B3 SA Brasil Bolsa Balcao

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Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's earnings results for the first quarter of 2022. [Operator Instructions] As a reminder, this conference is being recorded and broadcast live via webcast. The replay will be available after the event is concluded.

I would now like to turn the conference over to Andre Milanez, B3's CFO, who will be joined by Fernando Campos, Investor Relations Associate Director. Please go ahead.

[Andre Milanez, executive]

Good morning, everyone. Thanks for joining our first quarter earnings call. It's a pleasure being here for the first time with you.

Well, let me start making some remarks about the quarter. 2022 started with more uncertainties in our -- in the financial markets globally, with the war in Eastern Europe and inflationary pressures around the main economies around the globe. In Brazil, we saw that movement as well, with interest rates increasing and reaching the highest level in 5 years.

But even in that more challenging scenario, our volumes were still very healthy during this quarter. We had BRL 31.2 billion in ADTV on the cash-only equities listed segment. And on the derivatives, ADV, a total ADV of 4.4 million contracts. Those represent a reduction in relation to the first quarter of last year. But we have to remember that the first quarter -- actually, the first half of last year was a very strong period with the second wave of the COVID pandemic, and we experienced all-time high volumes in our platforms.

In terms of the revenue, it's worth remembering as well that last year, the first quarter did not fully reflect the impacts of the pricing policy changes that we implemented, which were only done in February.

So despite that, we presented very healthy volumes. In relation to the last quarter, our volumes were pretty much in line. The ADTV for equities was slightly lower, and the ADV for derivatives grew in relation to the last quarter.

During this quarter, we also had the opportunity to see our -- the resilience of our business model being -- playing an important role. So despite the reductions that we saw in volumes in relation to last year, our revenues did not reduce at the same level. We closed the quarter with total revenues of BRL 2.5 billion, a reduction of 4.6% in comparison to the first quarter of last year, and with a recurring EBITDA of BRL 1.7 billion and a recurring net income of BRL 1.2 billion.

It's also perhaps highlighting that these figures, the figures for the first quarter, they incorporate the figures for Neoway, a company that we acquired at the end of last year. And we tried to highlight the impacts of the incorporation of those figures in our numbers for the quarter in order to allow you to make better comparisons.

And finally, also because of the acquisition and the consolidation of Neoway in our figures, we've announced the revision of some of our guidances. So the expenses and investments on new initiatives, the guidance for that was reviewed as well as the guidance for depreciation and amortization and the expenses linked to revenues. So those were the 3 guidances that were reviewed as a result of the acquisition and consolidation of Neoway in our financial statement.

With that, I would like to pass on to Fernando, who is going to go into a little bit more details about the results for the quarter.

[Fernando Campos, executive]

Good morning, everyone. Entering in more details about the segments. In the listed segment, we saw a 10% decrease in revenue, reflecting the lower trading volumes mentioned by Milanez, and also the price -- the new pricing policy that he also mentioned in cash. It's worth mentioning in cash equities also the lower turnover, which was 166% in 1Q of '22 against 176% in 1Q '21, but the turnover was in line with -- for 4Q '21.

In FICC, there was a 5% growth in volumes compared to fourth quarter '21 and a 16% decrease compared to first quarter '21. The RPC rose 6% compared to the first quarter '21 mainly in BRL interest given the market volatility, implying more volumes of long-term contracts.

In OTC, we saw an increase of 12% in revenue mainly as a collateral effect from the increase in the basic interest rate during the period, with growth in fixed income instruments and from new issuance of bank instruments and corporate debt. We also saw in Treasury Direct, the number of investors grew by 27% and the outstanding balance grew by 20%.

Talking about the infrastructure for financing. There was a 10% decrease in revenue, reflecting the decline in the automotive market in the quarter, with the financing falling 9% due to the less favorable scenario.

And finally, in technology, there was a 33% growth in revenue with a 16% increase in the number of monthly customers using our OTC system and 58% increase in data analytics, mainly explained by the inclusion of Neoway in this line.

