B3 SA Brasil Bolsa Balcao

BOVESPA:B3SA3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the audio conference call about earnings results of B3 for the second quarter of 2020. [Operator Instructions]

As a reminder, this conference is being recorded and broadcast via webcast. [Operator Instructions]

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

[Daniel Sonder, executive]

Hello. Good morning. Thank you, everyone, for joining the call. I just want to take a moment to thank the Investor Relations and the Finance teams as well as the Communications teams. They do the hard work of preparing all the materials and putting together the information for you guys. And I hope everyone also is doing fine and taking care of themselves.

I wanted just to start with a brief statement. We had a good quarter in terms of revenue growth. We saw a recovery of asset prices in the markets, driven largely by actions both on the monetary and the physical products in Brazil and elsewhere that led to a recovery in sentiment regarding the effects of the pandemic.

We also saw in Brazil, the lowest ever interest rate, and that has obviously changed investor behavior and has led new individuals to look at stocks and other riskier assets as an alternative for the portfolios as well as some funds to begin shifting their allocations into equities and other assets rather than just government bonds as used to be the case. We saw, therefore, both an increase in market cap as well as pretty high turnover in our equity segment. We also saw positive results, although not so sharp in the derivatives segment.

Our OTC business also grew. And the one less than spectacular segment was the infrastructure for finance, where we obviously saw a sharp decrease in the sale of new parts and financings due to the quarantine and social distancing with partners.

We -- I think we're able to manage our expenses well again and take the benefits of operating leverage in the company, and therefore, we printed good operating profit and net income at the end of the quarter. I also just wanted to briefly mention some of the other announcements that we made yesterday on the financial front. One was that we changed our guidance for CapEx due to some additional investments that we're making in products and in our operational robustness. And also, we announced that the Board approved a new debt transaction of BRL 3.6 billion that we hope to close by the end of this month. And this will add to our debt balance and allow us to move closer to our leverage target, and also to continue to distribute healthy dividends and interest of capital and other forms of payout for our shareholders during this year and early next year.

So those were my initial remarks, I'm sure you've had a chance to look at our earnings release. I'll ask Marcela to make a couple of comments as well, and then we'll open up for Q&A. Thank you.

[Marcela Bretas, executive]

Thank you, Daniel. Good morning, everyone. I hope everyone is well and safe. So just briefly going through some of our highlights, operational and financial highlights for the quarter. So we have in the equity listed market, strong performance driven by higher volumes, as Daniel described, were mainly driven by low interest rate, asset price recovery, which drove market cap of liquid assets up.

And also, a new flow of investors, especially retail investors coming into the market. So we had ADTV for the cash equities market of 92% in the quarter. For the listed derivative market, we saw a more modest volume growth of close to 3% ADV increase.

On the OTC market, we have our clients continue to look for transactions to strengthen their balance sheet, and we saw their volume, after issuances of banking funding instruments, up 30% year-on-year. Finally, the infrastructure for financing, we felt differently from the other segments. The negative impact of the pandemic and volumes were down 41% in the SNG project.

We had net revenues of BRL 1.9 billion, which is approximately 30% up versus last year, and our net income reached BRL 890 million, with adjusted expenses flat relatively under control with growing only 10% year-on-year.

With that said, we will open up for questions from you.

[Operator]

[Operator Instructions] Our first question comes from Thomas Peredo, BTG Pactual.

[Thomas Peredo, analyst]

So my question is regarding the products and services. So the company has been delivering on the road map of products but I would like to ask an update on more structural and long-term initiatives, like the registration of insurance policies, registration of electronic deals that duplicate as electronics, the platform for the energy markets and the initiative to provide liquidity, for instance, payments.

So if you guys could give us an update on which stage each initiative is? And when do you expect them to be launched if there is already a time line? And I know that the company doesn't give any guidance on revenues or net income but if you could share a ballpark of the total addressable market in terms of revenues that you see for these initiatives, I believe that will be very helpful to help us think on the total potential that the company has in the long term.

