B3 SA Brasil Bolsa Balcao

BOVESPA:B3SA3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's Earnings Results for the First Quarter of 2023. [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 Chief Financial Corporate and Investor Relations Officer, who will be joined by Fernando Campos, Investor Relations Associate Director. Please go ahead.

[Andre Milanez, executive]

Thank you, and good morning, everyone. Thanks for joining our first quarter results call. The first quarter, we found a still challenging scenario with an environment where interest rates remained at very high levels in Brazil. A lot of uncertainty not only in relation to the local economy, but in relation to the global markets as well, particularly in Brazil, uncertainties about the fiscal policy which ended up impacting our performance during the quarter.

As a result of that, we posted gross revenues of BRL 2.5 billion, a reduction of 3% and 4%, respectively, in relation to the first quarter of '22 and the fourth quarter of '22. If we look at the volumes, particularly for the stock market during the quarter, they were -- the reduction that we saw in the average daily trading volume was mainly the result of the compression that we saw on the company's market cap although we remained with turnover velocity very healthy, above 150%.

Fernando will comment a little bit more on the operational performance of each one of our segments. But I think it's worth highlighting here once again the strength of our diversified business model. It's particular here, I would like to highlight the performance on our listed derivatives segment. And on the over the counter segment on the OTC segment that ended up offsetting the reduction that we saw on the stock market.

In relation to the expenses, I think as we mentioned during the first quarter results call, we did have -- we did see an acceleration of our expenses during the first quarter, but they were also impacted by nonrecurring items, particularly nonrecurring items related to efficiency initiatives that we started -- carried out during the second half of last year.

So the first quarter this year, we -- without any, let's say, large nonrecurring items, we already saw the positive -- we started to see the positive impact that those initiatives presenting a reduction in total expenses, both against the first quarter of last year and the last quarter of last year as well.

I think we -- I would like to reinforce here our commitment with cost discipline. I don't think that has ever been away from our agenda, but perhaps we're going to give a special attention to that matter now. We will continue to look throughout the year at expenses very carefully, always seeking to optimize our cost structure without having to compromise our growth strategy. As I mentioned in other occasions, our goal is to be on the lower range of our expense guidance for this year.

I'm going to call Fernando now to talk a little bit about the operational performance of each one of our segments, and I'll get back afterwards. Fernando.

[Fernando Tavares Campos, executive]

Talking a little bit about the operational performance for the quarter, starting with our cash equities. We saw an ADTV of BRL 25.2 billion on the cash equity market, 20% below the first quarter last year and the fourth quarter last year. I think here, just to reinforce what Andre mentioned before, it has much more to do with the compression, the reduction of market cap of companies because we still saw a turnover velocity at high levels, about more than 150%, 153% to be more precise.

I think it's important also to highlight the decrease in margins in the fees of the cash equities market. And this retraction, when we compare to the first quarter last year, although we saw an increase compared to the fourth quarter last year reflects the investment that the company is making on strengthening its central book when -- in year and 2% quarter-on-quarter. And this line mainly growth with the fund industry, which is -- in which we are seeing an increase in the fixed income funds during this period.

It's also worth highlighting the growth in Neoway revenue, which grew 15% year-on-year, although we saw a small decrease quarter-on-quarter, given the loss of a client that was important for Neoway in the period.

Now I'm going to get back to Andre to talk about the financial results, returned to shareholders and other highlights.

[Andre Milanez, executive]

Thank you, Fernando. Our financial results during the quarter was positive, and we posted around BRL 142 million. The increase that we saw in the financial revenues is mainly explained by the positive results that we achieved by repurchasing approximately $50 million related to our bond during the quarter. This is in line with our strategy to keep an active growing, managing our liabilities and seeking for opportunities to optimize our capital structure.

And although we had that positive result, we also had a lower average cash balance during the period. So the result with the repurchase of the bond was able to more than offset that lower average cash balance.