Just talking a little bit about the adjusted expenses, excluding Neoway. So we saw adjusted expenses growing by 34% versus the first quarter of '21, mainly due to the lines of personnel by collective bargaining agreement and new hires. There was an increase of about 20% in the number of employees we retrieved from those 2 quarters. And data processing, it's worth remembering that the development of new initiatives given the nature and the way in which they are being managed by Agile methodology and other project management tools to accelerate the go-to-market of these new initiatives, has the effect in our statements of higher expenses and lower CapEx.

So with that, I'm going to -- Milanez will talk a little bit about the strategic progress that we had on the quarter.

[Andre Milanez, executive]

Thank you, Fernando. I think before we move on to Q&A, I just wanted to highlight some of the launches that we had during the quarter in terms of our road map.

So on the listed segment, we've started the retail liquidity provider for certain stocks in the listed equities. Remembering that the RLP was -- that only available for derivatives for the Ibovespa and USD mini contracts. This is the next experimental offering that was launched at the end of January, and it's going to be run for 12 months.

In the OTC segment, we launched our platform for receivables, credit card receivables. We aim to provide here high-quality infrastructure for market participants and hope to become a relevant player in this market.

And finally, in insurance, where we have been making some good progress, have over 80 clients ready, registering with us. We started to register house insurance policies and -- property insurance policy, actually, this quarter, and hope to expand this offering further during the following quarters as other categories of insurance -- the registration of other categories of insurance become mandatory.

So I think that's it for the main highlights, and I'll leave more room for Q&A.

[Operator]

[Operator Instructions] And our first question comes from William Barranjard, Itaú BBA.

[William Barranjard, analyst]

We have 2 questions. The first one is about Neoway numbers. We would like to understand them better. So is there any non-recurrent events or seasonality effects in the first quarter? And how much of those numbers was recurring? So we would like to understand basically if it is okay to annualize the first quarter numbers to project the entire year?

And our second question is about the company overall expenses. We would like to understand if, in a scenario where revenues are not performing as expected, if you see any room to slow down the speed of the expenses growth? That's it.

[Fernando Campos, executive]

This is Fernando. I'm going to answer the first one, and then Andre will answer the second one.

So regarding Neoway numbers, it's -- the numbers are within the budget. There is -- most of the revenues are recurring revenues, so it's long-term contracts that we have. And it's with -- the numbers are within the budget that we have for the company, but we expect them to accelerate throughout the year. So I wouldn't annualize them now. But because what we have in the budget, although there isn't any seasonality, but we expect the revenues to accelerate with the connection that we are making.

[Andre Milanez, executive]

Thanks, William, for your question. Regarding the expenses, look, we are very confident that the strategy that we are adopting for the company to grow should be -- it's a good one. So what we try to do, and that's why we decided to change a little bit the way we communicate this to you and all the investment community by segregating our guidances between the core business and the new initiatives, was to ensure that, that was clear to everyone.

So we will continue to make the efforts to strengthen our core business and work on the road map of new products and new features to unlock value in our core business. We expect to be able to seek efficiencies in terms of expenditure in the core business and keep growing at a more normalized levels in terms of expenses for the core business. But we also think it is necessary to separate a part of our cash generation to explore those new opportunities that could be potential opportunities of growth for the company in the future. Some of them could be, let's say, important insurances that we are making.

So we do not plan to change that for -- in the short term if the volumes are not performing as good as they have in the past. We believe this is important to ensure the future and the future growth of the company.

[Operator]

And our next question comes from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

Two questions. The first one is what your expectation is for velocity for this year and next year? And where do you think it will end up stabilizing turnover velocity for your equities business?

Second, could you give us an update about the litigation regarding the case with the Central Bank from 1999, and whether there has been any development there?

[Andre Milanez, executive]

Thank you, Carlos, for your question. Well, it's a very good question. And we don't know where this is going to be -- going to land or normalize. What we believe is that we will not return to the levels that we had 2 years ago. I think we saw some structural changes taking place during this period. A number of investors, number of advisers, the deepening and the dynamic of the capital market has structurally changed during these 2 years. So that's why we do not believe the turnover or the trading volumes will resume to what they were before the beginning of the pandemic.

We already started to see some deceleration during the second half of last year when interest rates here in Brazil started to [indiscernible]. The first quarter of this year was pretty much in line with the last quarter of last year. So I mean we -- it's difficult to say, but I think we don't see those levels reducing much further than what they are, they currently are. I think April perhaps was slightly slower. We do not see as yet a trend there.

