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

Hello everyone. Welcome to Marcopolo's conference call to report the results for the third quarter 2024. The presentation and comments on the results will be delivered by Andre Armaganijan, CEO; Pablo Motta, CFO; Jose Valiati, Investor Relations Officer; and Eduardo Willrich, Legal and Investor Relations Manager. Please note that the simultaneous translation tool is available on the platform. [Operator Instructions] This conference will be recorded and will be available on the company's Investor Relations website, ri.marcopolo.com.br, along with the presentation here. [Operator Instructions]Before moving on, we take this opportunity to emphasize that the forward-looking statements are based on the beliefs and assumptions of Marcopolo's management and on information currently available to the company. These statements may involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists are cautioned that macroeconomic, industry and other factors could cause actual results to differ materially from those expressed or implied by such forward-looking statements. We'll begin the presentation by handing over to Mr. Valiati. Mr. Valiati, you may go on.

Good morning, everyone. We would like to thank you very much for joining our conference call to discuss the results of the third quarter 2024. We are going to start on Slide 4, where we start with the highlights of the period. In the quarter, Marcopolo continued to reach historical records in all results. The main highlights is the growth in 43% in net revenue, growth of 42% in net revenues from exports from Brazil, ROIC of 25.2% and EBITDA of BRL 466 million with EBITDA margin of 20.1%. Now let's go to the next slide. In the 9 months of 2024, the Brazilian bus production showed growth of almost 20% compared to the same period in 2023. This growth, although substantial, is based on a weaker base of 2023 that had been negatively impacted by the transition into EURO VI. If we keep the current pace, the expectation is that the Brazilian industry will recover until this year, the levels of 2019, that is close to 25,000 buses. Let's go to the next slide. In the third quarter, Marcopolo production directed to the domestic market grew by 49.2%. The production for exports from Brazil grew 13.3%. And in our international operations, we saw growth of 9% in production. In the third quarter 2024, the company intensified its pace of production in Brazil, getting closer to planned volumes, whereas the production in the international market continues with gradual evolution. Let's go on to the next slide. Net revenue consolidated reached BRL 2,314.8 million in the third quarter '24 with a breakdown very similar to the third quarter 2023. The growth of 43.3% of net revenues reflect the better scenario for the market as a whole with expansion of volumes sold in the Brazilian market and also the set of international operations that the company owns. All segments of products showed better revenues when we compare the first half to the second half. Let's go to the next slide. Consolidated net income of the third quarter '24 reached BRL 566.8 million with margin of 24.9%. The increase of gross profit and gross margin shows better operating leverage due to the substantial growth of volumes and revenues in the quarter, the advance of exports as well as the better performance of international operations in the company. EBITDA was BRL 466 million in the quarter, EBITDA margin of 20.1%. EBITDA was positively affected non-recurring in BRL 28.5 million because of a reversal of provisions associated to the corporate restructuring of Metalsur, our Argentinian subsidiary and BRL 7.9 million because of the result of the equity equivalence of our former subsidiary in Argentina, Metalpar. In the half year, we had BRL 375 million with margin of 14%. Now I'm going to turn to Andre that is going to talk about the market prospects and outlooks.

Thank you, Valiati. We are going to start with the road buses that continues heated because of the high cost of airfares. Marcopolo's share continued to grow in the segment. Urban buses, we showed that it was right to have flexibility to manufacture different models in Brazil. International operations were a highlight with excellent sales performance in Australia and the beginning of deliveries for Monterrey in Mexico. Micros and Volares continue performing well with the delivery of 397 micros and 110 Volares in the quarter for the Paths to School program. The model that we believe we are going to have stability in the program. On the next slide, international operations picked up, especially with the sale of intercity buses. International productions confirmed our expectations with consistent results. South Africa continues with positive results and the launch of G8 in the country should leverage businesses in the intercity segment. Marcopolo Argentina starts to recover volumes and results with a new growth of units manufactured and delivered compared to the second quarter '24. After years, the unit is projecting a higher volume for '25. In Australia, we continue to show consistent results, record with growth of volume and margins. The operation continues with a positive outlook for the remainder of '24. In Mexico, the highlights are the first deliveries that I mentioned and thinking of Superpolo in Colombia continues to show very good results with a positive outlook for the remainder of the year. Let's go to the next slide. In the third quarter '24, Marcopolo launched a new Volare Fly 12 model and also Volare Attack Hybrid, which is ethanol fueled. The initiatives show our vocation for innovation with unique products, solutions and concepts. We continue to work to reduce our working capital, especially with materials and inventory. In the third quarter, even with the increase of volumes manufactured and investments -- I'm sorry, even with increased production and payment of the buyback program, we reduced our net indebtedness to BRL 135 million or 0.1x net debt-EBITDA ratio. Marcopolo continues to show growing results based on its growth pillars, operational leverage, better international operations and increased exports, but new opportunities continue to pose, as seeking more efficiency, increasing industrial automation, new products as the launches that are directed to decarbonization and also in traditional segment as Fly 12. We have a positive bias for the remainder of the year with a consistent order book and a good mix. Now we are going to go to your questions in the Q&A session.

