Marcopolo SA

BOVESPA:POMO4

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. to announce the results of the first quarter of 2023.

This conference call is also being transmitted on Marcopolo's Investor Relations website, ri.marcopolo.com.br, simultaneously in Portuguese and in English. You can find a presentation there too. [Operator Instructions] As a reminder, this conference call is being recorded.

Before continuing, I would like to say that statements made during this conference call about Marcopolo's business prospects, operational and financial projections and goals and also statements on its growth potential, they are forecast based on the expectations of the management regarding the future of the company.

Forward-looking statements are highly dependent on the conditions of the internal market, general economic performance of the country and international markets, and therefore, they are subject to change.

Today, with us in Caxias do Sul we have Mr. Andre Armaganijan, CEO; Mr. Antonio Valiati, Investor Relations Officer; and Eduardo Willrich, Planning and Investor Relations Manager.

First, Mr. Valiati will talk about Marcopolo's performance in the first quarter of 2023 and then Mr. Armaganijan will talk about the rest of the year.

Now, I would like to give the floor to Mr. Valiati. Mr. Valiati, please, the floor is yours.

[José Valiati, executive]

Good morning, everyone. I would like to start by welcoming Andre, who will from now on, join our conferences. Welcome, Andre.

[Andre Armaganijan, executive]

Thank you, Valiati. I would like to thank everyone listening to us. I'm very pleased to share our prospects and our vision of Marcopolo in our relationship with the market.

[José Valiati, executive]

Thank you, Andre. We may move to Slide #4, starting with the highlights. In the quarter, Marcopolo has reached historical results, expanding its profitability if we compare its good performance with the fourth quarter of 2022.

We have recovered the margins. And we have reached levels above the usual. And we have recovered recurring EBITDA margins of 12%. And now we are aiming at bigger challenges.

And we may move to the next slide. In the first quarter of '23, the Brazilian production of bus bodies was 5,677 units, 40% above the first quarter of 2022. Although, it's quite superior that 2022 we should remind that production was lower than its potential because of the historical negative seasonality associated to the first quarter of each year. And also because of the beginning of the transition of the engine transition from Euro 5 to Euro 6.

In the first quarter, Marcopolo's production meant for the Brazilian market grew 27.5%. Our production for exports from Brazil has dropped 55.9%. And in our international operations, we saw a growth of 32.8% in the production.

The production of the first quarter of 2023 was affected in Volares, because of the transition -- engine transition from Euro 5 to Euro 6. And then after January 1, 2023, Volares buses needs to be equipped with Euro 6 chassis. And seeking approval of Euro 6 by manufactures and the market impact of a higher price of the chassis has also affected sales and production.

Other segments have not been so heavily affected, considering that along the first quarter of 2023, the buses that -- we are adding in the bus body for the Brazilian market still had Euro 5.

In the quarter, we have reached the consolidated net revenue of BRL 1.615 billion, a record for the first quarter. The increase in revenue as compared to Q1 2022 reflects an increase in volumes sold in a domestic market in Brazil and also international operations, a better sales mix with a higher share of heavy bodies and deliveries for Caminho da Escola.

In the segment of urban, is the one with the highest share in net revenue accounting for 37.8%. Then we have the intercity segment with a share of 25.1%. Volares is still a positive highlight with 22.4% of our revenue.

Now on Slide #8. In the first quarter, the company's gross profit was BRL 369 million, with a gross margin of -- and the increase in gross margin reflects a better environment recovery of the sales mix and sales and better operational leverage.

International operations have also presented an evolution in gross margin, thereby, contributing for the consolidated performance. EBITDA was BRL 293 million with a margin of 17.7%. EBITDA was positively affected by nonrecurring effect that was booked.

In equity related to the realization of the FX variation that was accumulated and the dissolution of Marcopolo Canada. The operation made it possible to offset the negative effect of that affiliate in our equity and also generate an additional gain of BRL 17 million.