I think it's worth highlighting that April had 2 holidays here in Brazil, long holidays. There was also a holiday in the U.S. I'm not saying this is the reason for the April figures, but definitely, it didn't help a lot, but that's how we see it. So we do not see those levels reducing much further or going back to what they were before the pandemic.

And hopefully, with all these changes that took place, once we start to see the conditions for further increase in volumes, perhaps what we would see, it's a much stronger movement than we saw. Because we -- as I said, we are in a very different position than we were when this movement occurred, but this is not something that will occur in the short term. Perhaps over, I don't know, 12 to 18 months, provided all the conditions in terms of inflation control, level of interest rates allows such movement.

And finally, in relation to your question regarding the contingency, we do not have any development during the quarter. As we said, it's difficult to have a projection of when we should have any news here. We are still in the same situation as we were since the last time we spoke about it.

[Carlos Gomez-Lopez, analyst]

If I can follow up. Originally, the idea was that you might get the resolution on the case in about 2 years, I believe. And that was, I think, the initial message back in the middle of 2021. Does that mean we are about 1.5 years away from it? Or is it still 2 years from today?

[Andre Milanez, executive]

Look, it's difficult to say. This is the best estimate, but the timings for the justice here in Brazil do not have a specific schedule or specific time table. So this is our best assumption in terms of the time that could take for us to have some news. It could be sooner than that, it could be -- take longer than that. It's really difficult to say, Carlos. Unfortunately, that's the best we can provide you with in terms of information as at this moment.

[Operator]

Our next question comes from Ian White with Autonomous Research.

[Ian White, analyst]

Just a couple of fairly short follow-ups, please. First of all, I wondered if you could say something about the equity issuance pipeline that you're seeing, particularly the IPO pipeline? And whether you think we should be expecting a return to essentially healthier IPO activity over the course of the second quarter, or whether we might expect that later in the year?

And just the second question was around competition. I just wondered what your expectations were now in terms of outcomes from the CVM's study there into equity market structure?

[Andre Milanez, executive]

Thank you very much for your questions, Ian. Well, in terms of IPO, we still have a very strong pipeline. But as you know, the market -- the current market conditions are not ideal for companies to do their listings. It's really difficult to predict when we could have a new build for those companies to access the market, and that will depend heavily on the evolution of the macro environment. It's hard to say -- it's difficult to see that changing significantly in the short term, but that doesn't mean that we could not have small windows opening yet this year, so it's really difficult to say.

I hope -- I wish I had a precise answer to your question, but I think that's the best we can give in terms of expectations. So highly dependent on the macro environment and market conditions for those transactions to become effective, but we have a very strong pipeline of companies waiting for that window of opportunity.

And the second question was regarding the regulation. So we expect the regulation to be issued probably next month, so before the end of the term of the current President of CVM, and we are not expecting any material impacts for our business in terms of the regulation. There might be some changes regarding trading of blocks. We have already been working since -- actually before that in a trading block facility that we plan to launch to the market right after the new regulation is issued. Of course, we need to wait for that in order to ensure that we have all the details in terms of the -- what is going to be required in the regulation. But that could potentially be something that could help to unlock some value and make trading blocks easier for our clients and participants.

So overall, I think we are very optimistic in terms of how the new regulation will evolve, and I think it's pretty much in line with what we expect for our activity.

[Operator]

Our next question comes from Kaio Da Prato, Banco UBS.

[Kaio Penso Da Prato, analyst]

So I have 2 questions here. So the first, if you could talk a little bit about the OTC business. So I would like to better understand if you expect the same level of growth during the rest of the year so of more than 10% year-over-year. And how are you seeing competition in this line of business if you are already witnessing any pricing pressure from other market participants?

And the second is on the credit card receivables segment. So you mentioned that your platform was launched this quarter. So if you could detail a little bit how many players are already linked into your platform. What is your competitive advantage versus the existing companies? Or if it is just a matter of pricing? And how is the interoperability working with the other platforms?

And finally, if I may, what can we expect in terms of revenues going forward?

