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Edited Transcript of POMO4.SA earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 Marcopolo SA Earnings Call

Caxias do Sul Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Marcopolo SA earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Eduardo Bellini

Marcopolo S.A. - Former Commercial Director of International Operations

* José Antonio Valiati

Marcopolo S.A. - CFO & Director of IR

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Conference Call Participants

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* Joao Noronha

Santander Investment Securities Inc., Research Division - Head of Capital Good and Conglomerates

* Thiago Audi Casseb

Crédit Suisse AG, Research Division - Research Analyst

* Lucy Sousa;APIMEC;President

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Presentation

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Lucy Sousa;APIMEC;President, [1]

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Good morning, everyone. We are going to start our session. I would ask you to leave your phones on silent mode. So we are here, a meeting of Marcopolo S.A. that is part of Level 2 of Corporate Governance. And our panel is with Mr. James Bellini, CEO; José Antonio Valiati, CFO and IR Officer; Eduardo Frederico Willrich, IR Manager; and I am Lucy Sousa, President, APIMEC, São Paulo.

I greet everyone who is here with us, but also those that are following us on the web. So Mr. James, you have the floor to open the session.

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James Eduardo Bellini, Marcopolo S.A. - Former Commercial Director of International Operations [2]

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Good morning, everyone. Welcome to our presentation to discuss the earnings of this year. I would like to say that Dan Ioschpe is here with us. He is one of our Board members and came to support us here. So thank you very much, Dan.

So without any further ado, I am going to turn the floor to Valiati, that he's going to make the presentation of our results and then I'm going to make a brief presentation to you about prospects and outlooks for this year.

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [3]

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Good morning. Well, talking a bit about Marcopolo. We are an international company. We were founded in 1949. And yesterday, we turned 70 years old. It was on the 6th of August of 1949 that the company was established. The main events and the periods can be highlighted.

So first, in 1961, where we had our first export. And as of then, the vocation of a global exporting company was established. And as time went by, it consolidated. We had our IPO in 1978. And today, we have 16 manufacturing plants in 11 countries. And the Marcopolo group as a whole has 18,500 employees.

The main characteristics of our product is: First, state-of-the-art technology in buses, expertise to have the body on any chassis model, including electric. We have had some units with the chassis of electric buses, which is a trend for the next years. We also have a very experienced engineering team, in fact, different teams separated by product, micro buses, urban buses and road buses and customized products, which probably is one of our main characteristics. We produce our bodies according to specs and criteria established by our clients.

We have a global footprint. You can see on the map where we are present: Brazil, Argentina, Colombia, Mexico, the U.S. and Canada, by means of investments in New Flyer. GB Polo, we reduced our stake to 20%. In South Africa, we have 100% of the subsidiary. In India, 49% in associated -- in association with Tata. In China, we own 100% of our subsidiary. And in Australia, we have Volgren.

I always show this table, which is the demand of the bus market and the Brazilian production of buses, and here, it's very important to observe the behavior of the domestic market, mainly compared to the demand for buses produced in Brazil to be used in Brazil.

We had a peak of production of 28,000 units in the years between 2010 and 2013. In 2014, we started to decelerate production to the domestic market. 2015, we went to 13,000 units. 2016 and '17, we hit the floor of demand for buses in the domestic market with less than 10,000 units, 9,874 and 9,804. In 2018, we started to recover the market domestically and produced 14,800 -- 14,800 approximately.

And this year, we can see that we have shown growth in demand, basically for the domestic market, since exports and -- for buses produced in Brazil kept basically the same volume.

With a bit more color for the Brazilian bus production, we had in the second quarter, growth of 24.9 units and for exports, we had a decrease of production exported in the quarter of 21%, and year-to-date, practically stable.

