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Edited Transcript of POMO4.SA earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Marcopolo SA Earnings Call

Caxias do Sul Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Marcopolo SA earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Eduardo Bellini

Marcopolo S.A. - CEO

* José Antonio Valiati

Marcopolo S.A. - CFO & Director of IR

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Conference Call Participants

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* Augusto Akihito Ensiki

HSBC, Research Division - Latin America Analyst

* Gabriel Rezende

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Lucas Marquiori

Banco BTG Pactual S.A., Research Division - Research Analyst

* Marcelo Garaldi Motta

JP Morgan Chase & Co, Research Division - Research Analyst

* Thiago Audi Casseb

Crédit Suisse AG, Research Division - Research Analyst

* Victor Mizusaki

Banco Bradesco BBI S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the conference call of Marcopolo S.A. to discuss the earnings of the third quarter 2019. This conference call is also being webcast on Marcopolo's IR website, ri.marcopolo.com.br, simultaneously in Portuguese and in English. In there, you will also find the presentation available. (Operator Instructions) As a reminder, this conference call is being recorded.

Before going on, we would like to let you know that any statements made during the conference call relative to Marcopolo's business outlooks, projections, operating and financial goals as well as its potential growth, are forward-looking statements based on the management's expectations about the future of the company. Forward-looking statements highly depend on the conditions in the domestic market, the country's general economic performance and on international markets and, therefore, are subject to changes.

With us today in Caxias do Sul, Rio Grande de Sul are James Bellini, CEO; José Antonio Valiati, CFO and Investor Relations Officer; and Eduardo Willrich, Planning and Investor Relations Manager. First, Mr. Valiati will talk about Marcopolo's results of the third quarter '19. Then Mr. Bellini will talk about the performance of the company and outlook for the remainder of the year.

Now we are going to turn the call to Mr. Valiati. Please, Mr. Valiati, you may go on.

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [2]

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Good morning, everyone. We would like to thank you for attending the conference call of the earnings of the third quarter 2019 of Marcopolo S.A.

We are going to move on to Slide #4 showing the evolution of the Brazilian bus production. Until September, we produced in Brazil 17,122 bodies, an increase of 13.6% compared to the same period '18. In the period, the intercity buses accounted to -- accounted for 25% of production. Urban and micro buses accounted to 57% and 18% of the market, respectively.

The highlight remains at the urban segment with an increase of 48% in the 9 months of 2019. In the third quarter 2019, the production of bodies remained stable compared to the same period '18 with a new highlight for urban models.

Now we are going to go to the next slide. Marcopolo's consolidated production in the third quarter was 18.6%, down compared to the same period '18. In production devoted to the domestic market, the highlight was the urban segment with growth of 1.8%.

In intercity buses, we would like to remind you that the third quarter of '18 benefited from an advance of purchases that was generated by the mandatory installation of elevators in these models as of October 2018. And therefore, there is a very strong base of comparison to compare to this year.

In Volares, we had a decrease of sales directed to the Road to School program. Later on, we are going to make comments about the new bids that we had for this program. The production allocated to exports and foreign markets had a drop of 6.5% in the third quarter. With reduction of volumes, especially in the intercity segment and Volares, that was basically affected by the reduction of sales to Argentina, Chile and African countries and partially offset for higher volumes in Mexico.

Let's go on to the next slide. Consolidated net revenues had a drop of 1.8%, basically affected by the Brazilian market with the reduction of volume in intercity buses and increase of urban buses. In exports, the increase of revenues is explained by a weaker base in 2018.

As a reminder, part of the orders of the third quarter last year was transferred to the fourth quarter '18 to balance the drop in sales of intercity buses in the domestic market in the period. In our controlled external units, higher revenues are allocated to the performance of Mexico with good performance in all segments, especially intercity buses.

We are going to move on to the next slide now. In the quarter, gross profit had a drop of 20.3% with gross margin of 13.3%, with more urban buses and less intercity buses in the domestic market, a lower volume of exports and the consolidation of Metalsur, the Argentinian company, that brought a net result of minus BRL 5.7 million.

EBITDA reached a margin of 5.6% with BRL 60.2 million, which is explainable to the factors explained above and also because of a less net [worth] compared to March 2018. Net income reached BRL 22.8 million with net margin of 2.1%.

Now I'm going to turn the call to Mr. Bellini that will talk about the company's performance and our prospects for next month.

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James Eduardo Bellini, Marcopolo S.A. - CEO [3]

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Good morning. Well, as for highlights of the quarter, I think that the new accessibility norm is affecting the intercity buses, especially the freight market with the new decree of 10.014 that authorizes buses without elevators, probably we are going to have a fourth quarter back to normal.