[Andre Milanez, executive]

Thank you for your question, Kaio. I'll take the first one regarding OTC, and Fernando will help me here with the second question that you made.

So as I tried to highlight during the -- my initial remarks, I think in times like this, the other segments that we have that are less exposed to the, let's say, to cyclical movements tend to work as a cushion and help in terms of maintaining the resilience of our revenues. That's clearly the example here with the OTC market, where we have revenues that are more dependent on level of interest rates, but there are also more recurring revenues.

The fixed income market, as you know, it's been very -- there has been a huge demand for that during this first quarter. We have seen a significant increase in the level of issuances, and that has helped to improve or to increase the revenues in this segment. And I think that trend should continue at least for the following -- for the next months. Those new issuances, they also help in terms of boosting the total inventory of assets that we have which, coupled with higher interest rates, should also translating in positive revenues for the company. So it's difficult to say if it's going to keep growing at exactly the same rate, but we still see a positive trend here.

Regarding competition, I mean, I don't think we have anything major in terms of news. As you know, we have some competitors that have been launching initiatives in specific -- for specific asset classes, sometimes targeting specific types of clients. So far, they haven't been capable of stealing significant share from us. We remain very relevant in this market. And we have been working hard to maintain that position, being very close to our customers, ensuring that their needs are being met by the products that we are launching, by the -- that we are developing. And we're going to keep doing that in order to maintain these competitors without any significant market share increase.

So -- and that is not new. It has been going on for more than 2 years now. And we're going to, of course, being wary of the potential threat of those guys. We take that matter very seriously here. But I think we're going to keep working very closely to our customers. I think that's the key, the main thing that we can do in order to be -- to continue to be successful here.

[Fernando Campos, executive]

So Kaio, regarding the credit card receivables platform, we still -- it is still in early stages, so I think it's too early for us to share any numbers with you guys. Regarding interoperability, our platform, one of the advantages that we had, it was that we went a little late on the market, but it kind of helped us because we worked on the interoperability issues before we launched the platform. So the platform is ready. And from a technological standpoint, it's going well.

But since we launched it about a month or 1.5 months ago, we are still on -- we are rolling our commercial strategy and our commercial efforts to increase the number of players that uses our platform. But it's too early to share any numbers with the market, okay? Sorry for that, but...

[Andre Milanez, executive]

We definitely are going to go after the big fishes here.

[Fernando Campos, executive]

Yes.

[Operator]

Our next question comes from Domingos Falavina from JPMorgan.

[Domingos Falavina, analyst]

And I think it's your first call as CFO, Andre, so congratulations on a well-deserved move.

[Andre Milanez, executive]

Thank you.

[Domingos Falavina, analyst]

My question is regarding -- you're 'welcome. My question is regarding Neoway. We're trying to crunch down some numbers in here to see, quite frankly, if the M&A made sense, right? We are seeing an increase in CapEx of about BRL 200 million. Very ballpark numbers here, okay? You're spending about BRL 1.8 billion in the acquisition, which with today's [ the latest ] some BRL 200 million carrying cost once you fully pay. And it seems you generated about BRL 20 million losses in the quarter, you realize about BRL 100 million. So you're basically having a carrying cost of about BRL 0.5 billion for this Neoway acquisition.

My question is like, in your business plan, by when does this carrying cost turns positive? Or if we did anything wrong in our assumptions here, basically, not BRL 200 million of the incremental CapEx is to Neoway? And if not, how much it is? Or anything else you could help us kind of draw the income statement.

[Andre Milanez, executive]

Well, thanks for your question, Domingos. The number you're referring to is the size of the change that we made to the guidance, right? Is that the figure you used to make those assumptions, correct?

[Domingos Falavina, analyst]

Yes, correct. In the mid of the range. Correct.

[Andre Milanez, executive]

Okay. Well, I think, just to make clear, the revision of the guidance is, as I mentioned, all of that was due to the acquisition of Neoway. But the impact, the direct impact of Neoway are the ones you were seeing on the guidance for new initiatives and the linked -- revenue-linked expenses.

Depreciation and amortization is just a consequence, right? So as -- I know that you know that well, but in the acquisition, we've acquired Neoway, when we acquired Neoway, we had to recognize intangible assets and goodwill. And those intangible assets, they start to be amortized, and that's why our depreciation and amortization expenses increased.