The control of Argentina Metalsur had a substantial performance with a negative EBITDA of BRL 7.4 million as compared to BRL 48 million negative than Q4. So if we discount these 2 effects, the recurring EBITDA margin would be 17.1%. The net debt of the manufacturing segment in March 31 represents 0.3% in the 12 months.

Now, I would like to give the floor to Andre, who will be talking about the scenario and its prospects.

[Andre Armaganijan, executive]

Thank you, Valiati. First, talking about intercity market. We would highlight gaining market share, especially because of the success of the launch of G8. And so the intercity is still warmed up with the benefit of longer lines and also more expensive air tickets. G8 accounts for more than 70% of the sales of heavy vehicles, concentrating the sales of the new family chartering still has good volumes of renewal.

Urban segment has been grown in volumes also because of the post-pandemic scenario. So there are subsidies and a higher cost of individual expert investments by CDs have been partnering sales with positive prospects for the upcoming months.

And I think 2023 the company has deliver more than 1,000 deliveries for Caminho da Escola. The company still expects to deliver fewer units for the 2022 competition. And we are awaiting the new competitive procurement very shortly.

The engine's position has affected Volares and business has concentrated in our inventory items. Exports are still affected by the difficult macroeconomic and political scenario in the main country in South America and especially because of the absence of major packages meant for the South African and South American markets.

We expect to recover in the second quarter of 2023 with more sales associated to the launch of G8 and sales for Central America and Africa.

In international operations, we have implemented actions along 2022. And we are seeing the first results as expected with a different costing scheme and profitability. The main highlight of Q1 '23 was the performance of Marcopolo Mex -- Polomex in which we sold higher value-added products, reversing losses to a positive result of BRL 11.4 million in Q1 this year.

Marcopolo's trade in Marcopolo, Argentina have also demonstrated fast recovery as we clear up our portfolio by replacing products with prices that were impossible by healthier alternatives. Marcopolo is focused on implementing the same transformation that strengthened Brazilian operations, but also in its international operations. Q2 2023 shows that reflect of our initiatives will be clear in the second quarter.

Our prospects remain positive for the rest of the year with accommodation of volumes in future months because of the engine transition. This movement was expected and we believe it will be more seamless than we had expected. To balance the drop in volumes, we have actions such as giving vacation and giving training in the market which is renewing its fleets after many years of urban renewal and the aging of the Brazilian fleet.

In the quarter, Marcopolo has demonstrated its capacities as a cash generator and a positive expectation also for the second quarter of this year. We are working with the objective of reducing a raw material inventories after we -- after having higher inventory levels.

We have also managed to execute successfully the plan of selling the units that we had in our inventory in the Volares projects. So we had to make up for when we were manufacturing less because of the engine transition. We're also receiving the payments of the federal program Caminho da Escola which contributes for cash generation.

Now I would like to give the floor to Eduardo to talk about the recent changes in our governance structure.

[Eduardo Willrich, executive]

Good morning, everyone. On March 30, we completed our succession and our CEO succession was implemented. We have a Board of Directors and a people management committee with the support of external consultants.

So the position that was held by James Bellini was then transitioned to Andre during which we dealt with very difficult situations. And James is still in our company as Chairman of the Board of Directors. We have our new CFO with Valiati, who is still as IRO. CFO now will be Pablo Motta, who had been a Controller. Marcopolo Board of Directors, 7 members, 6 of those are independent with a very diverse and experienced composition.

Now we may move to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Lucas Marquiori from BTG.

[Lucas Marquiori, analyst]

I'm wishing the best for Andre and the new cycle in the company. I would like to ask you about the margin. It really surprised us the 17%. And I would like to understand how much this reflects a nonrecurring effect? If we think in terms of volume, was there any concentration in volumes of Euro 5 in the first quarter, which wouldn't be there along year that's why. We used the factory more than usual or maybe in terms of pricing the company did not price commodities up, absence of funds. So I would like to understand how you're seeing this margin dynamics. How much do you think that this is -- that's all are my questions.