In the second quarter of last year, we had some one-off orders to Africa, and this year, unfortunately, we did not. If we separate by segments of products, you see intercity with growth of 32%; in the year, 11.8%. Urban buses with growth of 20.4% in the quarter and 37% year-to-date. And micro buses, a retraction of 18.8%, but in the half year, basically stable. As for Marcopolo production in the same period, we saw the production in the Brazilian market, altogether for Marcopolo in Brazil, we grew 25% in the quarter and 30% in half year. Exports, especially because of the demands we have in the previous year, we had a retraction of 45% in the quarter, 26% in the half year. As for external units, practically stable altogether, a reduction in South Africa and Australia were offset by an increased production in Polomex in Mexico. And altogether, we had growth of 4.8% in the quarter and 13.2% in the half year.

Also thinking of product segments, Marcopolo production in intercity buses had growth of 21.7%. Urban, less -- grew less than the market but especially because of the largest demand was for the city of São Paulo, where Marcopolo has a lower share. We have more competition in this market. And in micro buses, despite there was a decrease in the market, Marcopolo has good growth with 71% and year-to-date, 134%. In the Volares segment, also we had substantial growth, both in the quarter and year-to-date.

As for the external market, likewise, we have a growth in intercity buses of 47.5%, where we have the largest share. Urban buses, because of the demand of last year, we did have a retraction in volumes. And micro buses to the external market, also a lower volume with significant retraction. Altogether, we grew 4.8% in the quarter, 13.2% year-to-date.

With regard to results in the quarter, we had 4.6% growth in our total net revenues compared to the previous year. When we break down by market, domestic net revenues with growth of 80%, and that does show a recovery in demand for the domestic market, not only in volumes, but also in revenue amount. And gross income, we had a slightly lower percentage due to the fact that the largest growth was in the domestic market when revenues and the competition is harder, especially in the state of São Paulo. Also important to highlight is that we had that improvement in the gross income compared to the last year due to a devaluation of currency.

Last year, we had an impact of financial expenses that basically neutralized most of the gross income. This year, we had the opposite effect. The exchange rates went down, the gross income was slightly lower, but we still had a financial revenues result that was positive. EBITDA, quite stable, comparable to last year, and net income, we did have substantial growth of BRL 23 million. The income last year was affected by the financial expenses due to the exchange variation, since we lock the exchange -- the rates when the order is placed, and the result is reflected when we build, and therefore, we had a higher gross income. And then you have to recognize the financial revenues from the exchange rate. In the half year, we also had substantial growth from BRL 54 million to BRL 117 million in net income.

These were the main numbers I would like to comment. And now I'm going to turn on to James, who is going to make his presentation. Thank you.

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James Eduardo Bellini, Marcopolo S.A. - Former Commercial Director of International Operations [4]

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Well, the main highlights with regards to domestic market and exports, what we can highlight here is that in intercity buses, first, the accessibility law affects the freight market. That is, this market is still very much retracted due to issues that have not been settled yet, basically, with regards to the lift. The other intercity market in the domestic market are back to normal, with good prospects for the second half '19. We expect to resume exports as of the third quarter. A bit more focus on the fourth quarter. So we are going to see something in the third quarter, but it is in the fourth quarter that we expect the highest recovery.

The segment is still negatively impacted by the drop of sales in Argentina. Argentina has always been to us a very important market, one of the most important markets in exports, together with Chile. And the crisis in China has deeply affected our numbers.

The pace of production for the second quarter '19 is going to be kept for the third quarter. That is, we expect to keep the same pace. Just as a reminder, the third quarter '18 was favored by an anticipation of purchases caused by the accessibility norm.

As for urban buses, the segment continues to recover in the domestic market after we started to recover in the second half of '18.

You know that there is a bidding process in São Paulo. It has not been completed yet, but it is already affecting positively our sales. We see a recovery in the urban buses market, and exports going back to normal with the reduction of special buses to the African continent and that impact profitability. This is what Valiati was explaining, we had some special orders to Africa last year that we didn't have this year. And generally, orders to Africa have very good margins. We have good profitability and because orders were not placed, that had a negative impact in our profitability in those lines.

As for micro buses and Volares, the second quarter, we have delivered 826 units to the school program: 331 micro buses, 306 urban buses and 189 Volares buses. And we heard that last year, that a new bid for 6,200 units is confirmed to take place on August 12. That was a very positive surprise to us, we were not expecting that.