[Daniel Sonder, executive]

I'm going to try to base out the points here and Marcela will help me one by one with some more details on the past there and so on. So on the insurance side, we have been working with the regulators and the markets for quite some time, for over a year now. We selected that segment as an important adjacency that we want to have a role in because we believe that there is really an opportunity for a modernization and digitalization, if you will, of the infrastructure within the insurance sector that is relatively behind in terms of its development compared to what we see in the registration for bank instruments, for example, and obviously, for all the other traded listed instruments.

So I think this is one of those transformation is in the Brazilian market and infrastructure that is overdue, but frankly, that might take a while to consolidate. The regulator has taken a, let's say, strong position to push for this organization in terms of the registration requirements and then provisional requirements. But it's also accepted a gradual approach, where it will add step-by-step the insurance segments into that, starting with the, let's say, smaller segment where there are less number of policies and less impact.

And therefore, it's starting from the -- what's called the -- if, let's say, the guarantee insurance [Foreign Language]. So the large ticket insurance policies for projects and for execution of infrastructure contracts, building contracts and the like.

So this is where we are. Our platform was accepted as the proper platform for operation about a month ago.

[Marcela Bretas, executive]

We just repeat, last week, the approval for Susep granting us the full authorization to operate in the market.

[Daniel Sonder, executive]

Yes. And we already have a test case with one client that is operating. We are not going to be the sole players in this. It's possible that other platforms -- also after this market, in fact, they have received the authorization from Susep to do so. And on your question about the marketing size, I don't have any information to share at this point. And this will be the case for the other markets as well.

But I will -- let's say, I would take your point and review internally whether we can, at some point, share some more visibility on the total market opportunity.

[Marcela Bretas, executive]

We just -- you should say that all these new products, we don't have a consumer who really want that and is going to largely impact our revenue. Well, we do say that we see a valuable opportunity for most of these new markets that we're entering of -- our revenue pool between, let's say, BRL 20 million and BRL 50 million for each one individually. But it doesn't mean that you can just multiply the number of projects then by 50 and get the total addressable market because our expectation is that some of them will proceed some of them will surpass our expectations and some of that will fail. Overall, we take a portfolio approach in order to project potential new revenues from new segments that we enter.

[Daniel Sonder, executive]

The second one I want to mention is it's energy. And in energy, we have also just made some announcements of what we are trying to do. And the first step in that market is to really create information and a little bit more transparency. So we have -- the regulation of energy in Brazil took place about 20 years ago. And since then, we have had a greater number of players in the market who are offering energy outside of the derivatives market and buy energy outside of the derivatives market as well as a few brokers that do the job of finding buyers and sellers.

Our objective is to, at the first stage, really allow everyone to register and have visibility of all the transactions that take place.

With that, eventually we will have a curve of prices for different time periods of energy. And out of that would grow the opportunity to trade in derivatives and so on and hopefully attract also players that are not, let's say, hedgers or users of the energy themselves but rather financial investors that have the opportunity to take a view on how prices will perform.

That is the idea, but we are very early in that process, and we are in the process -- in the stage of really creating this first registration platform. So I don't know if Marcela, you want to add anything on the energy side?

[Marcela Bretas, executive]

No.

[Daniel Sonder, executive]

On the payments side, what we chose to do is, obviously, there is a huge transformation going on in the payment sector with a number of new players and a number of, let's say, new technologies and changes that are going on. And we chose to play the role that we think is the most fitted one for B3, which is to be the infrastructure to some parts of this process and really help the regulator and the market reach its goal, which is to make a fair play field for all types of players.

And particularly, what I mean by that is that there are big players and small players, and when you talk about instant payments, which is -- what the Central Bank -- which is to put in place gradually starting in November, there is an issue, a technical issue with respect to the liquidity of the players. So when you have income payments happening overnight or during the weekend when the markets are closed, when the market is open, there might be an issue with some shortfalls and excess liquidity by other players. And we are setting up a clearing house where we will be able to allow the people who have excess liquidity to offer that liquidity to players who do not have excess liquidity. And with that, there will be sort of a seamless path to the end user so that even the small player can make payments or allow clients to make payments at a point in time, 20%. So that's essentially in the world that we seek to play. I -- there isn't a big economic opportunity at this point related to this. We chose to enter that space, again, to position ourselves to understand this ecosystem better and also to meet the expectations of our regulator whose top priority is to make this happen.

