Intercity Urban, Micro and Volare. When` it also something related to exports. So the trajectory is not so linear as the recovery of growth of the tourist market and even urban public transportation in Brazil. And so this recovery is more volatile, more erratic. So if we look at the composition in terms of allocation of sales and it can still get a lot better when we see that -- so there is an evolution of the mix with that regard. There's another factor which might be closer to what we are having today in terms of international operations, that they also contributed to the operation, not just in terms of product features of each product, but bringing margins close to what we have in Brazil also in those operations. So a relevant point that happened to contribute [indiscernible] a national operations, converging positive results. And there is a major opportunity, bringing it back to a close - even superior levels in terms of profitability in Brazil.

Where does the new [indiscernible] come from?

Well, mix is still poor. So that can get better even further. So the distribution of the internal market -- we can have more [indiscernible] international operations can contribute [indiscernible]. We are getting better and they may contribute even further. There's a fourth factor volume. We should consider the volumes in 2023.

Is the production volume that is still very low?

We haven't yet gotten to 2019 volumes. So we expect the market to go back to normal in 2020. And in 2023, we are not even close to that, and we are hoping that in 2024, we can mature volumes as volumes go back to normal.

About capital allocation, in fact Marcopolo as you said, conducted international [indiscernible] from a profitable operation trying to maximize as much as possible [indiscernible] results of our current operations. The work that we've been doing most of the investments were made in the recent past in electrical line. Now we have internal work that we do have [ other ] opportunities to improve our operational management. So here, we are talking about modernization, but especially [indiscernible] internal processes in the company, this is going to make us more competitive and will help us in [indiscernible] as we are doing this work. We want to make the company more competitive. And for sure, we need to look into the future, the market [ labor ] and availability of human resources for the best [ potential ]. So we are paying close attention to the automation and digitalization of the plant and of course, a electrical project and everything related to it. There is just transformation for us that [indiscernible] always mentioned to you in terms of having a product that only makes [indiscernible]. Now, we start talking about technology, too, and this [ calls for ] some investors. But the main lesson learned is that Marcopolo [ international ] competition. It has understood that we need to take good care of our plants and make the most of them. Global expansion, well, we always [ go to ] market. But right now, that is not our main focus in terms of opening any new plants. We learned many lessons in the past. I think that with all of this, once the company starts generating cash and it will surely do so this is relevant, has been presented before. The idea to have a quarterly payout of dividend, and this is also included in our pipeline in a significant way in terms of capital or development costs, dividend payout and locations with the current existing manufacturing complex and new technologies.

Your next question comes from [indiscernible] from Capital Assets.

My question has already been answered by my colleagues. So congratulations on your performance. You may move on.

Our next question comes from [ Gabriel Tinen ] from Santander.

I have a question related to the Road to School. Just to make sure I understood. And the idea is to do that along 2024, a good part of it go to 2025. And also a follow-up. The current capacity, is it sufficient, or do you need anything more?

We have been sized to work on those volumes. So the company is sized and to deliver. We have delivered even greater volumes...on how much or when as the bidding was [indiscernible] only held in October. I think that part of the volume will go on until the beginning of 2025. And so it usually it's good for 1 year. And so after the approval, the approval of the result as Andre said, has not yet taken place. So it's due any time and then the time or the deadline starts counting. So for the company - the company could deliver volumes once the [ cities ] is joined and are interested in buying.

Very clear. And number 2, this is more related to the international operations. We saw a gradual recovery along your last reports. And how has the evolution been, and what is still missing to happen? What do you still need to do?

Well, for sure, most of the results of our international operations, are related to the management that the company is doing for each one of the teams. Of course, there is a recovery all over the world and the Brazilian market, we transfer costs, and we did that also overseas, but we mustn't fail to mention what we've been doing with the team in Brazil and the team here, I'm talking about support and operation of international operations and also the management of local teams. We changed the [indiscernible] the people processes. We have a better administrative control of the operations. Obviously, the launch of new products to [indiscernible] complementing, if you want to understand where the increase comes from. So in addition to the better management of operation, our new product, so G8 is very successful in Brazil in the success in terms of exports and the introduction of our new products is going very well. We are also working on localizing it to manufacturing locally. So new products and management, price transfer due to cost increase in operational efficiency. This is something we work very intensely all through the pandemic. Adaptation of headcount. Unfortunately, we needed to streamline back then to make the company leaner and that is what we do. There's still many actions going on internally. And of course, each market work different - but operationally, I can say that this is the reason and this combination [indiscernible] reason for the success. This is the reason why we believe that they will all continue to contribute more and more to Marcopolo's performance and results too.

We now end the question-and-answer session. I will like to give the floor to Mr. Valiati for his closing remarks.

Once again, we thank everyone for your participation. The Investor Relations department is available to answer any other questions you may wanted to ask. We wish you all a good day. Thank you very much.

The conference call of Marcopolo S.A., has now ended. Thank you very much for your participation, and have a good day.