I think it is important to say that this positive result does not necessarily -- will not necessarily reoccur during the remaining of the year. Of course, if we see opportunities to, again, to maximize shareholders' return through the management of our liabilities we will seek to do that. But we cannot -- we cannot ensure that this will be the case throughout the next quarters.

Our recurring EBITDA totaled BRL 1.6 billion with a margin of almost 73% -- 73.5% and the net income attributable to B3 shareholders reached BRL 1.1 billion. During the quarter, we also distributed a total of BRL 740 million. Around BRL 400 million were deployed in the repurchase of our shares. And the remainder was distributed to shareholders through interest on capital.

On this topic, I think it's also important to mention that during the quarter, we canceled around 280 million shares that had been repurchased during the prior year and which represent almost 5% of the company's total shares.

Last, I think it is important to mention that despite our strategy of expansion in other segments, a large part of our efforts on most of our efforts remain dedicated to our core business and focused on development of new products and new services. We do still have a very robust road map of products for the remainder of the year. We have continued to make progress in the discussions with the regulators around our block trading facility. We do intend to be the first ones to offer this solution to our customers and to the market and our expectation, providing that these discussions in the approvals go according to what we expect that we should be able to launch our new block trading facility by the beginning of the second half of this year.

And also, I think another important update in relation to our new businesses and initiatives during this last month, we have obtained all the necessary regulatory approvals for the acquisition of Neurotech that we announced at the end of last year. We are still waiting the fulfillment of certain precedent conditions that do not involve regulatory approvals, but there were other conditions that needed to be met for the transaction to be completed. We do expect those conditions to be met soon. And with that, we will finally be able to announce the completion of that transaction that was announced last year.

I think those were the main that I wanted to make. I now open the floor for questions that you might have. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.

[Daer Labarta, analyst]

I guess my question following up a little bit on the expenses, good job in the quarter. They are controlling expenses a bit. Is there room to control costs more? I mean, I think particularly just given the environment we're seeing with volumes kind of being relatively weak. How much does that influence how much you want to do on expenses. So like how much of that is like within your control? And is there room to cut more? And if volumes were to come back, would you be less focused on expenses? Just it's kind of an indirect question on your margin outlook. But just to think about how much control on the expenses, and if there's more room to keep costs under control.

[Andre Milanez, executive]

Thanks for your question, Tito, and thanks for joining our call. Tito as you know, we do have, let's say, a cost structure just, to a large extent, almost fixed in nature. So there's not a lot of variable costs that we can start cutting. And most of our costs, as you know, it is in concentrated in people and technology expenses.

I wouldn't say that we have been paying less attention where when a tailwind was more favorable. I think what we did first, we decided to start to explore new initiatives and that explains in part the increase that we saw in our expenditure and also something that I have already mentioned in other opportunities, but during the last 2, 3 years, what we started to see also us, that's probably not the best term, but some sort of migration of expenses that were previously being capitalized or being treated as CapEx now being treated as expenses or investment expenditure, most related to development of internal platforms and internally developed platforms and solutions, mainly given the changes that we have been making in terms of how we carried out those initiatives with the adoption of Agile methodology starting to use much more the concept of MVPs and also the increase in the adoption of cloud computing for those new initiatives.

So I think that, that explains to a large extent what we have seen during the last years. But having said that, of course, we do recognize a more challenging environment, and we perhaps decided to give a little bit more focus on that topic. We do believe that we will -- there is still room to keep seeking for efficiencies during the year. But at this point, all I can say is that we are definitely targeting to stay at a lower range of our guidance that was announced at the end of last year.

[Daer Labarta, analyst]

Great. That's helpful. Maybe one follow-up, [ Margus ], on the new initiatives in Neoway and Neurotech just update on when you can see some benefits from that? I know it's kind of a longer-term type of strategy. But when can revenues maybe start to benefit from those investments? And how are things going there with the integration, particularly at Neoway?