Exports will show an improvement compared to the third quarter '19 in all segments, however, not reaching the levels of 2018. In the urban buses segment, basically, we will continue to have our recovery that we saw in the previous quarter. The external market should also show evolution compared to the third quarter.

As for micro and Volare buses, so if you compare the third quarter '19 to the same period last year, you're going to have the lesser number of vehicles that were delivered for the Road to School program. Remember that Marcopolo was talking about 4,800, with 2,000 micros, 1,600 urban buses and the remainder of Volares. We're expecting that as of the first quarter of 2020.

Moving on to the next slide, so we are going to talk about Marcopolo's market share. We completed September with 49% share in the production of buses. The highlight continues with intercity buses, in which we kept 68% market share and micros with 62% share. If we added the Volare production in the year, we would go up to 77% in shares of micros and almost 70% in the total market. As a reminder, the Volare model is a complete model with the chassis M model.

Now we are going to talk in the next slide about our international operations. The highlights here, well, first, we have our controlled operations, and the highlights were Marcopolo Mexico and Marcopolo Australia. The Mexico unit continues to benefit from an increased intercity and urban buses sales. In Australia, after the restructuring we had in the first months of the year, it was able to reverse loss and recorded profit of $4.8 million in this quarter.

As for associated companies, the highlight is Superpolo that continues to positively affect unit results with the sales in Bogota. On the other hand, we have lower results for New Flyer, 84% below the third quarter of '18, and also the consolidation of the Argentinian subsidiary, Metalsur.

The prospects for the fourth quarter this year are positive. In a way that we have increased our production in Brazilian operations as of October, the domestic market continues to gain share, basically strong in all segments. Exports, they should show some recovery compared to this performance that we had in this quarter.

This is a good environment for the new renewal of fleet and investments in quality public transformation -- transportation, especially because interest rates are at their lowest historical levels associated to an economic performance.

Well, those were our results and our initial comments, and we'll now open for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lucas Marquiori from BTG Pactual.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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I have 2 questions, very quick questions on my side. First, to try and understand the foreign markets a bit better. We know that 2 of your very important markets, Argentina and Chile, are facing difficulties. I would like to know if you have alternatives for exports. You said that the volume of exports should improve in the fourth quarter. I would like to know in what geographies and that somehow offsets a more retracted market for Chile and Argentina. So this is the first question.

My second question, if you could give us a bit more color on the deregulation. We have seen some public hearings, town hall meetings to discuss intercity international freight markets, especially talking about deregulation. Any news in the topic? Is this issue going on? Has it been involved? And how has this improved in your opinion?

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James Eduardo Bellini, Marcopolo S.A. - CEO [3]

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Lucas, thanks for your question. This is James here. Well, about your first question, we did have a steep drop in the Argentina market. It was almost nonexistent this year because of the crisis, and that really affected our results. And in Chile, also, we had results below expected. As you know, Argentina and Chile are our main export markets. And indeed, they have affected us.

In the fourth quarter, we are going to see some recovery in the Chilean market. We are able to resume some orders, especially for intercity buses. That will at least bring some relief for us to take a deeper breath with regards to Chile. And we did have some positive surprises with Peru and Bolivia that somehow at least decreased a bit the impact of Chile and Argentina.

As for deregulation, we know beforehand, and this is a fact, that it will happen. So our expectation is that, first, there will be some retraction in terms of sales because our main clients will be a bit more affected because of the deregulation. But in the mid and long term, we have expectations that demand will increase because of the deregulation.

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Lucas Marquiori, Banco BTG Pactual S.A., Research Division - Research Analyst [4]

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Just one question as a follow-up. Is it correct to think that deregulation will start in the freight market and then go on to public transportation? Or do you think it will reach all categories at once?

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James Eduardo Bellini, Marcopolo S.A. - CEO [5]

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Well, I think deregulation at first will affect regular lines. This is what we heard of. Freight market should be more impacted by issues related to buses, Uber, these new players that are coming into the market.

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Operator [6]

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Our next question comes from Thiago Casseb from Crédit Suisse.

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Thiago Audi Casseb, Crédit Suisse AG, Research Division - Research Analyst [7]

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I have 2 questions. First, regarding the recovery of volumes in the fourth quarter, as you mentioned, we should see in the month of October an improvement of intercity buses. That is affected by the freight market and the new norm. We understand the intercity buses is still being recovered, but the prices are still not reflecting the cost of raw materials because of the crisis. Are you planning any passing on of costs for the next months?

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James Eduardo Bellini, Marcopolo S.A. - CEO [8]

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Well, first, as for the recovery of volumes, well, yes, we already see a recovery of volumes for the fourth quarter. This, indeed, has a huge impact in the freight market. And as for prices, we still are having some difficulty to recover prices. Margins in the domestic market are gradually improving at a pace that is not as fast as we would expect, but they are recovering. The major problem here is that the general capacity of the industry is way beyond the current demands. So the pressure on prices is something natural. And right now, we are not being able to pass on costs as fast as we would like to.