But our business plan, we expect Neoway to -- it's not going to break even this year, and we knew that. We don't expect it to break even this year. But according to our projections in our business plan, we expect the operation to become profitable by next year. And we knew that there are other potential opportunities that are not, let's say, are more related to the potential that Neoway could have in terms of helping to unlock value in data and products that we already have rather than just the existing products that they have. So I think that's it.

[Domingos Falavina, analyst]

And the BRL 200 million, how should we think about this being a 1-year investment versus the recurring levels of CapEx that Neoway is going to take? Because like breakeven is far from the cost you're going to have in carrying this, right, the opportunity cost of the cash and et cetera. So I also want to understand if this BRL 200 million is one-off or if something we should be seeing, BRL 50 million to BRL 100 million every year from now on?

[Andre Milanez, executive]

Well, I think the first thing is that the majority -- and just for you to understand, I think the majority of not only the -- you mentioned CapEx, but a lot of the resources that we are spending in these new initiatives. Because of the nature of those, some of them are being developed as MVPs. In Agile methodology, a lot of those new technologies that are being developed are being developed using cloud rather than being developed on premises.

So we expect that although these are, to a certain extent, investments, a good portion or a majority of that figure will not meet the accounting criteria to be recognized as CapEx, okay? And this is the level for this year. I don't -- there are some one-offs in that figure, but I don't see that level reducing much further going forward. But we expect our revenues to more than compensate for that. So it's less cost reduction, more revenue opportunity and synergies.

[Operator]

And our next question comes from Marcelo Telles, Credit Suisse.

[Marcelo Telles, analyst]

Marcelo Telles. Andre, congratulations on the new position. I have one follow-up question to Domingos' question and another question on crypto.

Just going back to Neoway, this incremental CapEx that you're now forecasting, was there -- is this a different level from the -- or a much higher level than the CapEx that Neoway was doing if they were doing any type of investments? So I think it would interesting to know if you are ramping up the CapEx effort in the business versus what Neoway used to do. So that's the first part of the question.

And when we look at the expenses plus the investments as per your guidance of new businesses, can you tell us how much is -- what percentage would be actual operating expenses and how much would be actual CapEx? So that it can help us get a better sense of what your overall operating expenses is going to be.

And on crypto, can you comment -- I know you had a lot of initiatives, as you mentioned in your Investor Day about the crypto for 2022. I know that several ETFs of crypto already trading, but I think you had a more ambitious goal for crypto. If you can give us a bit of a view on where do you stand now on crypto? You had the announcement, I think, for some of BTG,XP setting up their crypto trading platforms. If -- and what does that entail for you?

[Andre Milanez, executive]

Okay. So the first question on Neoway -- and sorry,thanks for the question, Marcelo. The question regarding Neoway. There are -- so you can have a sense for the figures of Neoway because we had to publish their figures during the process of approving the acquisition in our shareholders' meeting. There is some increase, not significant ones, but there is -- there are some increases in terms of the money that's being spent primarily to develop new verticals that they didn't have.

So the main one is the connection with the, let's say, the vertical for capital markets, something that they did not have and then that we believe is important for the business and to help to unlock value in terms of some of the products and data that we already have. So I think we can leverage from the platform from Neoway to distributing those products and other new products as well.

[Technical Difficulty]

[Marcelo Telles, analyst]

Hello. Can you hear me? Sorry, I can't hear you. I just want to make sure the line didn't go down.

[Operator]

Excuse me, ladies and gentlemen, please hold.

[Andre Milanez, executive]

Sorry, I think we had a -- our call was disconnected here. So where -- what was the last time you guys heard us? Sorry, Marcelo.

[Marcelo Telles, analyst]

I think Andre, I think you were starting to answer the second part of the question. I think probably regarding the breakdown of expenses and CapEx for new initiatives and business.

