B3 SA Brasil Bolsa Balcao

BOVESPA:B3SA3

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3 Earnings Results for the First Quarter of 2021. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live via webcast. The replay will be available after the event is conclude.

I would now like to turn the conference over to Mr. Daniel Sonder, Chief Financial Officer of B3. Please, Mr. Sonder, you may proceed.

[Daniel Sonder, executive]

Hello, good morning to all. Hope everyone is healthy and safe. I'm here with the Investor Relations team of B3 as well as finance team, and I just wanted to first thank them for putting together all the materials for the earnings release, together with the communications team. I'm going to make some very brief remarks at the outset, myself and Marcela Bretas who is our Managing Director for Investor Relations. And then we will take your questions.

I just wanted to open by highlighting that we had an exceptional first quarter for the -- for 2021. We had our revenues up by 25% versus last year and our EBITDA up by 24% in the same period. We have had a very good environment for the development of our business deepening and strengthening of the capital markets in Brazil. We have seen strong capital markets activity in the first quarter of 15 IPOs in several follow-ons. And we've also moved forward in our product launches and new initiatives in the company.

We have focused on operational resilience, we have focused on client centricity, we have witnessed a large increase in the number of individuals trading equities in Brazil and a very strong brokerage sector -- retail brokerage sector around our ecosystem which is obviously very positive for B3. And we have again moved with the strategic objective of strengthening our core business as well as adding new products and services to our platform and investing in some new initiatives. We announced recently also a succession process in our senior management team and we're very happy to have the talent bred inside B3 to be able to make a consistent and planned transition from the leadership of Cicero who has been a very, very valued member of our team for over 20 years. And I think the company is in a very strong position moving forward.

And finally, I just want to make a note before turning over to Marcela for details on the numbers regarding the health and social situation in Brazil which due to the pandemic continues to be very serious. B3 has taken a proactive approach towards that scenario by making donations through a non-profit, and we have done that in -- we did that in 2020, we are hoping that work was not going to be necessary again in 2021 but regrettably, that's not the case. So we continue to make such charitable donations and hope to have a -- somewhat of an impact in the sad health and social emergency that is still around us.

So with that, I'll turn it over to Marcela and she can detail some of the numbers and I'll take your questions afterward. Thank you.

[Marcela Bretas, executive]

Thank you, Daniel. Good morning, everyone. Hope everyone's safe at this time. As Daniel mentioned, we had a very strong quarter driven by volumes in our platforms across our businesses. Overall, revenues grew 25% year-on-year, reaching BRL 2.6 billion in the quarter. Adjusted expenses reached 6.5% year-on-year, reaching BRL 292 million in the quarter. With that, EBITDA was BRL 1.9 billion which is a 24% increase over last year's numbers.

As we mentioned, we had revenue growth across all of our businesses. For the Listed Equity segment, I would also like to highlight that we implemented the new intermediary pricing model as it was announced in December last year. So starting February, we have this new pricing schedule in place that substitutes the previous schedule that we had, which was based on discounts given by level of ADTV reached by the whole margins.

With that, the Listed Equity segment's revenue was BRL 1.3 billion in the quarter, which was 20% up year-on-year. Listed fixed income in Derivative segment reached BRL 625 million in revenues and it was up 38% over the first quarter of 2020 driven mostly by increase in market steam. The OTC segment had revenues of BRL 270 million which were up with 10% increase versus first quarter 2020 results.

And finally, restructure for financing saw revenues of BRL 122 million high at 17% increase versus our last year. As I mentioned, adjusted expenses reached BRL 293 million, most of the increase was driven by adjusted personnel expenses, which was impacted by the annual salary adjustments who were some new hires that we had at B3 and data processing expenses, which were 14% up year-on-year. B3 ended the quarter with BRL 7 billion gross debt. We just announced through a material fact that we'll be raising an additional BRL 3 billion in the debentures. And we also distributed BRL 100 million to our shareholders in the form of INC, dividend, and share buyback.

With that, I end here and I open up for questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Vinicius Figueiredo, Itaú BBA.

[Vinicius Figueiredo, analyst]

In this quarter, we saw a very tight expense control with sequential improvement, in data processing, third parties, any of your personnel. My question -- my first question is, is it reasonable to assume that this control will be maintained in the next quarters, and if yes, would it motivate any changes in the company's guidance for expenses for the full year? And my second question is regarding M&A opportunities. We saw the issuance of the debenture of BRL 3 billion being announced yesterday. Of course, it optimize the capital structure of the company, but it also puts the company in a good position to capture some M&A opportunities. Does this may make sense, you're this way, if so, what would be the focus of the potential in organic income?