[Andre Milanez, executive]

Well, we -- as I mentioned during my highlights, we are expecting to have the completion of the transaction with Neurotech over the next few weeks, there will be a lot of work to be done in terms of integrating is not the right word, but connecting all these 3 companies, B3, Neoway and Neurotech, seeking for the revenue synergies that we have envisaged during the acquisition.

So our ambition is that for that to become a more relevant representative segment within B3. I think the integration or the connection of these companies is going well. But this year is going to be a key year for us in terms of starting that right and seeking the growth that we have planned or we have imagined during the business plan, elaboration of those companies and delivering that and also trying to capture all the potential synergies that we could have between those companies and between B3 and working on a road map of new products that can be either enhanced or developed now that they will have access to B3's data.

So I think it is going well, but it's still early for that to be representative, but our ambition is for that to become more and more representative as part of our overall revenue pool.

[Operator]

Our next question comes from [ Antonio Juezi ] with Bank of America.

[Unknown Analyst]

Congrats on the results. So I would like to explore a little bit a team that Tito mentioned it. So on sharing operating leverage with clients. So when you look at your margin today and your fees on equities and other products, how do you think about a from now on, especially considering competition.

[Andre Milanez, executive]

Thanks for the question, [ Antonio ]. Look, as I -- as we discussed, I think the main questions that we had in relation to our pricing policy have been addressed 2 years ago, our pricing policy was preventing potentially the increase of volumes, 2 examples that we already discussed in relation to that, that were fixed fees in our depository that we're potentially preventing the expansion of the retail investor base and also the level of discounts for high-frequency traders that are much more sensitive or elastic to our prices where we would -- we needed to potentially offer larger discounts for them to be able to increase volumes.

I think most of those issues or all of them have been addressed during that big pricing revision that we carried out. And I don't see the need for any -- we don't see the need for any changes in terms of our pricing policy at this stage. We will keep managing our pricing policy, monitoring that very closely. From time to time, we are making fine-tuning adjustments, but I don't see the need for any significant revision at this point in time.

[Unknown Analyst]

All right. Andre, if I may follow up on this. How do evaluate competition today when you look at the equity business and OTC?

[Andre Milanez, executive]

Look, we have competition on the OTC business, at least for 5 years. And this became part of our day-to-day activities. Having competition is healthy, and we have been able to maintain our position on those markets. That has made us to be, let's say, potentially be more even closer to our customer base, and we are very confident that we will keep being the preferred choice for our customers on that.

On the equities business, as you know, we already have some sort of competition with global markets already compete with B3. The only thing that we do not have as of today is an alternative trading venue in Brazil because we already compete with other exchanges with ADRs when companies decide to list abroad, this is already competition for us.

We have been preparing for a moment where a new trading venue could be -- could appear in Brazil. In our view, chances of success are higher when there is product differentiation. So if you take the example of Australia, Chi-X was more successful in entering the market because it explored product offerings that were not being developed by the [ incumbent ] exchange.

We have been working in a very robust road map out since B3 was created, trying to offer all the products that the market was asking for sometimes even trying to anticipate potential demands coming from the market. So we do feel very confident that we have not left any gaps to be explored, and we are ready to face competition if that's to be the case.

[Operator]

Our next question comes from Pedro Leduc with Itau.

[Pedro Leduc, analyst]

Just quickly on the data and technology revenues based on the pipeline of products and processes, you've streamlined that have gathered. What can you tell us about the trajectory for these revenues going forward this year, first? And then second, just on the operating leverage and profitability levels that you've achieved, assuming throughout the year, revenues do pick up, if you could see this operating margin level we saw this quarter more as a floor enable progress throughout the year. Thank you.

[Andre Milanez, executive]

Thanks, Pedro, and thanks for hosting us during the last few days here. So in relation to margins, I mean, as you know, our margins given the level of operational leverage, the dollar business has, our margins are much more sensitive to the top line than anything else.