[Andre Milanez, executive]

Okay. Good. So apologies for that. So as I was saying, and I briefly mentioned here in the previous question, the vast majority of those are going to be -- although they are investments in nature, right, so we are developing new products, making new initiatives. Because some of them are being developed in cloud, some of them are starting to develop MVPs, then we check if it's working, then we decide to implement additional features, doing that using Agile methodology, et cetera. Most of that do not meet the accounting criteria to be recognized as CapEx. Different from perhaps what we had in the past where we had a big project, where you knew exactly everything that you would be doing, and you would be capitalize that over a longer period of time and then starting to amortize that.

So that changes slightly with the way of developing those things now and also investments in nature, that majority is going to be ended up being recognized, accounted for as expenses. I would say it's more around 80 to 85 expenditure and -- sorry, 85, around 85. 85-15, that's slightly different than that, but around that number. So it is 5 expenditure and around 15, 10 as CapEx, as pure CapEx.

[Marcelo Telles, analyst]

Excellent. That's very clear. Yes. And the crypto?

[Andre Milanez, executive]

And your second question regarding crypto. So as you mentioned, we already have some products, some crypto products on -- let's say, on the regulated market. We have several ETFs. We are planning to launch Bitcoin Futures this year over the next, I don't know, 3 to 6 months. We are planning on doing that.

And as we mentioned during our Investment Day, we are working on initiatives for the, let's say, non-regulated market. So we want to be able to provide our participants with infrastructure solutions that they could use to offer if they wish to do that. At some of the examples you mentioned, if they want to offer that to their customers, provide them with the infrastructure that they can offer through which they can offer access to crypto to their existing client base. So that's what we are working on. And other solutions in terms of reconciliation, potentially custody services that could help those clients that are wishing to offer that alternative to their client base.

[Fernando Campos, executive]

So we have 2 more questions from the web. The first one is from Christopher Long from FM Global. Have you now entirely implemented the new pricing policies? Or should we expect revenue margins to begin to decline again at some point in the future?

[Andre Milanez, executive]

Thank you for your question. I think we've mentioned that already, but we have implemented around 80% of what we plan to do when we announced the pricing changes. We are very satisfied with the results. I think the main objectives that we were seeking when we implemented those changes have been achieved. Our main concern was to prevent our pricing schedule, pricing policy to be an obstacle for the growth of our customers and the market, so we eliminated fixed fees and perhaps we're -- would have been a reason of complaint for retail investors or for brokers. In order to attract the retail investor, we've addressed trading fees for those players who are more price sensitive, such as the high-frequency traders.

So we're very satisfied with the results. The bulk of what we plan to do was implemented. The reality is that the remaining 20% of the business, the part that was not implemented, it's very difficult in terms of the implementation effort. So we probably will try to bundle those changes with other changes in the future, but we do not have a time line for doing that nor a huge pressure to do that. So there is no clear expectation at this stage of implementing, at least not the way it was initially mentioned and [ conceived ].

[Fernando Campos, executive]

So the second question that we have from the web was from [ John Pereira ] from BTG. So the second question is about the units contribution, but I think we tackled that on our last question.

And secondly, how long does the tax benefit coming from the amortization of Cetip could we realize?

[Andre Milanez, executive]

We will -- thank you for the question. The goodwill was being amortized over 5 years. Business combination occurred mid-2017. I think actually, Cetip was incorporated around June, if I'm not mistaking, of 2017. That's when the business started to be amortized or deduct for tax purpose. So we will -- that benefit we went at the end -- probably around the end of the first half of this year.

You also have to remember that the size of goodwill, there was a significant portion of the acquisition price that was also recognized as intangibles. This is being amortized as well, so the main difference is that goodwill for accounting purposes is not amortized. The intangibles are amortized, but that also generates some tax benefit. And that will last a little bit longer because if I'm not mistaken, the average amortization fee term was around 5 years. So that will be less slightly longer than purely the goodwill amortization.

[Operator]

This concludes today's question-and-answer session. I would like to invite Andre Milanez to proceed with his closing statements. Please go ahead.

[Andre Milanez, executive]

I just would like to thank you all for joining our call and for your continued support. I'll also thank all the team that made all this hard work of putting all the -- our materials together to communicate our results to you guys. Have a nice day, and I hope to see you soon. Bye-bye.

[Operator]

That does conclude B3's audio conference for today. Thank you very much for your participation, and have a great afternoon. And thank you for using Chorus Call.