[Unknown Executive]

So we had a good base in Q4 2022. We had good performance. We had a negative impact that was extraordinary in the second quarter of 2022 as a whole with some operations that dropped down the margins. It shows a recurring that we have been performing since Q3 2022 onwards and more clearly in Q4 2022.

For the first quarter, it was better than usual in terms of volume. And seasonally, it could be weaker. But keeping the pace and it was not the same pace comparing Q4 with the first quarter of 2023. So in our opinion, this is a regular pace. There is no type of impact that could be so positive, especially because we could not advance purchases. As when we had other engine transitions in the past because we had shortage of parts, so we could not produce as many chassis that the market would consume that would be so relevant. There is a stronger pace associated to the reopening after the pandemic. And there is under renewal, because we have been carrying over renewal after the opening, but it's still fall short from 2019 levels.

And we can say that these volumes were strong. So in the context of production that we saw until 2019, these volumes aren't weak. And in 2019, we were not at full potential. We're still recurring volumes in Q4 2022 and Q1 '23, but our volumes are still below than what we had in 2019. So we do not understand this as exceptional. And I will complement saying that we should have an impact considering the transition and this was caused by the Caminho da Escola. This impact it seems to be extraordinary showing that there is the manufacturing pace that is growing and it should grow even more. So -- and we think this is going to be normalized in the second quarter. And it seems to be more normal in the second quarter than it was in the first quarter.

As to pricing specifically varies operational leverage. And we can dilute fixed costs, the entire reformulation of the asset base, more efficiency, also leading to a better use of existing capacity. There was also a significant improvement in our mix during the pandemic. We see intercity buses focusing on higher value-added products. Overall, there is an improvement with heavier products in all segments and this improves margins. But individually the main driver and the main difference was the substantial improvement in international operations as Andre said.

[Lucas Marquiori, analyst]

This is great, very good. So it's about Q2 and visibility and recovery in Q3. And so this delivery ramp after Q3, so you have in portfolio, so your backlog goes up to Q3 when you can see this Q2, Q3 ramp-up.

[Unknown Executive]

Well, actually, backlog is shorter than that. I cannot see the entire third quarter. But I have many requests for quotes. People wanted to buy. And also, we have some prospects of people wanting to buy frames to which will affect the volumes in the third quarter.

In addition to that, we are hoping that very soon, there will be a new invitation to bid for the Caminho da Escola project, the way to school.

[Operator]

Our next question comes from Fernanda Urbano from XP.

[Fernanda Urbano, analyst]

I have 2 questions to ask. Number one is a follow-up, looking at Volares that you're selling Euro 6, half of deliveries were to Caminho da Escola and the other half to other customers. What is the demand like for this share that was manufactured that didn't go to Caminho da Escola and what are you expecting to the drop of volume? This is the first question.

And the second point is about Argentina. You said that the production is recovering and the numbers are good. So could you give us more details about the performance in Q1 and the pricing changes that are leading to this gradual improvement?

[Unknown Executive]

Fernanda, thank you for the questions. And as to transition from Euro 5 to Euro 6, we cannot give you an expectation of volumes because we don't publish guidance, so we cannot tell you and give you a number. And we can't -- we are not really sure about volumes. There may be, there is a drop in volume as compared to 2022. And this drop today is associated to Caminho da Escola -- more to Caminho da Escola than Euro 5, Euro 6 because before we had an advancement of purchases.

There was not enough time for them to advance purchases because the manufacturing of frames last year and we didn't buy it. But naturally, when Euro 6 frames are still being approved that will be used from our own -- for the bodies. And as a reminder, this change from Phase 11 to Phase 12 of the Caminho da Escola project, we are expecting lower volumes as compared to the second quarter of 2022.

[Unknown Executive]

Fernanda, complementing, thank you very much for your questions. About Argentina, we have been working since last year with many actions to effectively improve the operation. And we took a group of experts from our operations in Brazil and we changed the CEO of the local operation. And we are seeing significant improvements in the factory. And I was there many years in manufacturing -- the factory in itself, not just the factory, but culture of the company.