[Daniel Sonder, executive]

Great questions. Thank you very much. So we have not changed our expense guidance for the year. We continue to be committed to the range that we have announced to the market. It is not unusual for us that the fourth quarter has slightly higher expenses than the rest of the year. So the sequential decrease in expenses is I would say mostly due to a typical fourth quarter rather than anything, let's say more structural that we're doing in the company. We have I think over the year established a culture in the company of tight expense management which obviously we are happy about. But we will continue to make the investments in the areas necessary to support to growth of our business to improve client relationships and to move forward our product development agenda.

So no -- I'd say no news on the expense guidance of up to this point and we don't foresee let's say any deep changes in that going forward. With respect to the financing opportunity or the financing -- debt financing, pardon me, that we announced yesterday. This is consistent with our wish to have an efficient capital structure and we felt that at the end of the year, we finished a little bit lower than we had expected and that came for a good reason because actually EBITDA cash generation came in stronger than we had planned. And so the Board encouraged us to continue in this trajectory of raising debt and raising our cash position and making that cash available to our shareholders.

Our M&A strategy does continue but it's frankly not tied to this particular debt issuance debentures that we are placing in the market. These are separate matters. We do have the liquidity at hand to make the types of M&A transactions that we are looking at those are small -- relatively small deals in the adjacencies of our business that plug-in add-ons that put us in the right places in the market, close to our clients in a position to add value to their businesses' needs. So yes, M&A continues and we're looking at a few things but those are not necessarily dependent on this money that we're raising now.

[Operator]

Our next question comes from Otávio Tanganelli from Bradesco BBI.

[Otávio Tanganelli, analyst]

Sonder, Marcela, congrats on the results in the first place. I wanted to ask about the new price table implementation. This has been in place since February and on a sequential basis, the trading margins have declined only 2% per our calculation. So wanted to get a view on what should be the run rate of the further decline that we may or can expect in the coming quarters. And if you could also update us on the process of the brokers implementing the new price tables and your expectations of when could this be at the run rates of the new full implementation?

[Marcela Bretas, executive]

Otávio, nice to talk to you. So as you pointed out correctly, we had the new pricing table implemented in February. So we had 2 months out of 3 for the first quarter with the new pricing scheme in place. We saw when we compare year-on-year, a 7% decline in margin and also a 16% decline in our depository revenues that was mostly driven by this implementation of the new pricing scheme, which provides clients first of all with better discounts and lower prices at the trading and post-trading services of B3 and even deeper discounts for day traders.

And on the depository side, it exempts investors who have up to BRL 20,000 in custody from competency. And that our investors that have up to BRL 300,000 in balance, the fee that we received is now lower than before. You're correct, when you compare quarter-on-quarter, which leads to a lower delta in terms ADTV, we saw a smaller decline but again it's not -- we didn't have the full quarter yet in effect in this first quarter for the new pricing table. And again year on year, we saw the 7% discount. I think the back-tests that we announced back in 2000 -- in the early phase of 2020 and when also, we announced the new pricing table, this intermediary model in mid-December last year should still be a reference in terms of discounts and what to expect going forward.

We continue to work towards implementation of the pricing table as we said we would but we don't have a clear timetable in place as of now because as you know, implementation of other steps towards to our -- the full model depend on market readiness. So we are -- it's not fully under our control. Our wish is to implement it as soon as possible. We would like to do that in 2021 still but again, it's not fully under our control when we'll be able to do that.

[Operator]

Our next question comes from Ian White, Autonomous Research.

[Ian White, analyst]

I had a few detailed questions, please. First of all, I was interested if you might be able to say a bit more about what you're seeing in the data analytics revenue line. Performance there was pretty strong versus 4Q '20 and I'm just keen to understand if this is basically a subscription-based level from what you would expect to grow or are there some one-off items in there in the first quarter? And maybe you could give us a sense as to the types of products, what you seeing better traction in that business, please? That's question one.

Secondly, I'm just guessing you might be able to update us on regarding the progress towards launching a credit card receivables registration offering later this year, which I think was something that you mentioned with the last update of full year results. Is that still expected to proceed later this year and what are the remaining hurdles to clear for that, please? That's question 2.

Lastly, one, if you could provide any extra detail in terms of recent trends on retail derivatives trading. I think you disclosed just over 200,000 active traders in the minimal evolve contract back in October. I wonder if you'd be able to share either the number of active traders that were in that contract at the end of the first quarter or if you can kind of give us a sense that you're still seeing very strong growth in the user account there, please.