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Operator [9]

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Our next question comes from Gabriel Rezende from Bradesco BBI.

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Gabriel Rezende, Banco Bradesco BBI S.A., Research Division - Research Analyst [10]

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I would like to have a bit more color on 2 points. In your release, you said, although urban buses production grew in Brazil, you only grew 2%. I would like to understand why the drop in market share if you are expecting a market recovery in the next quarters?

And the second is about deliveries for the Road to School program. I would like to confirm the number of 4,800 vis-a-vis the 3,600 we had and how the flow of deliveries is going to be like in 2020.

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [11]

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Gabriel, this is Valiati speaking. With regards to the growth of the urban market, effectively, we are this year with a much larger market than we had in previous years. And this growth happened basically in São Paulo where our share is lower. Therefore, our growth in the urban segment was not the same as previous years just because of this reason. And also, we saw in presentations that intercity buses decreased. So we followed in the amount of intercity buses. But when you have a mix of more urban buses and less intercities, we are a bit more affected.

As for the Road to School program, remember that when we had the auction, we had a request for proposals. And the request for proposals is valid for 1 year. So the 4,800 units that we won should be delivered, we estimate, as of the next year, and it will go along the whole of the year of 2020.

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Operator [12]

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[Denis Hosia] from [Credit Capital] would like to ask a question.

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Unidentified Analyst, [13]

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I have 2 questions. First, about the city of São Paulo, that they are resisting new concessions, we don't know what's going to happen. So I would like to know what is the process like now for new lines. And what does Marcopolo expect with regard to purchases, not only of the group, but of other companies, and if you were able to sell to different players?

And New Flyer, we saw much lower results compared to what it has generated before. I would like to know what is going on in the North American market and if Marcopolo is thinking of any kind of partnerships with New Flyer with regards to hybrid buses, development of new buses and, perhaps, I don't know, Marcopolo exporting products to the North America market that the market does not produce.

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James Eduardo Bellini, Marcopolo S.A. - CEO [14]

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Okay. Let's go first to the bid of the city of São Paulo for the public transportation lines. It was completed in September. There was basically a consolidation of the same groups operating in the same lines, but there is a discussion open with regards to the time of the concession agreement, that would be 15 or 20 years. This has not been decided yet, and therefore, the process has not been fully completed yet. But because we already know who the winners of the bid were, they are just fixing the time, and that will not change the operators of the lines, at least these are the news that we have. So basically, the winners of the bids will continue to be the same. And so the market of São Paulo continues normal despite this indefinition about the time of contract.

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Unidentified Analyst, [15]

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Is that a problem for you to -- for them to renew fleets?

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James Eduardo Bellini, Marcopolo S.A. - CEO [16]

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Well, the São Paulo market has to be in the most -- has been the most important market, and we were waiting for the definition of lines. But right now, the market of São Paulo is something that is helping us, and it explains the recovery of our sale of urban buses for the year. And it is one of the factors that show why the production of urban buses is increasing by 38%. As for our share amongst the different players, well, yes, we intend and we'll try to sell to the different bus operators in the state of São Paulo.

As for the New Flyer issue, well, the comments were that they don't have such good results in the quarter. We believe it was just a one-off result. We expect it to recover and show good performance in the coming quarters, at least historical levels. Marcopolo has been talking to them. Our investment in New Flyer was a strategic investment. Our intention was to be able to have synergies with them and evolve as a company. And we also do have the intention of going into the United States, either with New Flyer or with some other alternatives because Marcopolo has, as one of its goals, to sell to the American market, to the U.S. market.

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Operator [17]

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Our next question comes from Victor Mizusaki from Bradesco BBI.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [18]

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I have a question with regards to Argentina. Given a bit of a turmoil that we see in Argentina, do you see a need for a company to have some kind of provision or review its investments in the Argentina operation or that will not be necessary?

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James Eduardo Bellini, Marcopolo S.A. - CEO [19]

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Well, as for Argentina, Victor, in fact, we think the worst has passed. We've been through the worst. We think that next year, the market will pick up, and we are getting ready for that. So we do have good expectations for Argentina next year. So we are not thinking about any provision or restructuring. We are quite optimistic about Argentina, in fact.

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Victor Mizusaki, Banco Bradesco BBI S.A., Research Division - Research Analyst [20]

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Any specific points that we should consider as a sign of recovery that could be considered in our projections? Or do you think we should wait a bit more?

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James Eduardo Bellini, Marcopolo S.A. - CEO [21]

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We have been talking to the Department of Industry and the government in general. We are in close contact with representatives that are in the day-to-day of the market. And the expectation is that the government will resume incentives to transportation as it used to do. And because we have a local production, we will probably have very good leverage because we are going to be able to have checks and balances with exports from Brazil because Argentina is a very protected market. And because we are the only Brazilians that have investments there, we believe that this is something that really speaks on our favor.