We need to remember that Marcopolo is focused on people. So -- it's also very relevant. We think in terms of the cultural aspects. We've been doing that. We are getting way better. And we have a positive aspect is the end of the portfolio.

As I mentioned in the conference call, our prices were much lower than the cost increase that we had last year with inflation in Argentina, as you are well aware. And so we adjusted our prices. The market accepted that because it was basically a rebalancing of prices. And we are still implementing a few actions introducing urban models we have introduced in the Argentinian market.

We are working on verticalization and the use of local vendors to meet demand and then we want to avoid the shortage of materials and parts because of the imports. So everything together has demonstrated that we are on the right track. We are beginning to see the results, better numbers.

And for future months, we expect to see positive results. So all these actions have demonstrated that this reformulation structure, culture, new products for the local supply network have provided us more competitiveness and have managed or enabled better performance.

[Operator]

Our next question comes from Gabriel Rezende from Itau.

[Gabriel Rezende, analyst]

Congratulations on very good performance. I have 2 questions. Just a follow-up for the Caminho da Escola prospects. I understand that there is a certain of a feeling that for the next round, volume should be substantially higher than in the last rounds of Caminho da Escola in this call. What about Marcopolo's manufacturing capacity to cater to these needs? Is there any idle capacity today? And would it be sufficient to deliver the numbers much above traditional ones, historical -- much above historical levels. And you cater to that we are expecting a rise in volume.

And number 2, we have heard about the new set of segment and actions of the government -- federal government was specifically to support public transportation. How has the interaction been with the government in terms of subsidies for public transportation?

So how much subsidy is there? How much are they going to support it or not?

[Unknown Executive]

Thank you, Gabriel. As to Caminho da Escola, expected volumes had already been indicated in the public hearing, in the bidding of Phase 11. So Phase 11 and the intention of cities in terms of buying, we mentioned 7,000 units. And we are beginning the engine transition to Euro 6. And then we didn't have enough time.

So we didn't have enough parts and also an engine transition. So we would and part of the bid with Euro 5 frame and then in the same way we would address with Euro 6. We couldn't do that. And then volumes were initially with 3,900 units and a total final volume was like 3,000 units.

So this additional volume is associated also to a renewal lower than expected happened in Phase 11. So with a same number of manufacturing units, we have produced much more than we did last year or then we are manufacturing in 2023 or that we will manufacture in 2024.

If we look at the market, even with more units being bid, it will still be below volumes that Marcopolo has already produced in the past. So yes, we do have sufficient manufacturing capacity to produce.

As we said before, we are a company of people. We are labor-intensive. And of course, this is going to require some expansion in that area. But yes, we do have capacity to manufacture. And we are going to try and meet any needs of the market in the best way possible.

As to subsidies, there is no discussion. We've been monitoring everything that we get from customers. And according to perception in each one of the units, what we saw during the pandemic is that the public transportation is something that is essential. And we shouldn't relate this tariff to the system.

We will need to keep the system working, fully operational outside peak hours and schools. So we need to keep public transportation. And we need to do this. And this is what we see going on.

Cities probably have seen that. They see that public transportation is something essential. So it's a continuity with a system evolving and it's something that has come to stay with what where we want to go back.

[Operator]

Our next question comes from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions. If you could comment on better cash generation. What should we expect looking into the future in terms of cash generation, more payout of dividend? Or should we expect any significant CapEx in future years that will use that cash?

And the second question regards the competitive environment. Could you tell us about pricing and competition?

[Unknown Executive]

Victor, thank you for your question. As to the cash position, we have a very good cash position. The company has an aggressive policy for the payout of dividends. And recently, we have changed our policy. And this payout of dividends will become quarterly again. So in due time, this may be decided by the Board of Directors.

But our intention is to keep a payout policy that has historically been 40% to 50% of the company's profit. As to investments, even during the pandemic, the company not stopped investing in products, operations. And obviously, it is our cash availability. As it happens and as it becomes stronger, we have -- there is no difference in terms of what we are already investing or in our old frames.