As for market share, last year, we closed at 56%. This year, year-to-date, we are at 49%. As for market share per segment, in intercity buses, we kept the same level, 68%. In micro, we have 63%. In urban buses, we closed the year at 49% last year, and we are at 37%. So we expect to keep the same market share of last year as of the second half of '19.

Well, the Second Wave, we are very much focused on the Second Wave program. You know our main focus now is to improve profitability in the company. So we are working very hard on efficiency. The average efficiency of Ana Rech and San Marino plants advanced 5 percentage points comparing the average reached in '18, vis-à-vis the average of the first half of '19. We continue to focus on operating excellence, and we are expanding the scope of good practices to other units. We are doing lots of work focused on Ana Rech and as it yields results, we expand to other units, and that has been bringing us very good results.

As for operational planning. Well, we have joint work with an international consultant and we are improving our commercial industrial plans. This is what we call in Marcopolo the performance project. So the idea is to integrate our plans amongst all units, and we already feel the reflexes of that in the procurement area with lower internal inflation and also in the commercial area, with some more confidence in our delivery times.

In the same effort, we are feeling quite consistent impacts on quality. We have been systematically decreasing problems related to technical assistance and costs with non-quality, which has always -- have always been a recurring problem. So we are working on that, decreasing wasting lines, inventory and rework. And that has been working quite positively.

As for our project to optimize plants, we have, first, the São Mateus plant. The plant has been receiving investments for the verticalization of parts and components that started already in '18. We are keeping our daily production. In addition to Volare models, we are also keeping production of urban buses as of '19. In the first half of this year, we produced 354 buses in São Mateus, including 22 Torinos, which are urban buses. We also completed our manufacturing center. It was opened on February, 7, this year. It was built in Ana Rech -- on the site of Ana Rech, where we had the Plastic and Fibers Plants. Remember, the fire we had back in '17? And now after all that twisted iron that you probably saw the images, this is what we have. And along '19, the center has been receiving machinery from the areas of parts and components manufacturing of Ana Rech, Planalto and San Marino. And that will enable us to close the Planalto plant and transfer everything to San Marino, in terms of bus production. And to the manufacturing center, we are going to have the manufacturing of parts.

In international operations, our outlook is the following: China, Marcopolo China is suffering with a reduction of demand of the main markets of Myanmar and Hong Kong. We are reviewing the operations, and our idea, perhaps, is to change the business model in China, think of something different. We are still assessing the market. MASA in South Africa, the unit continues to be affected by low demand and deceleration in the local economy. This is a market issue. Metalsur in Argentina, July '17 last, we announced consolidation of 70% of Metalsur with the closing of activities of Metalpar, which was our urban buses plant, located in Buenos Aires. And the production of urban buses, therefore in Argentina will be also in Metalsur. So as of this year -- the second half of this year, we are going to concentrate urban and intercity buses in this -- on the same site. New Flyer, a reduction of results originated by New Flyer were expected after we reviewed the backlog, and the performance is probably going to be stable, but at lower levels. Basically, it is affected by a reduction in growth in the markets of the U.S. and Canada.

Polomex in Mexico, we are having very good performance with substantial growth of the operation this year. This is a reflex of measures adopted last year, and contracts negotiated along the year of '18, to increase market share and improve our product mix. So for the second half, we expect a bit of a more moderate growth, because we had very steep growth in the first half of this year. Superpolo in Colombia, the joint venture performance is -- has been very good, quite exceptional. And it has to do with the renewed fleet in the city of Bogotá. And that will continue to affect positively the company throughout the year of '19. We'll still see the impacts of that until the end of the year, with no major setbacks.

In India, we have a positive seasonality of school buses until August. So by the end of the year, we expect to have a better scenario than in previous years due to unanticipated purchases -- anticipated purchase related to EuroVI, which somehow will smooth seasonality, which really affects us every year. And Volgren in Australia, even with the drop in volumes in the first half of '19, has been presenting an evolution of results by means of operating improvements. We've extended practices and integration to the Brazilian operation. Volgren now has a Brazilian executive of ours that took over the operation. And we expect with this movement and all the integration that we are having with the plants in Brazil and in Australia, taking resources from here and there, we are able to have a very good response from Volgren in terms of results for this year.