As I mentioned, we will continue to pay special attention to expenses without having to compromise the strategy to keep diversifying and delivering growth. But having said that, the behavior of the margins going forward will be much more subject to the performance of the top line than anything else. We will remain very focused and committed to cost discipline, but the behavior of the margins will largely depend on what to expect for the remainder of the year, especially for the cash equities market that represents a significant portion of our top line.

And in relation to the data business, as you know, part of the -- of our strategy here, besides monetizing or extracting value from this very unique assets that we have, and that was not being explored and trying to extract the full potential of that. We also are aiming to diversify further our revenue pool and bring more revenues that are recurring in nature and transactional or less cyclical.

Those business that we acquired having have been growing between 20% and 30%. And our expectation is to at least maintain that pace of growth or even try to accelerate that with the connections between B3 and this company. So that's what we will be seeking to achieve in terms of the data revenues.

[Pedro Leduc, analyst]

Congrats on the quarter.

[Operator]

Our next question comes from Ian White with Autonomous Research.

[Ian White, analyst]

I just had a few, please. First, just a bit of a follow-up on data and analytics. I wonder if you could just explain a couple of things, please. And firstly, what portion of the data and analytics revenue is booked as point in time services versus sort of recurring subscriptions. I guess I'm just trying to understand why those revenues stepped down from 4Q '22 into 1Q '23? Whether there's anything I was missing there?

And just following up on a previous question. Can you set out perhaps sort of what specifically of the new product developments or sort of sales opportunities you expect over 2023 within data and analytics, what's in the pipeline there, please? Those are questions one and 2, and just finally, on litigation, doesn't seem to be sort of much update in the financial statements, so assuming not much has changed. But can you just maybe provide an update on the 2 sort of main areas there and when you think some of those cases might ultimately be completed.

[Andre Milanez, executive]

Thanks, Ian. I'll start with the last one. Unfortunately, there's not a lot of updates there. It will still take a while to have some resolution on those matters. Again, we remain very optimistic in the outcome of those 2 issues. But unfortunately, not much I can add or no significant developments on all those matters more recently.

In relation to the data question I don't have that information now from the top of my head in terms of how much of that is recurring and how much is nonrecurring? A large proportion of the data revenues is recurring in nature, but I don't have the percentage to give you now. We can follow up on that with you later on.

But what explains the situation you described was that mainly during the last quarter of last year, we did have some large nonrecurring sales that occurred and that were not -- did not repeat during this first quarter of '23. And in addition to that one large client that ended up canceling its contract. So the churn rate was slightly higher during this quarter. So that explains to a large extent the situation that you saw and that you described the vast majority of those revenues are recurring in nature.

And in terms of the road map, I mean, there are a lot to be done, particularly once we finally have the conclusion of the Neurotech transaction. Neoway has already been working in the development of new products and enhancing its products with B3 data, opportunities of cross-selling, so newly selling data solutions to B3 customers such as large brokers, et cetera, have already started to occur. And the same will take place once Neurotech's acquisition is completed.

I don't have details of specific products to discuss here now during the call. But there are -- and we can potentially explore that further in future opportunities in terms of more details about new products, but besides initiatives such as the ones that we already discussed, like the creation of a capital markets vertical within their way to start enhancing products that BT was already offering and developing new products, more dedicated to the capital markets.

Very quickly, there are a lot of opportunities of cross-selling, up selling between the client base of these 3 companies that have very little, I would say, overlap and increase in the value of the solutions because you are enhancing those products with the combination of the existing products and the use of BT's data. But we will have

[Audio Gap]

to give you more color and flavor of new products, specifically over the course of the year.

[Ian White, analyst]

I appreciate that. Can I just squeeze 2 short follow-ups, please. On the Central Bank transaction litigation, I think previously, B3 has said, there was more than -- or sort of more than a 50% chance to be settled on a 3-year horizon looking from August 2021. So in August 2024 still kind of a realistic date where we think that might be dealt with? Is that what you're saying no change? We can still use that as an anchor point. And just secondly, on the -- is there anything you could say about the client that canceled its data contract at all. Is there anything we should know there that's moving to a competitor or I don't know, sort of consolidation or something like that, that was the underlying driver there?