And we will be paying attention at upcoming opportunities so that we can allocate cash generation to our strategic plan. And Victor just complementing, talking about the competitive market. So we have now we have traditional markets, the same players. And what we have been doing -- as Marcopolo has usually done, launching products with higher value-added technology innovation, when we talk about G8.

And so this is related to what we deliver in our product. And as a reminder, more than 70 years of experience and we've been looking especially the latest products and features that were demanded by our customers. And we are looking even closer to passengers.

And we developed a product that is very much focused on reducing the cost of operators, fuel, technology, comfort, safety, not just for the drivers, but for passengers too. So this is a launch that really made the difference in the market and what we have been seeing in terms of product.

And here, I'm talking about the intercity segment. Our customers accepted very much this vehicle, and also in terms of exports in many markets. And customers that weren't buying Marcopolo are buying Marcopolo again because of this product. And this has attracted many passengers for the system.

And in the interest in urban segment, we have new products that are slightly more similar to intercity. But we have been making investments in some solutions for diesel and electric buses too. So what we have seen Victor is that Marcopolo has differentiated itself more and more with investments that we are not seeing in the competition making, providing product differentiation and now with the electric buses will provide a full solution. In addition to the traditional solution of frame and body, now we have an additional solution that is a full solution.

In terms of presence, we still have very strong global presence especially in Latin America, Africa. And we do not see the competition moving as fast as we are. As a reminder, we have a significant distribution structure in terms of service levels that we offer to the market. So all these factors together are points of differentiation: technology, innovation, product, distribution networks, after sales, fast speed, all reacting depending on market needs. So these have been some of our differentials. And we are not seeing any major launches.

And we are a first-class company, state-of-the-art, providing innovation and new solutions for our customers in general.

[Operator]

Our next question comes from Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

Congratulations on your results and success to the new management. I would like to ask you about the price dynamic if we compare to products. Was there any price evolution? Or is it stable? Could you relate that to cost? Are you seeing any cost reduction of materials, raw materials because logistics is getting slightly better, commodity prices are also adjusting, did the margin have any effect?

And the second question regards the credit to fund the purchase of buses. These are my questions.

[Unknown Executive]

Thank you, Lucas. As to pricing, we cannot say anything specifically, improved margins and what we've seen since Q3 2022. And we have a dilution of fixed costs and the process of cost transfer happened and we saw this growing. And this has made it possible to adapt the asset base to increase volumes. And we went back to margins that would mean that we wanted to have for a long time.

So if we look at the segments we can see that overall, things are better and we are better. So the difference between Q4 to Q1 or even Q3 comparing the scenario in Q3 and Q4 2022. Now, the international operations are better. Brazilian operations have been performing similarly for a very long time. But maybe this was not so clear because we had some margin detractors internationally.

As with all the margin problems, now in the first quarter, we can have the performance that we have had. In the first quarter it becomes clearer and you can see a potential for the Brazilian operations towards the potential of our international operations. All of this combines together so that we can understand the new margin level of the company.

As to credit, even though the passenger transportation segment as a whole, including both intercity and urban, was heavily affected during the pandemic. What we see in practice is that most companies did their homework and could manage even extending contracts and managing the situation, which was certainly very difficult.

But most companies and customers have a financial situation that is very healthy, which makes it possible. We have good credit conditions and good credit availability. And also, we have a warmed up for demand. So we have availability and appetite.

As we have Moneo bank, we also participate in credit concession, also because of low levels of defaults. This is not a problem despite the higher interest rates. And we think that this might be temporary. But there is credit available and many customers are using it and others are buying with their cash availabilities. But this has not limited our sales. Credit has not limited sales.

[Operator]

[Operator Instructions] We are now ending our question-and-answer session. I would like to give the floor to Mr. Valiati for his closing remarks. Please, Mr. Valiati, you may continue.

[José Valiati, executive]

Once again, we would like to thank everyone for your participation. The Investor Relations area is available to provide any clarifications or answer any questions you may have. Have a good day. Thank you very much.

[Operator]

Thank you. Marcopolo S.A. conference call has ended. We thank you all for your participation. Have a very good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]