Well, this is what I had for today, and now we are going to open for the Q&A session.

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Lucy Sousa;APIMEC;President, [5]

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Well, thank you very much for the presentation. We will now start the Q&A session, but before, I'm going to give James, the seal of 18 consecutive years of presentation in our São Paulo regional office. We thank you so much for this partnership. So this is the seal of partnership. We thank you very much for this good partnership.

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Questions and Answers

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Lucy Sousa;APIMEC;President, [1]

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So if you want to ask questions, just raise your hands.

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Joao Noronha, Santander Investment Securities Inc., Research Division - Head of Capital Good and Conglomerates [2]

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This is Joao from Santander. I have a question about volumes. In the presentation, you show a drop in volumes for the domestic and exports market. Exports seem to be in a historically high level, so I would like to understand if there is still room to grow, or this, if this the level of volume we should expect from now on. And in the domestic market, you are annualizing something close to 18,000 units, and in the past, we had 23,000 to 25,000 units. Historical data, when we see since 2007, is it something that you consider the normalized market in Brazil? Or do you think the scenario has changed? First question. And second question, the restructuring of your manufacturing complex. You talked a bit about [Planalto], I would like to know about what your plans are? And if there is any news about that.

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Unidentified Company Representative, [3]

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Well thank you, Joao, for your questions. Okay, external markets. As you can see in the table that we showed in your -- in the presentation. It's generally between 4,000 to 5,000 units, and it has been maintained consistently for almost a decade. And we believe this is the volume that should be maintained. And obviously, we are always trying to expand our share and sales to the market as a whole. I would remind you, because we have several plants in several parts of the world, the export market is not always serviced through Brazil. It might be serviced through units that we have throughout the world. As for volumes in the domestic market, if you observe the chart in last years, we had volumes close to 32,000 units, past that even. The number we believe that is sustainable in Brazil would be between 21,000 to 22,000 units. I think this would be considering the market back to normal. I don't believe that we are going to have a demand in the domestic market of 28,000 to 32,000 units, but it's quite possible and sustainable to have something between 21,000 and 22,000.

Your other question concerning our restructuring. As James explained in the presentation, we should complete the restructuring process and total transfer from [unit] Planalto, from the Planalto unit. The bus production is no longer in Planalto unit, we have all of it in Neobus. And until March next year, we believe we are going to have the means to close Planalto definitely. As I mentioned in previous presentations, we want to have 2 centers of production: Ana Rech and Neobus in the south and Ciferal and São Mateus in the north. We still do not have any other definition of closing each one of these units. The market demand for the future will be a determinant for -- we do not have a definitive position. What we want is to rationalize costs in these units, centralizing in Caxias do Sul all back-office, fixed costs and leasing production with the other centers.

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Unidentified Analyst, [4]

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I am from JPMorgan. I also have 2 questions. First, with international operations. As you talked about each one of the regions, I would like to know strategically in the mid-long term, does it make sense to increase share in some operations that you do not have 100%? If it makes sense to go to a new market? So I would like to know a bit about your international strategy. And a follow-on in terms of plant restructuring, with the closing of Planalto, what do you expect in terms of the asset itself? Are you going to sell it? Sell the land, sell the machinery?

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Unidentified Company Representative, [5]

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So I'm going to start answering the second question that is related to the closing of Planalto. We are -- we have been working with that for some time now. The process was a bit slower because we also needed to make some investments, especially with the painting in the area. We only had in Caxias do Sul, volume of production was low, and we kept them in contingency, and now we are making the investments in Ana Rech, and we are going to transfer the operation until March of next year. Part of the savings of the process have already been captured, but we believe that we still are going to be able to reduce cost by BRL 3 million, BRL 4 million a year because the unit now is only working with the manufacturing of components and painting. So as for cost reductions, we believe we are going to have a cost reduction from BRL 3 million to BRL 4 million.