[Andre Milanez, executive]

In relation to the first, I mean, I don't think things have progressed as expected, honestly. So it is really, really difficult, especially when you -- when we are discussing the judicial system in Brazil to estimate a time frame. But I honestly don't think this will be resolved. I mean if you record aiming to have a resolution almost we are in May. It's 1 year and 3 months ahead of us. I don't think this is likely to occur before August 24, simply because the process has not progressed in the judiciary system have not -- has not moved at all during this period. So I think it will take longer than that. Very difficult for me to give you an estimate on when to expect some sort of resolution in relation to that case, unfortunately.

Fernando, can you give some color on the client discussion to Ian?

[Fernando Tavares Campos, executive]

Sure. So it was a client. The cancellation of the contract was in December. It was a client from the retail sector, which is, as you know, in Brazil, retail sector is going through a kind of a hard time. So it was much more of a customer management decision from the customer than anything else, okay? Ian it was more related to the hard time, the retail sector. It was -- as you know, Neoway's main revenue pool comes from sales and marketing. So it was a client that used that service on the retail market, which is going through a hard time.

[Operator]

Our next question comes from Kaio Penso Da Prato with UBS.

[Kaio Penso Da Prato, analyst]

I have one question here in terms of the margins of the equity business. We only saw a small increase, if you take a look on a quarter-over-quarter basis, even with much lower volumes. And if I remember correctly, I thought you had some [ movement ] last quarter that impacted the fees. I just would like to get a sense if we had any type of [ movement ] this quarter as well? And how should we think about that going forward if we can consider that this margin should not change too much throughout the year of 2023.

[Andre Milanez, executive]

Thanks, Kaio. As I said, I mean once the major changes that were implemented in our pricing policy, we should now see behavior in terms of average margin much more in accordance with mix of products and mix of clients. And this quarter, what we saw mainly was some changes in the mix of clients with a higher -- slightly higher proportion of clients that have lower fees in the overall composition of the volume.

That has to do to a certain extent with the market-making programs that we have been implementing and expanding. But I don't see that evolving let's say, to a much higher proportion of the volume. Of course, we do not control, completely control how much each one of these types of clients is contributing to the overall volume. So there will be still potentially some fluctuations according to the behavior of each one of these groups throughout the year. But I don't see reasons for that to fluctuate much more.

[Operator]

Our next question comes from the webcast. It is from [ Mick Dillon ].

Can management please give an update on the impact of changes to interest on capital tax loss.

[Andre Milanez, executive]

The topic in terms of changes of interest or the extension of the interest on capital have been on the table for a while. In isolation, that measure, of course, would have an impact for the company because it would take away the tax shield that we have today of overall, the interest on capital that is paid to shareholders.

But again, it's really difficult to say exactly what's going to happen. In the past, there were discussions of the end of the interest on capital tax benefit, together with a reduction in the corporate income tax and taxation on dividend, that the discussions now are news around the potential termination of this benefit, again, are -- this is a topic that is already -- is once again in the news.

I mean the impact would be negative to the company. If I'm not mistaken, we are talking about potentially a benefit of around BRL 300 million, BRL 400 million a year in tax benefits. But again, this will depend a lot on how these discussions will evolve during the course of the next months.

[Operator]

Ladies and gentlemen, this concludes today's question-and-answer session. I would like to invite Andre Melanie to proceed with his closing statements.

[Andre Milanez, executive]

I just wanted to thank everyone for joining our first quarter results, and thank you all for the support as usual, also take the opportunity to thank all the finance team to putting together all the materials for this quarter release. Thank you for your support. Have a nice Friday and a lovely weekend. Bye-bye.

[Operator]

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