Marcopolo SA

BOVESPA:POMO4

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. where we will discuss the earnings of the fourth quarter '19 and for '19 -- 2019. This conference call is also being transmitted by the website of IR at Marcopolo, ri.marcopolo.com.br, simultaneously in Portuguese and in English, where you can also find the presentation. [Operator Instructions] It's important to remind you that the conference is being recorded.

Before moving on, I would like to clarify that statements made this conference call with respect to Marcopolo business prospects, forecasts, operating and financial goals and also the potential of growth of the company are all based on beliefs and assumptions of the Executive Board concerning the future of the company. These beliefs and expectations depend highly on domestic market conditions, general economic performance of the country and international markets, and as such, are all subject to changes.

We have from Caxias do Sul, James Bellini, CEO; José Antonio Valiati, CFO and IR Officer; and Eduardo Willrich, Manager for Planning and Investor Relation. Mr. Valiati will start by talking the performance of Marcopolo during the year of 2019. Mr. James Bellini will follow to talk about the perspective for 2020. I would like now to hand it over to Mr. Valiati. Please, sir.

[José Valiati, executive]

Good morning, everyone. We would like to thank you for your participation in the conference call for the earnings release of the fourth quarter '19 of Marcopolo S.A.

If we can check Slide 4, we can see a brief overview of the company. Concerning for the instructions to new shareholders that we have, Marcopolo is a Brazilian-based company, globally present. Our brand is a reference in buses in all countries where we operate. We are market leaders in Brazil for manufacturing of bodies -- bus bodies, and we operate in all different segments of the category: intercity, urban and micro and complex buses involving chassis and bodies and we also have model Volares.

Our company was founded in 1949. And in August last year, we celebrated our 70th anniversary. We have 15 industrial plants, 5 of them in Brazil and 10 abroad. We amount to 17,000 employees, considering also people that work in our affiliates. Our company had its IPO in 1978 and it's part of Level 2 of BOVESPA corporate governance level. We had 15,000 buses or bodies produced in '19 -- in 2019 delivered to the customers. In other words, we have delivered high-quality products, meaning lower cost of maintenance and improved cost of resale, focusing on reducing consumption of fuel and tires. We have a very broad aftermarket sales of parts. We also provide funding lines, and we have a number of specialized engineering solutions to offer among other characteristics of our company.

Now we can go into Slide 6. Here, you're going to hear more about the results from 2019. In 2019, we produced in Brazil 22,821 bodies or a 10.8% increase over 2018. In the period, our intercity models amounted to 26% of our production, whereas urban models and micro buses amounted to 58%, 16% of the market, respectively. The main highlight is in the segment of urban buses or a 34% increase in last year. On the fourth quarter '19, the production of bus bodies grew 3.2%. The highlight of the half year was the production of bodies for intercity, so domestically with a growth of 50% in terms of volume.

On the next slide. At Marcopolo, the production focused on the domestic market grew 3.3% in 2019. Focused more on urban buses, the production of micro buses had a 12.7% decrease in the year as there were no units for the federal program, Caminho da Escola, Go to School (sic) [ Way to School ] since August 2019.

In the production focused for foreign markets and exports in our international operations, there was a market retraction of 12.1% in our results, and the exports were impacted by political and economic crisis that were experienced in different countries in South America. Marcopolo Mexico though had a volume -- what was 36.6% over 2018.

Next slide. In 2019, our consolidated net revenue grew 2.8%, with an increase in sales to domestic market and a pickup in the last quarter in terms of volumes for intercity market. Considering the crisis in South America and less sales to African continent, which were very positive in 2019, has led to a retraction of 25.4% of our revenues. In external units, the increase of 3.6% in revenue resulted from the operations of Marcopolo Mexico, which had a 72.8% increase in 2019, with a very good performance in all segments.

Next slide, the distribution of net revenue. We can see the different shares, especially for intercity, which amounts to almost 40% of the company revenues. It is followed by urban vehicles, 34% of market share, followed by Volares amounting to 14.7%. The revenues of Volares include a complete part selling chassis and body as one single product. And that's why the Volares and Marcopolo are independent. Micro buses amount to 6.2% of revenues in 2019 and the additional business, 5.2% of our revenue.

Next slide. In 2019, gross profit of the company had a 2.1% decrease, with a gross margin of 15.1%, which is a result of the sales mix. There was more exposure to the domestic market than the foreign market, more representation of intercity and urban rather than selling this model export and less sales to the export market.

EBITDA reached BRL 338 million with a margin of 7.8%. The retraction of EBITDA margin may be explained by the sales mix more exposed to the domestic market than the foreign market, greater representation of urban vehicles so domestically rather than to export, and last, consideration of the equity method due to the operations in Argentina. We reached BRL 212 million with a 4.9% net margin, positively affected by the financial results in a year-to-date analysis.

Now let me give the floor to James who's going to talk about the perspective and the performance for 2020.

[James Bellini, executive]

Good morning, everyone. Thank you very much for being here. We started by talking about the performance and prospects for domestic market. In 2019, the demand for intercity buses is very inconstant, differently from what we had in 2018 because of the accessibility rule that got into effect. We think that the main growth for operations in 2020 would support really the recovery of volumes in the operations of intercity buses.