As for the sale of the property, it will be possibly available for sale. And unfortunately, in recent years, the market and the Brazilian economy did not show high demand for property. And we believe that as of March next year, when we make it available to the market, we expect the economy to be better, and we expect property to have a better value and that we are able to sell it. As we also have the property of Três Rios that belongs to Neobus, is also on sale, but you know the real estate market has not been quite favorable. Perhaps as the economy picks up, it will improve.

Your other question about units overseas. As for our units overseas, we have been thinking of some changes. In Argentina, for instance, we had 50% together with Metalpar from Chile. And that was an operation that was very important to us because the Argentinean market, although it is in a crisis now, has always been a market in which we had a very high share. Now we have 70%. It was a difficult operation, complicated, we have been working on that for more than a year in the attempts to settle those issues.

And now finally, with the closing of Metalpar, we're able to increase our share to 70%. Already with an out clause, that is in 4 years' time, we are going to be able to have a put already with the price established. So within 4 years, 2023, we want to take over 100% of the operations in Argentina. As for GB Polo, our intention is to leave GB Polo. We lowered our stake to 20%, and the idea is to work to leave the operation. This is no longer interesting to us. It was something of the past, but that didn't prove to be effective, especially with regard to contributions to our results.

Mexico, we have 76% stake -- sorry, 74% against 24% of -- 26% of Mercedes, and we are starting negotiations with Mercedes to absorb their 26%. But right now, it's just a start of conversations. We don't have anything concrete for that.

In China, as I mentioned before, the idea is to change the profile, to change the business model. We want to increase our operations in China, and we are starting to format that somehow.

And in India, we have the intention to continue in India, but we are still assessing whether Tata is our best partner. We are conducting studies with this regard, and we would like to change the business model in India. Today, we are very much squeezed, we do not have access to points of sale, and that really is complicated because by not having access to the points of sale, we are basically subject to the decisions of the partner. We don't have the majority, so we do not have much room in terms of actions of what to do when the market's slow and et cetera. So that's basically it.

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Unidentified Analyst, [6]

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This is [Matias] from BTG Pactual, and I have 2 questions as well. One more to the financial side; the other, more strategic. You had taxes for the quarter that really drew our attention. I would like to know what numbers we use for the second half? And the second, James, the question is to you. You are CEO and Chairman at the same time, what is the focus in the company? What is the main target of operations? And if you could give us an update of the search for the executive, if it's going okay, if you could give us a bit more color there.

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [7]

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Well, the tax bracket in the quarter was reduced. It benefited from the effects on interest on capital that we paid out, as you mentioned, but we also recognized in the quarter, the [PBI], which is the incentive program for development and innovation. As for future prospects, we probably are going to keep a tax bracket that is way below the normal 34%. I cannot tell you the precise number, probably not at the level of the second quarter because we have those benefits, but along the year, we are going to have effects relative to the interest on capital that we are going to account for -- or the Board are going to decide in the next meetings, as usual. So I think that perhaps we are going to stay between 20% and 25%.

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James Eduardo Bellini, Marcopolo S.A. - Former Commercial Director of International Operations [8]

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As for your question in the search for an executive, I took over the CEO position. I was Chairman, I am still the Chairman, but I'm going to leave the chair of the Board to the Vice Chairman, because I should not keep the 2 positions for more than 2 months -- 6 months, I'm sorry. But I'm quite confident, Marcopolo is no news to me. I was an executive with the company for 14 years in the past, and in the past 2 years, when Francisco was leading the company, I was quite close. So nothing that is happening is news to me. My family has always followed the operation from close, so much so that in the beginning of my term as Chairman, we changed the governance model and decided that the governance would be by the appointment of an Executive Chairman, and that enables me to be closer to the operation, having access to information. So when Francisco left, and I took over as CEO, nothing was really a concern, because I was already following the operation from close.