And we think that in the context of that evaluation that -- which we do and the know-how that we have we felt that it was the right thing to do, both strategically as well as from a, say, positioning with the regulator point of view. And maybe you want to talk about the receivables?

[Marcela Bretas, executive]

Yes. So the Central Bank issued new rules and requirements for what would be necessary from the platforms that wanted to act as underwriters and register of receivables. Those rules will come in place in November, and we are setting up our operations to be able to play in that market.

So we continue to be interested in that segment. We are in the process of preparing ourselves to be compliant with the regulator's request.

[Operator]

Our next question comes from Marco Calvi, Itau BBA.

[Marco Calvi, analyst]

So my question is regarding the recent change in the BDI regulation. Can you share an updated view on the recent regulation changes? If you can discuss the main initiatives the company has taken in order to accommodate this new regulation framework? And what sort of effect should we expect in terms of increased volumes?

[Daniel Sonder, executive]

Thank you, Marco. We are very, very excited about this opportunity. And the impact that it can have in the Brazilian market, I think I want to take the opportunity to salute the regulator, CVM, for really working hard to make those changes and to really help in moving forward, what we think is a very, very important agenda.

So the main point here is that the scenario for Brazilian investors has changed. And people need to have in front of them, the biggest number of good alternatives for asset allocation possible, within the environment and within the frameworks that they are familiar with.

So investing abroad in non-Brazilian assets, for Brazilian investors, both institutional and also individuals is extremely cumbersome for a number of reasons, in particular, FX and tax. And I -- we have been, for quite some time, seeking to be the venue where Brazilian investors can find non-Brazilian assets in a much easier way.

And this goes through the PDR program. So the regulator has done a number of changes, which we think, over time, will really be transformational.

And we will look at some point and talk about how incredible it was before 2020. You could not buy PDRs or so many stocks in Brazil.

And let me just go through the asset classes that they have allowed for. So the first thing is that they allow for BDRs of companies that have their main business in Brazil.

So we're talking about XP, PagSeguro, Stone and a few others that have chosen to list abroad, but they have their main business in Brazil.

Those BDRs will be allowed to be listed here as long as they are listed in a recognized market. And we are now working on the details of that, let's say, description, but obviously, the United States and NYSE and NASDAQ will be under such a classification. And so that's the first important thing.

The second one is that BDR, non-sponsored BDRs of non-Brazilian issuers, so any company that is listed in a recognized market can have a BDR. This -- creation of this non-sponsored PDR does not depend on any action by the original issuer, it just depends on a depository bank. The depository bank who buys the securities, hold them in custody in the U.S. and issue the receipts in Brazil. Those all can be bought by retail investors as well. And we think there's a big opportunity and that the broker community has also been very excited about this. And I'm sure that there will be a lot of work to inform and educate people about those assets.

Also bulk of B3, which is a small subsidiary of ours, which has some very specific functions is a custodian bank and is the custodian for over 500 BDRs already that have thus far only been available for institutional investors and will be now available for retail as well. And we will continue to expand the activity.

The third asset type is BDRs of PTS. So exchange-traded funds linked to indices abroad.

This is obviously an asset class that has grown immensely, internationally. And that we can now structure or the market can now structure BDRs with those underlying assets and offer them to local investors. And this provides for diversification, even for small people and low-cost investment strategies that we find very useful for all types of investors.

And the final one is BDRs of global bonds issued by Brazilian companies. So as you know, a lot of the Brazilian companies have tapped for a decade, the global markets for debt financing, and DBS has allowed that -- those securities be traded in Brazil.

As long as it's issued by a listed company in Brazil, so that obviously, investors can access public information and make their sound investment decisions.