For urban buses, which restarted to pick up volumes in the end of '18, was a highlight in 2019. There was a completion of the bidding for the lines in the city of São Paulo. As a consequence, we expect good performance in 2020, supported by the pickup of city fleet, the federal program, Caminho da Escola, where we are going to provide over 1,600 urban buses.

For micros and Volares, 2019 was positive for retail. Total volumes were negatively impact by no deliveries to Caminho da Escola as of August '19. For 2020, the prospects are quite positive for retail and for bidding process because Marcopolo is going to deliver up to 2,000 micros and 1,200 Volares. We've maintained our market leadership, closing the year with 49.8% market share. Intercity and micro clearly show the importance of our brand. The market share of urban is also a highlight, maintaining a level higher than what used to be our record.

Next slide. Exports have suffered as a result of political crisis in relevant markets to the company, especially Chile and Argentina. Lower sales to the African continent have also impact our comparisons with '18, which has been a record year. For 2020, we have positive prospects because this confirmed the important sales of intercity to Argentina and large volumes also to African countries. We are still not sure of the Chilean market because so far, we haven't seen any recovery.

2019 was an important year for the project of plant optimization with the verticalization of parts in the unit of Espírito Santo. We are going to bring the plant to level of efficiencies as high as the other plant in Brazil, focusing on positive results for the first time in this unit. We are also working on paying dividends over our own equity. We had discontinued that before because of the Brazilian crisis on quarterly dividend share.

Concerning coronavirus, we still haven't had any impact and shortage of parts. The Chinese operation is at a halt and we are still waiting for additional instructions by the Chinese government.

Next slide. In 2019, MASA had a poor -- an impact to poor performance of the local economy. The prospects for 2020 is to get to a -- offset of results, considering the new management and the new CEO at MASA. Metalsur has also suffered with the Argentine economy and crisis, but we have positive prospects for 2020 with the pickup of volumes in the fourth quarter of '19. The units have been adapted also to produce urban models. And we have had good orders placed for this specific product. Australian company, Volgren, had a production below the production in 2018 but has achieved good prospects for 2020 with positive results.

Chinese operations of MAC has an interrupted status, waiting for instructions. We are assessing the impact of coronavirus on the results and on the units. Marcopolo Mexico was a great hit with greater volumes in terms of higher added value, leading to a good mix and excellent financial results.

Next slide, talking about our affiliates now. Colombian operation of Superpolo had a record year, supported by the volumes of a bidding in Bogotá, as we have reported throughout '19. For 2020, we are expecting lower volumes, and our challenge will be to get closer to significant results once again. Results in New Flyer have amounted to BRL 27.8 million in terms of equity income, 62.4% lower than the previous year. The expectations are to recover these results as of the first quarter '20 of Marcopolo or the fourth quarter of '19 for New Flyer. 2019 was a poor operating performance year for our affiliate TMML, amounting only to BRL 3.9 million in terms of equity income, and we are still working with our local partner to improve that.

The first half for 2020 impact a -- higher demand in our local market. We expect to have better results in all our international operations as well. Associated with the low interest rate at historical levels and the confirmation of our REIT growth in terms of economic development, we expect a really good year and an expansion of fleet in Brazil.

So these were our comments about our prospects and perspectives, and now we can open for the Q&A session.

[Operator]

[Operator Instructions] Gabriel Rezende of Bradesco BBI.

[Gabriel Rezende, analyst]

I have 2 brief questions to ask. First, I understand the 30% decrease year-over-year in the volumes in Mexico. Do you think this is a result that was impacted by the comparison basis or is something just specific for the quarter? Secondly, concerning cost. Local sales tend to have lower commissions and BRL 100 million higher year-over-year. In addition to that, has anything else contributed to that significant decrease in expenses with sales? And is it setting a new trend or is just a mix of domestic sales as opposed to foreign markets?

[José Valiati, executive]

Thank you for the questions. I'm going to start by talking about Mexico. There was an expansion in growth in sales volume in our unit in Mexico leading to an increase in sales. There is a trend of having additional increase. We are going to gain volumes through market share. Mexican market is very stable in its total production, but Marcopolo has obtained some of its historical market share. It used to have 30% market share in the market in the past.

Concerning the decrease in expenses with sales, Gabriel, there were 2 factors that contributed to it: one, lower volume of commissioning rate over sales; and a second factor that has led to the decrease in expenses on sales was lower provision for bad debt at Marcopolo and at Moneo Bank.

But still talking about Mexico, quarter-over-quarter, there was a reduction in volume so it was just a onetime occasion. In the quarter, there was a decrease in volume and -- but we don't expect that for 2020. We really do not expect that for the next year.

[Operator]

[Operator Instructions] Marcelo Motta from JPMorgan is going to ask a question now.