As for priorities, well, I think that my main priority is the succession process, to define a solid consistent succession plan for Marcopolo. This is something that we never had in the company before. So that is quite understandable because -- and when executives, it's hard to plan for the succession, they think, well, am I going to leave? Well, eventually, we are going to leave, but it's not easy to prepare succession. And sometimes, this is something that stays at a lower level, but we understand now, and we have been discussing that with the Board, that the succession plan is very much a problem -- important, and I do not have the problem at all. I'm just in an interim position. I'm going to pass the job on to someone, and I'm going to devote part of my time to develop the process. We never know what's going to happen tomorrow, and as it happened to Francisco, he had an opportunity that was unique in his career, and he seized the opportunity. Ideally, we should have someone already in place. We didn't, so we had to go through this transition, but it has been a smooth process. The idea is that my successor will come from the executive officers that already work with us. We are conducting assessments with each one of them, working with coaching and et cetera, and I'm certain that this is going to be a very smooth process.

And my other -- or second or first priority is profitability. We have to work on profitability. We have been working on that. In the 3 months that I have been in this position, that was one of my main focus, because in the past, the company had other levels of profitability. We got to 10%, 11% in net income, and I think that we have to go back to that. So right now, those would be my main priorities.

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Unidentified Analyst, [9]

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This is (inaudible), BBI. I have 2 question, both related to the [past fiscal] program. I would like to know what is the historic market share of Marcopolo in the program? And how much you are expecting in terms of discounts, considering it's going to be an inverse option?

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Unidentified Company Representative, [10]

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Thanks for your question. Market share, in past years, historically, looking at the program from 2010 to 2013, we had about 50% market share. Last year, in the bids we had -- we were able to reach 70% market share, and that highly contributed to the results of '18. And also, it gave us better understanding of the program as a whole. It's very hard to say how much market share we would have for the new bids, but I think we would be able to reach something like that. As for discounts, it will depend on the appetite of the competitors. How much was the last discount? We have that? No.

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Unidentified Analyst, [11]

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This is [Roger] from [Technocast]. I have 2 questions. First, about exchange rate, it's very important in your profitability and competitivity. What is the exchange rate you work for the year of '19 that is profitable? And it's hard to think of -- project the foreign exchange rates, but what would be a reasonable number for next year? Second question in terms of regulatory issues. We are very much subject to changes in Brazil, city administrations are becoming more demanding in terms of flexibility, lifts, WiFi, air conditioning, the chassis has to have suitable suspension, platform. So in what can that benefit the exchange of vehicles? In Sao Paulo, we are having a new environment, new concessions. And also intercity buses, you have maximum age, so what is the scenario like in terms of replacement of the old fleet, considering new demand that we didn't have before? And also, we have EuroVI, in Brazil, it's going to be in 2022, but do you think it can anticipate orders for 2020? We have elections in 2020, do you think that can bring people to advance their purchases?

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Unidentified Company Representative, [12]

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Well, with regards to the exchange rates, we gave up trying to guess where the exchange rate is going to, because it's a very hard mission, as you should think. But to us -- or for our planning this year, we are working with an exchange rate of -- an exchange rate downwards. What is important is to highlight is that the exchange rate is regulated for each operation that we engage in. We have our price quotes, the commercial area with some safety margin when they are going to have the price estimates. Most of our sales are on demand. So whenever you are going to give the clients the price, you take into consideration not only the exchange rates that we have in the budget, because we don't lock the exchange rates for each operation, and then you make some projections, thinking of the exchange rates at the time. And then when we close the operation, we lock the exchange rates in that position to guarantee profitability.

So the level of the exchange rates today is good, it is at BRL 3.97, if I'm not mistaken, that was the closing of yesterday. And at this point, we are quite competitive. And in many markets in Latin America, we compete with Brazilian suppliers or local suppliers. So the exchange rate is an important relevant factor, but we have very little dependence on imports of products. We do have some indirect dependence, but the highest impact is on exports. So when the exchange rate is high, this is always good for us as exporters.