[Daniel Sonder, executive]

Ian, this is Daniel. Thanks for joining the call and thanks for your great questions, as always. So I'll take the first one and then maybe Marcela will take the next 2. On the data and analytics side, we have been working on that area and seeking to launch new products. But the change that you saw from last year in the revenue is actually mostly driven by FX. So we charge our international clients such as Bloomberg and Reuters dollars for market data and obviously the currency move significantly in Brazil from the first quarter. So that was the main driver there, but that's not to say that we're not investing in pushing more products and trying to, let's say, educate the market on the opportunities for using some of our pricing and data services.

[Ian White, analyst]

Daniel, if I could just jump in there, please. I'm kind of interested really in the sort of sequential jump that you had from 4Q '20 to 1Q '21. I didn't think FX would be kind of a major driver of there. The FX moves were more modest kind of relative to the fourth quarter last year but you still posting kind of pretty healthy double-digit revenue growth versus 4Q 2020. It sounds like there's nothing to make necessarily be aware of that but just make totally clear around of what I'm thinking of.

[Daniel Sonder, executive]

Okay. So let me get into that. I don't have data off the top of my head. It might be also related with subscriptions for new funds that are part of our -- that are part of the line. So we charge let's say access to our platforms for fund managers whereby they pay a subscription fee and then they have let's say the opportunity to use a bundle of services. And the fund industry has grown in Brazil with the number of funds expanding. So I will -- I think that's what's connected to that. So I will make sure that I have the detailed information and then reach out to you.

[Marcela Bretas, executive]

Regarding the receivables last 1 year, you're correct. We had some delays on the regulatory streamwork that is necessary for us to start offering the service. We plan to launch our platform in the second half of the year. We are working to update our systems and adapt them to offer the service and we're also making some partnerships in order to provide the services that we currently don't have in-house. So hopefully we'll be able to launch it in the third quarter if everything goes according to plan. On the number of individual investors for mini contracts -- for the mini index contracts we have more recently around 218,000 investors. Back in December, this number was 184,000. For the mini-dollar contract that we have also the IoT solution. We currently have 137,000 individual investors and back in December, it was 126,000.

[Ian White, analyst]

Can I just check that I heard the first one correctly, about 218, 218,000 investors in mini indices versus 185,000 I think it was at the end of the year that you said?

[Marcela Bretas, executive]

Correct. And all of them are active investors which -- who have made at least one trade during the quarter.

[Operator]

Our next question comes from Mariana Taddeo, UBS.

[Mariana Taddeo, analyst]

My question is related to the sale of new stake in Bolsa in Mexico announced in the last month. What was the duration of the sale and was there any impacts in this first quarter results or it will be fully accounted next quarter? Can you also give a sense on what could be the impact in terms of capital gain and also we have stakes in other and Mexican exchanges, do you also plan to sell the stakes?

[Daniel Sonder, executive]

Yes, Mariana, thank you for the question. We have made these investments over the last several years. So we basically did investments in 2016 at a very different time in our strategy, planning. And the idea has always been that through these investments, we would try to strengthen our relationship with these exchanges and discuss a product agenda that might allow us to do things together in our markets. And that having those equity stakes would let's say strengthen these relationships, give us access to the Board and do strategic decision making in these in these companies.

We then -- the frequency -- or presently -- I mean we have, let's see, periodically evaluated the merits of these relationships and in the case of Mexico, we felt, together with the Mexican exchange that the ownership stake would not, let's say, be a necessary condition for us to continue to have dialog with them. So we remain friends and we remain let's say thinking partners in terms of potential opportunities, but the -- we didn't have a Board seat and we felt that we could disinvest -- divest, pardon me, from the Mexican exchange without let's say any major impact on what we might be able to do in the future. Likewise, and we did it gradually. So we didn't make one-off sale, we sold it gradually over several months.

So the impacts of this is mostly accounted for in our numbers already. Okay? And there were no -- this is not a material number but we can detail, if you need additional information from what's in the financial statements, we can get into that for you. And the -- and with respect to the other exchanges, we have close relationship with the 3 exchanges where we continue to have investments, which are Peru, Colombia, and Chile. We have an associate of ours that is a Board member, that is a former colleague of ours in the team. And we continue to explore opportunities with those exchanges.

In Mexico, we didn't have a board seat in those are the companies we do. So we will continue to be close to them and hopefully be able to materialize on some of the opportunities in the future and do the same thing that we have done over the last few years, which is periodically evaluate whether that's still at the plan.