[Operator Instructions] The first question comes from Fernanda Urbano from XP.

Congratulations on your results. I have 2 questions on my side. First is about raw materials in this quarter. When we take a look at the break of margin compared to the second quarter, we see an evolution of the materials line as a percentage of revenue. Could you give us a bit more color on that? Does it make sense to think of increased raw material prices or is it because of a change of mix? And if so, could we think about a lower mix of the Paths to School program as one of the effects. This is one -- first question, raw materials. Second question, international operations. With the volume data that you show, we see the evolution year against year. But my question is operational efficiency and the use of capacity of these operations. So if you could talk about the level of efficiency of international operations and also which regions have room for improvement in the next quarters?

Fernanda, thanks for your question. This is Pablo speaking. Well, raw materials; you did mention some of the explanations already. This is because of the mix. We have a scenario in which there is a lower volume of the Paths to School program, heavy buses that consume more materials, more value-added and eventually consume more raw materials in the quarter. What we see for the line of raw materials, this is something that we monitor, inflation rates, demand for commodities has not brought really an increase in prices. This is a stable scenario, but it's always an area of concern thinking that Brazil is a bit more heated than expected, at least for the end of the year. It's still not something that is a concern, but it's also a point to watch out for. Andre is going to answer your second question.

Well, international operations, the major game right now is all the work of restructuring operations, reducing costs. Now we are [ grading ] recovery volumes. So the recovery that we had in Brazil also took place in markets abroad. We gradually launched G8 products to other operations. Some, like Mexico, are starting to produce locally this bus. South Africa also has the product now. All to say that volumes are growing and growing volumes are bringing results, and gradually efficiency in the manufacturing of each of our operations that bring us efficiency gains. We still see room to gain efficiency in some operations. Argentina is a very good example, the operation that has been affected the most by the lack of volumes. So the pickup of volume comes with an improved operational efficiency. In Mexico, we also see room for improvements in efficiency, especially with the localization of G8, and other operations still show opportunities, especially with increasing volumes. Australia, with more stable volumes, you see good results from the operation. This year was a year of relevant recovery of volumes. And other operations, China and Colombia, these are operations that will certainly bring gains for the coming years. So, we do expect highly the recovery of Argentina, growth in Mexico and maintenance and continuity for Australia.

Our next question comes from Fernanda Recchia from BTG Pactual.

I have 2 questions on my side as well. First, I'd like to explore the margin trend a bit. You talked to us about the mix for Q3. But thinking of next year and considering that you should have a better volume for the Paths to School program, better results of operations, a continued recovery for the coming year. So, how should we think of margins for 2025? Do you think there is still room for it to continue to improve year-on-year? Do you think that '24 is a peak and now it's going to be more stable year-on-year? So that's the first point. And the second point is, I'd like to explore the competitive scenario. If you could give us an update how you see the competition, especially under the lens of eventual increased capacity and also financial health. So these are my 2 questions.