As for the Brazilian market of buses and possible regulations, lifts, the effect of the regulation on intercity, interstate buses, basically this year, will reach 5 years for the average age of fleets. So we believe we are going to have this intention to buy, because customers need to keep their fleet at an average age of 5 years. But I don't think that we are going to have an anticipation of demands with regards to that. As for adding value in terms of items, elevators or lifts, elevators or lifts were a complication for the manufacturers because the product gets more expensive. That has a cost. And this is a problem, especially with products with lower added value, it becomes -- they become more expensive to clients, and that generates a need for negotiation with clients. As for the other technologies, the air conditioning, WiFi, well, they are basically standard in products now. The difficulty that we always have is to pass on prices, because clients want technology, they want the benefit, but they have difficulties to recognize or accept increase of prices related to that.

As for the election period, what we have seen in past elections, is that there was an effect, especially in the market of urban buses, in city elections. But that did not happen in the last elections. So if there is anything, it's always positive because, once again, the city administrations in which mayors want to be reelected, public transportation is a platform for their campaign, and it can favor us.

As for EuroVI, it's -- the date has not been settled for Brazil yet. They are talking about 2022, it's still a long way to go, we might have something in the months before the introduction of the standard, but it will only happen then. And then, of course, the trend is for clients to have a pre-buy. So that's based also -- pay the costs of that, the implementation of EuroVI will bring.

And in EuroVI, you also have the level of emissions that vehicles have to reach, and there are some municipalities that have already established a deadline for that. So EuroVI can be an alternative for cities to reach a lower level of emissions without having to go to electric buses. So you do have some kind of incentive for the replacement of the fleet. Just to comment, Scania already launched its new EuroVI line with prices 20% to 25% higher. And to even Scania's surprise, it was very much welcome because it enabled savings in fuels. Also that our gas-driven vehicles in São Paulo, there is a law for diesel vehicles to be removed. I don't know if Marcopolo clients are going for gas-driven vehicles. It's still very little. What we see is that it's still in (inaudible), the diesel technology still is dominant in the market. Perhaps, it's not going to be so for the future, but so far, the gas-driven market is very, very little.

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Thiago Audi Casseb, Crédit Suisse AG, Research Division - Research Analyst [13]

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This is Thiago with Credit Suisse. So I have 2 questions. First, you talked about the 21,000 units as a normal number for the domestic market. I would like to understand the breakdown. If you look at historic levels, it seems to me that some lines are a bit more depreciated than others, they have a lower volume, especially intercity buses, the segment in which Marcopolo has the greatest competitive advantage. And then you think of tourist and freight buses, so you see a -- an advantage for those lines when you think of a market of 21,000, 22,000 units?

And second question about margins, you talked a bit about initiatives to improve margin. The operating leverage, go to the market -- do you think that you could go back to the margins of 10%, 11% net margin?

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [14]

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Well, with regard to volumes back to normal, we talked about 21,000, 22,000. Effectively, the segment that most represents our share is urban buses. It is the segment that is lagging behind right now, and it is a segment in which competition is tighter. So we believe we also have room for intercity buses and micro buses. But I think the segment that will have the most impact is the urban segment. If you remember that the demonstrations that started in 2013 in the country, in a way, they pressured the demand for buses. Remember, it was the demonstration, the process for this, against the BRL 0.20 in São Paulo. And then other municipalities had difficulty to pass on prices. And of course, the renewing the fees has to do with passing on prices so that those operators can make ends meet.

If on the one hand, we have more and more demand for better-quality products with air conditioning and elevators, that has to be supported by bus fees. Fortunately, the movement has already started. Municipalities are starting to passing on prices, but we still have some room to follow. So growth this year, there was a growth in demand in the market as a whole, in urban buses, especially in the city of São Paulo. And we believe that the whole segment is going to grow. But again, the most important segment in terms of growth is urban.

As for margins, well, obviously, when you have a repressed demand, when you are below your production capacity, it's not only us, but our competitors, there is always a pressure for margins. And effectively, when the demand is reestablished, we will certainly be able to improve margins with less difficulty. While we don't, we are doing our homework, as James mentioned before, we are conducting several programs, especially the performance programs that affects the whole operational area of the company; we are optimizing plants; we closed Três Rios in Rio de Janeiro. We are closing Planalto, and we are focusing on our south and north hubs that has to do with decreasing costs and improving profitability.