So those are the large asset classes, and we are now working to finalize the details we're waiting for the rule to come out. We are working to finalize the specific, let's say, internal norms within B3, as you know, CVM writes the broad rule, and we write the operational manuals for each one of these products. So we are finalizing those requirements and should open up for business in the near future earn.

[Operator]

Our next question comes from Gustavo Schroden, Goldman Sachs.

[Gustavo Schroden, analyst]

I had one question related to your CapEx budgets. You increased by hopefully 30% your CapEx budget. And I'm just curious because I heard that you mentioned that it is related to -- as you need to increase the capacity given the new level of volumes. I want to understand if should we understand that this -- the current level is sustainable going forward because I thought that the current level, it's high. Current level would be related to -- or part of this related to high volatility, given the uncertainties on COVID-19 pandemic. And then now when I see, you mentioned that a new level of volumes, I wanted to understand if it is -- I mean, just keen to understand that is it a new level of volumes at B3. And how do you see B3 supporting this new level, let's say, in this way?

[Daniel Sonder, executive]

Thank you, Gustavo. That's a very interesting point. So there were a number of things that are happening at the same time in the market, right? So we -- there are let's say, momentary or short-term effects that led us to see very, very high volumes in the past few months, both the sharp downfalls, high volatility and then the fast recovery. But also there are structural factors with the additional few individuals very quickly. And a lot of activity in all types of assets, including mini-contracts, also with new high-frequency traders joining into that market and so forth. So there are a lot of drivers here.

But the end result is that the margin of safety under which we operated for a while has been reduced. So imagine you have a line where you're kind of following the trend of operating volumes and number of transactions. And you have another line, which is above that, which is the maximum capacity. Difference between the one and the other is the margin of safety. Now the line at the bottom shot up, and you might remember that in our last conference call, we invited my colleague, Rodrigo Nardoni, the CIO, to explain a little bit the magnitude of that shift.

And just to remind everyone in -- back in 2019, if you compare the volume of a typical day 2019 to the volume of our most intense days in March and April, the growth was of 100% in transaction volumes, number of messages and number of trades executed here.

So you obviously can imagine that the margin of safety was reduced. So what we're doing is essentially raising that upper line, which is the total capacity of our system to a higher level.

And that meets a number of objectives. It meets the objective of being safe that we can deal with a weird day or a very stressful day like we have back in March. But it also meets the objective of being able to welcome more and more investors into more and more assets. And I just mentioned that the BDRs will be now listed. And from one day to the next, when the systems are -- or when the rules are up and running, about 500 new assets will be available for individuals to trade, which are not available today.

So because those are just the ADR -- the BDR fund that are already listed for institutional investors, not to speak of all the other ones that might come either through sponsored BDRs of the Brazilian companies that I mentioned or through BDRs of EPS and so forth.

So we are excited to be able to have this moment in the Brazilian market and happy that the company is able to move forward some of its CapEx in order to adjust its platforms for that. I hope that was clear.

[Operator]

Our next question comes from Carlos Gomez, HSBC.

[Carlos Gomez-Lopez, analyst]

My apologies, I was mute. Congratulations on the results. I wanted to ask you about another area of activity that we have not discussed. How are your efforts in mortgage registration? And what potential do you see in that segment right now?

[Marcela Bretas, executive]

So we continue to move forward with our project in mortgage registration. We've been -- we are in the phase of pilot testing with new clients for our evaluation platform.

And we are also developing a new product-related to the automatic electronic evaluation system. So we are moving forward with that. But obviously, current market conditions haven't helped a lot in terms of pushing market demand for this product and helping also our clients in the process of automating the process of mortgage registration and evaluation.

But we continue to think that there is a big opportunity for us to tap with this product -- the similar product, and we continue to work on that, both here at B3 as well as through our subsidiary for Portal de Documentos.

[Operator]

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

[Daniel Sonder, executive]

Sorry. Hi, everyone. Thank you so much for joining the call. Thank you for the questions. I hope this was a helpful time. And if you need any further clarifications, please let us know. And again, thanks to all the team here for putting this together.

[Operator]

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