Fernanda, thanks for your questions. Well, first, I'll start with the margins. Well, what's interesting, and this is something that we have been bringing to surface when we are talking to investors. We have had very good quarters. The second quarter had a very high level of profitability, the third quarter as well. But what we always recommend is that our business is analyzed in a longer period of time. So, at least 12 months for you to be able to calibrate margin numbers and have a better prospect with regards to profitability. Today, we see that, yes, we are working to improve efficiency and delivering better results, but we depend a lot on the mix. So, within the level of mix we have today, there is room for us to deliver better margins, but we always ask you to consider a longer period of time to really be able to calibrate profitability. And then, as for the Paths to School program next year, we believe it's something that may happen, but it depends still of a formalization of the government that is extending the program for another year. Remember that the bid is for a year and can be extended for another year, but this is still to be decided. We believe it's going to happen, but it's not final. As for the competitive advantage, and thank you for your question, we are now at a very good time. The bus market is growing. It has been growing gradually, as Valiati mentioned in the beginning. This year, we should close at a size of market of 25,000 units, close to 2019. So there is still room for renewal, but it's happening gradually. And companies, all of them, all manufacturers, are at their full capacity. We have an order book for the beginning of next year. And that is not just for Marcopolo. All the competitors are with their orders full. Increase of capacity; there is difficulty to have substantial increase of capacity. We don't see it happening. And because of what? Because of labor. Remember that we have been talking about recovery of profitability through efficiency gains, but that happens gradually by training our labor. So hiring new people, training them, preparing them to deliver high efficiency takes time. We see the competition being affected by that. Many of the competitors announced numbers that are higher than what they are able to deliver, especially because the difficulty increasing capacity. So this, at the end of the day, is positive to us because we are being able to balance supply and demand. Financially, speaking of competitors, this is another point. Let's remember that some companies were in Chapter 11. So, during the pandemic, many were very frail. Remember, 2021 were the worst years ever of the sector. And Marcopolo had a strong capital structure, went well through the period, but the competition was affected. Many made investments, the market dropped. They had problems with investment made and capacity open. So I think the lesson learned by all of us in the period, plus the difficulty in hiring makes us keep plants with the current production capacity. It's a positive scenario. We have had the capacity to deliver what the market wants, and we have been working to gain efficiency, investing in plants, automation to get a better pace at our operations. So we see it's a good scenario for Marcopolo to meet the demand of the market.

Our next question comes from Gabriel Rezende from Itau BBA.

I would like just to use the opportunity to talk about the margins, which has been a good point of discussion for investors. So, if you could give us a bit more color of what can be done in home. We understand there are things that escape your control, like the Paths to School program, other geographies, as you mentioned, the product mix. But perhaps plant efficiency is something that you have more under control. So, if you could give us a timeline for plant efficiency, normalize and you go back to levels of efficiency that you had in the past, it would be really helpful. And the other point is how you see Marcopolo's backlog today? Up to what months next year or up to what period you have visibility for next year and the competition as well?

Gabriel, thanks for your question. I'm going to talk first about margins. This is very interesting. Marcopolo right now is not only recovering this plant capacity know-how that was lost in recent years because of adjustments post-COVID mainly. But anyhow, what we see in the current scenario is the mix, heavier buses, customers that have a demand, localizations that have -- to have more customization in their vehicles, and that brings us more challenges for our plants that are constantly trying to be prepared for something that is less and less constant. So that poses a challenge that we have been coming across week after week, which is to try and bring improvements in the long term, but also focus on quality and employee safety to be able to deliver sustainable results. So, our margins are at a strong level. Our challenge is to improve more and more, especially with regards to productivity. But what we have been focused on more and more is, let's look margins at a longer period of time, at least for a 12-months interval. And then you see that today, we don't have major detractors of margin. And that's why we have a positive prospect in terms of more sustainable results. And then consequently, if the mix scenario is stabilized, then we could deliver better results. But our concern today is to deliver quality, safety, and at least based on the scenario that we have today, keep results more and more sustainable for the future.

And Gabriel, this is Andre speaking. Thanks for your question. On backlog, well, our book for February and March is quite robust. The competition has very, very similar order books. We are already announcing some sales for the beginning of the second quarter of next year, and so is the competition. So, in line with everything that I mentioned, investments made, especially labor, people, skills, learning curve, everything is leading to a growing production. So a market and the recovery, together with demand and supply being more adjusted to efficiency gains, we see still room to have a very good backlog. In fact, today, it's even a bit bigger, which is historically what we have. But that is the scenario for today.

Our next comes from Gabriel Tinem from Santander.

The first topic is just to see if I understood about the Paths to School program. You're talking about moving volumes from '24, '25 and also extending the bid. And then the timeline is going to be also extended. In this case, what would be the maximum time for deliveries of the bid of 2023? And what's the appetite of municipalities to close orders and your expectation for next year? And second, exports, if you could give a bit more color of how you see the environment, the main markets that are standing out. So any elaboration here, I would appreciate.