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Unidentified Company Representative, [15]

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Thank you, Valiati. Anyone else?

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Unidentified Participant, [16]

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I'm an investor, and I would like to ask Valiati a question. If you could explain a bit better the expected impact of urban buses in the city of São Paulo, in the metropolitan area of São Paulo, which is basically dominated by another company? And to James, when you talked about succession, profitability, when do you think we are going to have the completion of succession and the level of profitability that you had before, and that are your priority?

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [17]

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Thanks for your question. As for the impact in the São Paulo market due to demands in the new bids, of course, in the city of São Paulo, we have greater difficulties because of our main competitors that is located in the city of São Paulo, in the state of São Paulo. And in addition, because most of the companies are connected to the supplier. So in the city of São Paulo, in the companies in which a competitor has a stake, our penetration is a bit more difficult. But there are other clients in the city that are not connected to our main competitors, and we are seeking to increase share in the city. So in the regions that are not connected to any stake of our competitor, we will probably have a better share and better than our historical levels. This is our objective, and this is what we want to get.

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James Eduardo Bellini, Marcopolo S.A. - Former Commercial Director of International Operations [18]

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As for your questions to me, well, the succession process itself, we do not have a deadline. In fact, there is no pressure also for this to have to happen immediately. My estimate is that between March and December next year, we will have completed the process. I don't think it's going to go beyond that. As for profitability, we already see some effects, immediate effects in this quarter, and we expect this year to have good impact.

Now to go back to the levels we want and we think are possible, probably as of 2020.

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Unidentified Participant, [19]

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Valiati, could you talk a bit about Colombia and Bogotá? How long will the renewal process take? And if you're going to have another bid in Santiago? And how long this will keep coming into Marcopolo's portfolio or backlog? And also in Mexico, when are you going to have the peak of production and sales, and how long the contract is going to last?

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José Antonio Valiati, Marcopolo S.A. - CFO & Director of IR [20]

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With regards to Transmilenio in Bogotá, we will see very similar results in the next quarter as we had in the first and second. So we see them, it's significant volume, the main characteristics are bigger buses, they are not simple urban buses, they are biarticulated buses. So they have a higher price, and this is going on throughout the year. But we do not have a confirmation of new bi-s. In Mexico, we have 1,080 units, they were announced last year, the contract lasts 5 years. The contract is equally divided along the year, so we should deliver about 200 units this year. But the main impact is not only those clients, we have lots of smaller clients in Mexico, increasing results. In fact, a good deal from growth in Mexico does not come from intercity buses, but rather urban buses. The number of urban buses is growing in that market based on initiatives that are maturing. We started last year with results that were not as good. We thought we would deliver last year, but we are adjusting the results of these initiatives this year.

This contract for 1,050 units, we have chassis from M&A. But we have the freedom of putting the bodies on other chassis, and this is contributing to our performance. The objective is to have relevant market share in Mexico, which is a bus market of approximately 9,000 units a year, most of them urban buses, but about 2,000 intercity.

Now as for Chile, things can happen at any time. We are just waiting for news from Santiago. There was a bit last year that was canceled because there was a changing mayor, then it was delayed, but we are working on the conditions, and we are expecting news at any time.

Any other questions? Very well then, I thank you very much.

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Lucy Sousa;APIMEC;President, [21]

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Do not forget to fill the assessment form, this is very important, for both APIMEC and Marcopolo. And as we have reminded, our next meeting's agenda is on our website. And we are going to have [quarters] that are also informed on our website. I'm going to turn the floor to James for his final remarks and the closing of the session.

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James Eduardo Bellini, Marcopolo S.A. - Former Commercial Director of International Operations [22]

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All right. Thank you very much for attending. This exchange of information is so much important to both sides. Again, we are always available, myself, Valiati, Eduardo, to answer any of your questions or to listen to your observations. Thank you very much for joining us, and have a good day.

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Lucy Sousa;APIMEC;President, [23]

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The APIMEC São Paulo with Marcopolo's meeting is now closed. We thank you very much 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.]