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Operator [22]

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Augusto Ensiki, HSBC, would like to ask a question.

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Augusto Akihito Ensiki, HSBC, Research Division - Latin America Analyst [23]

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Could you quantify what you think would be okay in terms of margins that you gained with your cost reductions and improvements in efficiencies? And how much do you think you can improve from now on?

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James Eduardo Bellini, Marcopolo S.A. - CEO [24]

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Well, thanks for your question, Augusto. The quantification of margin is not a number that we have right now. What we can say is the level of efficiency that we are having and then [our rack] units was improved by 5 or 6 percentage points, which is quite significant and contributes to our results, especially for the results in the quarter to be a bit more -- a bit less affected by the adversities. So this is a program that we have been working on, and it has been yielding good results. And as the market gets a bit more stable or resumes normal levels of demand, about 22,000 units, we are going to even see more results related to those initiatives.

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Operator [25]

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Mr. Marcelo Motta from JPMorgan would like to ask a question.

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Marcelo Garaldi Motta, JP Morgan Chase & Co, Research Division - Research Analyst [26]

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I would like you to comment a bit about labor provisions, if they are already showing a downward trend, if there is anything to go on with provisions, just for us to think about the behavior for the next quarters.

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James Eduardo Bellini, Marcopolo S.A. - CEO [27]

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Thanks, Marcelo, for the question. Labor contingency provisions, well, this is an issue that has been very much concerning recent times. These demands have to do with the past downsizing. So many of the people who were dismissed waited a period before they could challenge the dismissal because they had the hope of being rehired. And as time went by, many of them entered with the demands, and that's why we have this demand. We have been working quite hard paying close attention to this issue. The labor courts in the state of Rio Grande do Sul are not easy, but we believe and expect that the trend of provisions is to go down. Of course, they are not going to go down to 0. This is not what we believe. But for the next year, we want to reduce them by half, or approximately, and I'm talking specifically about the expenses that we have with provisions.

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Operator [28]

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The next question comes from [Andrea Jearaujo], an individual

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Unidentified Participant, [29]

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I have a question to James Bellini and the others. We have seen the price of Marcopolo's stock has changed levels in recent years. Considering what we talked about in the last meeting in São Paulo, I would like to have your opinion about what we should expect for the coming year or coming years with regard to the actions the company is taking, the restructuring not only in Brazil, but also overseas, and the new CEO. So could you comment on that?

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James Eduardo Bellini, Marcopolo S.A. - CEO [30]

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Andrea, thanks for your question. Yes, indeed, today, we have very high hopes with regards to next year and, more specifically, as of 2021 due to the work that we have been developing recently. It's true that we are changing focus, and we are going on some structural actions that will make the company to be -- to show better results gradually. This is not something that we can do overnight, but this is how we are doing for -- we have, as of next year, a stronger, faster recovery in terms of margins and results. And specifically, the consolidation of this work is going to yield fruits as of 2021. So we do believe that we are going to change the price of our stock very soon.

With regard to the succession plan, we continue to work on that, and we have evolved quite significantly. We, once again, would like to reiterate that the next CEO will come from the inside of the team, but we still haven't gotten to a final solution yet or a final decision yet. We believe that in the coming months, we are going to have something for you, but nothing so far. But anyway, we would like to again reiterate that we are working very hard on that, and we are going soon to tell you what's going to do.

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Unidentified Participant, [31]

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About the restructuring actions you mentioned, could you elaborate a bit more on what specific area you are implementing more actions? Could you give me just a bit more color?

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [32]

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Well, this is Valiati speaking, Andrea. We have the help of an international consultancy that is supporting us in those initiatives. Also, with other projects, we have been counting on their support. So we are working in several fronts: commercial positioning of the company, a pursuit for products that are more suitable, engineering processes, logistics, supplies. So it is indeed a set of actions, some that are part of the second wave already and others that are an expansion of the second wave.

And all that completed -- we believe that by the end of 2020, we will have completed all these projects to adapt and have our products more suitable. And then we are going to reap the fruit of all that as of 2021. And of course, in this process, we are assessing and analyzing international operations with regard to profitability, suitability, performance. So all that is being done.

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Operator [33]

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(Operator Instructions) We are now closing the Q&A session. We are going to turn the call back to Mr. Valiati for his final considerations. Please, Mr. Valiati, you may go on.

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [34]

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Well, once again, I would like to thank you all for joining us in this call. Remember that our IR department is at your disposal for any clarifications you might request. I wish you all a good day, and thank you for your attendance.

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Operator [35]

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Marcopolo's conference call is now closed. We thank you for joining us, and wish you a good day.

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