This is Eduardo speaking. Thanks for your question. Well, the Paths to School program, if it's extended to another year, we would go to the first half of '26. That is [ February '26 ]. So that would be the final delivery for the bid of '23. So if it's extended, we would have deliveries at basically the same pace that we are delivering today with an expectation or even higher volume. So, we would have something about 5,000 units for '25 that we won in the packet bundles of '23. This year, we are talking about 2,500 units, so 5,000 units for next year. So we have demand for an even higher volume than what we are delivering in '24. So there is an intention to buy that is higher with a higher pace of deliveries that we have in the second half of '24. But again, contracts have to be confirmed. And if they are, then we can improve expectations of deliveries for next year. And Gabriel, about exports, the large markets for Marcopolo traditionally are first, Latin America. We see purchases slightly lower in the beginning of the year. Remember, the end of the year is generally a good seasonal period. It is when we start to have higher sales, especially with heavy intercity buses like the G Generation, the 8th generation and double decker. So we see a pickup of the market. We also have a strong presence, and we talked about markets and you talked about countries. But Marcopolo is very strong in Mexico, Colombia, Peru, Chile; very relevant in Uruguay, Bolivia, Ecuador, almost all markets in which we operate. And then Africa, we also have relevant sales. Africa depends on large sales bundles. And when we see the fluctuation of Marcopolo representation in the total of the company has to do with sales of special bundles in Africa. So you're talking about urban buses, more spot purchases. But the company is working very close to this market to be able to have the sales. The African market is a very good market to us. And talking about global, because of our plant in Australia, we have a very interesting share in the market there. So, these are the major areas of operation of the company. And we see gradual growth in exports of Marcopolo, both in the fourth quarter and the next year as well.

Our next question comes from Andre Ferreira from Bradesco BBI.

Congratulations on your results. I have 2 points here. The first is that you mentioned in the release that with the cooling down of the Paths to School program, you can direct production to other markets. So, going back to exports, I would like to know if exports is a priority market to you. And Andre, you talked about spot sales to Africa. What else could happen for us to see a share in exports for Marcopolo back to what we had in the past, about 20%, 25%? And second; first, congratulations on the start of deliveries in Mexico. So, what is the plans of this model for the external market, and how do you think this is going to develop for the coming years?

Thanks for your question. Exports, what has been happening in a very positive note is the launch of G8 in many of these markets, the Chilean market, Peruvian, Mexican, South Africa. Now, these are markets that are starting to pick up with this new product being introduced in the market. So what we see is that in intercity buses, the success of G8, that is a bus that was very successful in Brazil, we started sales in G8 in mid '21. And we have more than 4,000 buses sold and approximately 1,000 exported. So, when you talk about share of exports in the whole, it is that indeed Brazil grew a lot. Brazil had the introduction of G8 that was earlier than international market and also an earlier recovery process. So the share of exports was lower, but because Brazil grew a lot in the period. But now, we are producing the product in those markets with exports or local production, Mexico, South Africa, Colombia are already receiving the product. Some are already starting production. That is going to help us a lot. Argentina was a market that was very much affected in terms of volumes in recent years, and that certainly poses a need for renewals. So we also expect in Argentina a market recovery, and that helps a lot, when we take a look at Marcopolo's exports numbers. We still have important share. The volumes in Mexico are going to help us. Of course, it removes sales from Brazil, but also reduces lead time. Local production, we believe, will help us gain market share vis-a-vis competitors that have local manufacturing. So, this is a bit of the dynamics of exports; a strong Brazilian market and we're picking up the export market with this product. Electric buses, also very important to us. We started developing our own product, which is the full asset. And we also produce electric buses with other bodies. We have worldwide about 1,000 electric buses sold in the world, most with third-party chassis and Marcopolo's bodies and they are sold in markets like Mexico, more than 60 buses in Mexico, 150 in Australia, more than 400, 500 in Colombia. with chassis partners. And in Brazil, several sales with partners and the beginning of some full Marcopolo buses. So we are selling buses in Porto Alegre and full Marcopolo buses in Sao Paulo. What we see in the market from now on in terms of electrification, both chassis and bodies going up. It's interesting that we see in markets a search for local production. So, today, Mexico is requesting electric products that are locally produced, Brazil as well, clearly working with locally produced products, and our full product showing very interesting performance. So, when you talk about asset energy efficiency, we are having very good results in the first tests in Brazil, which should give us, with the introduction of this product, gradually markets, an interesting market penetration. So that's the design, Gabriel (sic) [ Andre ] markets recovering, G8s getting more body and traction as it did in Brazil and electric buses gaining room, and Argentina recovering as a good market. So, these are our main focus of operations, because Latin America is very big and Africa is a relevant market. We are looking abroad. We are always looking into that. A global company has to consider opportunities for expansion. But these, in the short term, are the markets that we believe are going to bring us the best results.

Our next question comes from Victor Mizusaki from Bradesco BBI.

Congratulations on results. I have just one question on my side, about the capital structure. You are at about BRL 135 million net revenues, 0.1% net debt-EBITDA ratio. Thinking of a positive scenario for '25 cash generation, Marcopolo should have net cash. So what should we expect for next year in terms of capital structure? Are we talking about increasing Marcopolo's payout? Any specific investment that could be made next year in any other market?