[Operator]

Our next question comes from Tito Labarta, Goldman Sachs.

[Daer Labarta, analyst]

A question is on your EBITDA margin. I know you don't necessarily guide for any market but just want to see how you think of value current margin, historically high level's very good, volumes continue to be very strong, you have a lot of operating leverage. Do you think this level is sustainable or in other words, do you think you're in a position to maybe give more discounts also with the competitive environment, there have been much news on the competitive environment lately. Do you think you can get either, one, attract competition sooner or even maybe the regulator wanted to open up the market? Just want to put the margin in the context and how you think about it would be helpful.

[Daniel Sonder, executive]

Sure. I think the margin and I know it's a relevant item for you to try to let's say project the performance of the business, but it's not really something that we would drive our decisions by, frankly speaking. We have made a strategic decision to reduce our fees. We are in the process of implementing that. I think this is something that we are not changing directions on. And this is the result of the, let's say the trust and the relationship that we've developed with our clients, which has allowed us to see larger volumes going through our platform and we completely understand that the direction that the company should go is in, generally speaking, lowering our fees.

We don't do that in this domain natively. We try to be selective, we try to be meticulous and careful about it. Trying to address specific points that are either a pain and a complain to our clients or where we see an opportunity to drive additional volumes. So there is really price sensitivity in terms of seeing additional business coming through when we lower our fees. We will continue to do that and we will continue also to invest in projects and initiatives that's for our growth. And our -- this business has high margins in most places. It is a business where you have to invest in a significant capital in technology and human resources and talent and let's say building up your hard capital in terms of IT but also your soft capital in terms of systems and products and so forth.

And then over time, you see lots of volumes going through when the markets are fine. And when the markets retract and this might eventually happen as it has in the past, then it's also a business that has not a lot of flexibility to reduce expenses and there you might see margins contract. This is -- we are happy that hasn't been the case in Brazil over the last few years. But you and I were around when markets were less positive in 2014 and '15 and '16. And frankly, our margins were suffering there.

[Daer Labarta, analyst]

Daniel, and just anything on the competitive front, I mean it seems there was a lot more noise last year around this but have you heard anything about people entering the market, how you think about the competitive landscape?

[Daniel Sonder, executive]

Sure. I think competition is definitely a reality and a part of the daily conversations that we have here in the -- in B3. We are very aware of the fact that the market is becoming more and more attractive for a number of opportunities around us. And we don't expect that someone will try to start a full exchange with all the equity derivatives and fixed income and all the services that we do. But rather than competition will come business by business from small initiatives around us. If you -- and if you look at the listing business, we're very happy that more and more companies have chosen to live in Brazil, although, here and there, there are exceptions to that.

In the derivatives business, obviously, clients can trade Brazilian underlying assets away from the Korean in OTC platforms abroad and even some exchanges abroad. But again, we've been able to maintain most of the business and the liquidity both for local and international investors in the listed and the OTC derivatives. We -- obviously, there is competition in registration. There's a few small companies that have niche players that have sought in Brazil to enter that. And I think again the changes that we have made, both in pricing and in customer service, I think have been recognized by the market and we continue to maintain close to full dominance, although, again, these guys are there and we have to on a day to day, face that competition as well.

And finally, in listing -- in the listed equities market. In the past, there were conversations in the market about people launching other equities exchanges. I think, that we haven't heard about for quite some time. But there are other ways of competing with us and so as you know, there is a regulatory discussion about market fragmentation and whether more transactions could be done off-exchange within the platforms of brokers such as in some other markets. We have obviously tried to point out to the market and to regulators the -- some of the disadvantages of that and then to try to have a balanced discussion and also introduce new features in our own systems such as the retail liquidity provider which have tried to incorporate within degrees of strategies, some of the new ideas, and innovations that the retail brokers want to pursue.

So competition is a part of running this company, being aware of what's around us, and I think it's a motivation for us to keep investing and to keep meeting exactly what our clients want. And also, just linking to your first question, it's all obviously something that is connected with our view of reducing fees over time.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I would like to invite Mr. Daniel Sonder to proceed with his closing statements.

[Daniel Sonder, executive]

Sure. Thanks, everyone, for joining the call, and please feel free to reach out to us if you need anything else. And again, thanks to all the investor relations, communications, and finance teams for their hard work this quarter.

[Marcela Bretas, executive]

Thanks, everyone. The Investor Relations team is available if you have any other questions. Have a nice day.

[Operator]

That does concludes B3 conference call for today. Thank you very much for your participation. Have a good afternoon and thank you for using conference call.