[Marcelo Motta, analyst]

I would like to hear more about Caminho da Escola, the program Go to School, and all the buses that are expected to be sold this year. You've indicated there is no seasonalities during the first half of the year and also considering the year of elections. But please tell us a little bit about this backlog and also the pass-through of prices. There was a depreciation of the Brazilian real. It's better to export at the same time you are purchasing raw material. So please tell us a little bit about the dynamics of pricing, raw material prices and everything.

[José Valiati, executive]

Thank you for your question, Marcelo. Concerning Caminho da Escola, we expect some concentration in the first half of the year but not most of the volume. We also -- what, maybe 60% in the first half of the year. And there is high compliance rates and it's been faster than it was in the past. So we've seen orders being confirmed by the different cities, but there will be still a relevant portion allocated in the second half of the year.

Concerning the impact on the economy in terms of pricing and costs, with the project of the First Wave, we've been working extensively in gaining efficiency and improving productivity. And we've obtained very good results in such items. We've also been focusing on adjusting prices so that we can improve our margins and company results.

Concerning the increases in costs because of new pricing as a result of the foreign exchange, we've been managing it quite well so far. We are paying close attention. Should we need to incorporate cost adjustments, we will also incorporate that into new price strategies as much as possible. So far, we haven't suffered this kind of pressure yet.

[Operator]

Werner Roger of Trígono Capital would like to ask a question.

[Werner Roger, analyst]

Great results in a complicated year. And I have 2 questions. First, concerning deregulation of the intercity market. Do you think it's positive? What is your take on it on really opening it to different players without having excessive regulation? Secondly, concerning FINAME funding lines for acquisition of such vehicles using FINAME fund.

[James Bellini, executive]

Werner, this is James. Concerning the deregulation, we've noticed that our intercity clients are trying to get some protection against [indiscernible], which is really the company that's benefiting the most from such deregulation. But as it's something very broad, we've also realized that the market is accepting that, incorporating that and working for improving lines, improving services and improving competitiveness as companies to really meet the needs of this new reality, which is irreversible, in our opinion.

Concerning FINAME, the funding line, it is a funding line which has -- is still being used not as frequently as it used to because of the new very low interest rates. It's being used less than it used to be in the past, but because many clients now are using CDC or other funding lines, which have very similar cost range. But it hasn't been a problem to obtain funding lines for customers, considering the interest rates. I've been in activity for many years, and I've never seen interest rates be as attractive and favorable for customers to buy products considering different financing lines.

[Operator]

[ Andrea Araujo ], shareholder, would like to ask a question.

[Unknown Shareholder]

Can we expect any international restructuring of the company operations? And should we expect any changes in the management of the company, considering the information we got in our last conference call?

[James Bellini, executive]

Concerning international restructuring, Marcopolo is always considering possibilities. This is something that we did throughout 2019, restructuring our operations in Argentina and in other operations but it's nothing really highly significant. It is something that we are always paying attention to. What we want is to have all our international operations to become profitable. That would make sense to our business as a whole. Concerning -- I'm afraid I haven't understood your question, your second question.

[Unknown Shareholder]

Well, about the new CEO, could we expect something for 2020?

[James Bellini, executive]

The topic of succession is something that will take a while. The Board of Directors has realized and agreed that I should remain in my position for a while until we have a well-prepared successor for me. So I expect to be in my position at least for 1 year as a CEO only. I will no longer be part of the Board of Directors.

[Operator]

[Operator Instructions] Werner Roger with Trígono Capital has a question.

[Werner Roger, analyst]

Concerning the new type of fuel such as gas, we've seen Scania launching gas-fueled vehicles, methane gas. And probably there will be greater demand for electrical engines and also hybrid vehicles. How is Marcopolo getting ready to it? Is it working on partnerships to be able to meet the demands of new markets?

[José Valiati, executive]

Well, Werner, we've been paying close attention to all of it. We've been working in developing these items. As we work on bodies and our manufacturing of bodies, we produce for different chassis. But we've been paying attention to all of that, and we've already produced some hybrid electrical vehicles for different manufacturers. And we've been observing it very closely and making whatever it takes to be part of the market. And we couldn't agree more that this is a future trend, and we are paying close attention to it.

[Werner Roger, analyst]

We know that the import of conventional vehicles for logistic reasons and that reason means very little. But in terms of hybrid or electrical vehicles, has there been any different move, for example, from China? Or is the idea to develop the vehicles located -- just locally and then have it adapted?

[José Valiati, executive]

Well, part of the electrical chassis used in Brazil are being set up here in Brazil, are being manufactured in Brazil. They are imported as parts in kits and then set up here. And Marcopolo and other manufacturers are manufacturing a body for these chassis. I think this is the trend. But as I already have said, we are ready to provide bodies to different chassis. And if there is really a setup here working on electrical or hybrid, we'll be ready to meet their needs and produce bodies for them.

[Operator]

With that, we close the Q&A session. I would like now to hand it over to Mr. Valiati for his closing remarks.

[José Valiati, executive]

Once again, we would like to thank you all for participating in our earning release. Our Investor Relations area is available to answer any questions. Thank you all very much. Have a good day.

[Operator]

The earnings conference of Marcopolo webcast is closed now. Thank you very much for your participation. Have a good day.

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