Thanks for your question, Victor. Well, in terms of compensation practices, Marcopolo, at least for now, is keeping its policy of a payout of 50% or something around that, considering its net result. We do have a higher volume of investments happening this and next year at about BRL 350 million, but nothing that at least for now is going to make us go away from this level. We know that effectively, we can get to net cash. But for now, we continue with our policies in line with what we have been bringing to you in our interactions.

Next question comes from Marcelo Motta from JPMorgan.

Just a follow up as for CapEx. If you could give us a bit more granularity about the BRL 350 million, just for us to understand, is that a level to decelerate in the coming years? Is it to be kept high even to understand the dividend question that has already been asked?

Well, thanks for your question. Marcopolo, more and more, is positioning itself as a leading player in terms of mobility. So, we have been working very hard in the development of our products. So, there are significant investments in terms of tooling, in terms of portfolio. We are working more and more with the launch of new production solutions, s we did recently at Lat. Bus, as we -- and we introduced a new hybrid vehicle, improvements in our current portfolio. So, the main objective now is to have a portfolio that is stronger and stronger and that enables us to be a more competitive company, both domestically and internationally. And in addition, we have been considering, [ originally ] having our plants that are very flexible in terms of mix so that we are not really dependent on specific products in our lines. And because of that, this year, we are making higher investments in the operations of Espirito Santo's investments already announced. The idea is precisely that, enable the operation to adapt better in terms of layout for flexibility in terms of lines so that we can produce vehicles more diverse and not only the light vehicles that we manufacture today. So that's the objective, focus on product portfolio, really suiting products to new production solutions.

Our next question comes from Marcelo Audi from Cardinal Partners.

I have 2 questions. The first, going back to your margins. In the previous quarter, you said that there was potential room to extend margins by 4 percentage points to 5 percentage points. At what time span you expect that, and where would gains come from? Based on everything that you're saying, I think it would come from the increase of productivity and labor. But I would like to hear from you and if you keep this expectation. And the second question is about prices, what you see in terms of price dynamics? And for 2025, do you think it's going to be a year of more stable prices or do you think you're still going to see price increases?

Well, thanks for your questions, Marcelo. Let me start with margins. This is a very relevant topic. Our major concern is effectively be able to deliver, especially gross margins that are more and more consistent. And when we look internally and last quarter, we did discuss some of the topic, the discussion was within this current scenario, what are the potentials that we see, thinking that the efficiency that we have today is lower than the efficiency in the past? And what we brought to surface is that there is a potential of improvement around the numbers that we mentioned. But what we always use as an important assumption, and this has to be very clear in the analysis, is that we cannot start from the margin that we delivered in the second quarter as the reference margin, at least within the current context. In recent quarters, we are improving quarter-on-quarter. But we know that we want to have sustainable margins. So, if we think of a reference margin, let's think of an average margin of the last 12 months. to have a starting point that is more sustainable. And then as of then, we depend on the mix consistency. In the second quarter, we had a higher volume of Paths to School than we had this quarter. So automatically, in the quarter, you have a higher efficiency and you can deliver 3 percentage points, 4 percentage points that show a better margin. This quarter, we had a higher number of heavier vehicles, which does not allow for the same level of recovery or improvement in terms of margins. So, effectively, we do have the potential. But to give you a percentage, I think that we always have to have the last 12 months as a reference average. And then thinking of the mixes that we are going to have in each quarter, we are going to seek better percentages as a consequence of the work that we have been developing internally. So, there is work that we are doing day after day. And the good side is that indeed, we see that the structure is responding and responding well.

Thanks, Marcelo, for your question. This is Eduardo speaking. In terms of prices, we see that in recent quarters, we are following the projections of internal domestic inflation. Ad moving on, this is what we are going to do, try to keep prices adjusted to the increasing costs. As Pablo mentioned before, we don't have any factor that is especially standing out in terms of increased costs, but there is always something. So, for instance, you have the collective agreement and these things have to be passed through. So, the concern is always watch out internal costs and keep the prices compatible to the increases that we have in costs.

[Operator Instructions] The Q&A session is now closed. We are going to turn the call back to Mr. Valiati for the company's closing remarks.

Well, once again, we thank you very much for joining our conference call, and we would like to tell you that our IR team is always available for additional questions that you may have. Thank you very much, and we wish you a very good day.

Marcopolo's conference call is now closed. We thank you very much for attending and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]