B3 SA Brasil Bolsa Balcao
BOVESPA:B3SA3
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B3 SA Brasil Bolsa Balcao
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Good afternoon, ladies and gentlemen, and welcome to the audio conference call about the earnings results of B3 for the third quarter of 2018. [Operator Instructions] As a reminder, this conference is being recorded and broadcasted live via webcast. The replay will be available after the event is concluded.
I would now like to turn the conference over to Mr. Daniel Sonder, Chief Financial Officer of B3.
Hello, everyone. Good afternoon. I would like to welcome all of you to B3's Third Quarter Earnings Call. I'm here with Rogério Santana, Head of the Investor Relations team as well as the Finance and Investor Relations colleagues, and I'd like to thank them for preparing the documents you have in front of you. Additionally, on behalf of the entire executive team, I would like to thank you for your continued trust and support.
I'll start the presentation on Slide 3, where we show the operational and financial highlights for the quarter. The third quarter was marked by volatility in the financial markets in Brazil, reflecting the uncertainties regarding the electoral cycle. In this context, we had a solid performance across our business. Average daily volume grew around 19% in the Bovespa segment and value outstanding of Cetip Securities increased by 16%.
In the BM&F segment, the retraction of 4% in average volume is a consequence of the decrease in volume of Brazil interest rate -- Brazilian real interest rate contracts following the outlook of a more stable interest rate in the short term. On the right side of the slide, we see that this operational performance is reflected on our revenues, which grew by 9% year-over-year. Our adjusted expenses reached BRL 250 million, 9.5% higher than in the third quarter of '17, impacted by an increase in the personnel line, which we'll explain later in the presentation.
EBITDA adjusted for nonrecurring items was BRL 779 million, an increase of almost 17% versus the previous year, with a margin of more than 67%, once again demonstrating B3's considerable operating leverage. Recurring net income reached BRL 613 million, a 38% increase mainly explained by the increase in operating results and by lower income taxes in the quarter.
Regarding strategic developments, our focus remains on consolidating a corporate culture and continues to focus on proximity to our clients and their satisfaction. Operational excellence of our services and ability to innovate are also priorities, and in those lines, we announced yesterday the signing of a binding offer for the acquisition of the controlling ownership of BLK Sistemas, a company that offers a trading screen platform, focusing on the development of software and algorithms. This transaction aims to complement the portfolio of services offered by B3's brokers and institutional investors.
Additionally, in August, we released a roadmap that contemplates more than 40 products and services to be delivered until the end of 2019, aiming to address the most important demands of our clients.
Now Rogério will give more details about our operational performance.
Thank you, Daniel. Hello, everyone. I would like to ask you to move forward to Slide 4, where you will see the revenue performance and breakdown for the third quarter 2018.
In the bar chart on the left side, we see that revenues from our demand for segments grew year-over-year, leading to a 9% growth in total revenue. It is important to highlight that the decrease in the line other revenues is explained by an extraordinary revenue related to reversal of provisions recognized in the third quarter 2017. In the case of the increase in the Cetip liens and loans segment, it is mainly a consequence of change in the business model of some service we provide in this segment. In the pie chart on the right side, we see the breakdown of revenues for the quarter, which shows the highly diversified revenue base of our company.
Moving on to Slide 5. We will find the performance of financial and commodity derivative markets, where we had a 15% revenue increase year-over-year. As you can see, we experienced that significant growth in the RPC in the period, explained by the appreciation of more than 26% of the U.S. dollar against the Brazilian real, with a positive impact from the RPC of future contracts for FX rates and interest rates in U.S. dollar. The decrease in average daily volume reflected in the lower volume of interest rates in real contracts due to less uncertainty regarding the short-term base interest rates in Brazil. On the other hand, election-related volatility had a positive impact from the volume of our demand group of contracts, excluding commodities.
In the Slide 6, we have the performance of the equity market in the Bovespa segment, where we saw revenue growing almost 14% year-over-year, driven by a 19% increase of the ADTV from BRL 8.3 billion last year to BRL 9.9 billion in third quarter 2018. This performance reflects the increased volatility in the Brazilian market during the quarter, translated in the increase of turnover velocity from 69.5% last year to 73.5% in third quarter 2018. In addition, the average market capitalization increased by 12% over the same period of 2017. Both performance are shown in the bottom right chart in this slide. Trading, post-trading margin fell 3% year-over-year, mainly due to discounts triggered by higher-value traded and mix effects.
Next in Slide #7. We present the performance of the Cetip Securities segment. The additional value of securities and contracts registered in the quarter was up 36%, mainly driven by the increase in registration of OTC derivatives and throughput transaction. This increase, in addition to the increase of 13% in the issuance of fixed income instruments coupled the outstanding position to register in our platform, which reached BRL 7.4 trillion in the third quarter 2018, 16% higher than the previous year. This operational performance led to an increase of 13% in revenues compared to the same period of 2017 and amounting to BRL 312 million in this quarter.
Finally, it's worth note that the third quarter 2018 revenue in the segment reflects the impact of sharing of expense synergies capturing in the business combination with Cetip. The sharing of these synergies was translated in price discounts amounting to BRL 7.6 million and applied on different revenue lines we see in this segment.
In the Slide 8, we show revenues for the Cetip liens and loans segment, which grew 29% over the third quarter 2017. When analyzing the different revenue lines in this segment, the increase of 18% in liens revenue, as we see in SNG line, reflects the 5.5% rise in the number of vehicles financed in the period and certain adjustments to our pricing schedule.
Regarding the contract season, the increase of 40% in revenues is explained by the implementation of the new business model for this service in the states of São Paulo, Santa Catalina and Pernambuco, starting from the first quarter 2018. Just to remember, the contract season has been impacted by changing the business model, triggered by a federal regulation released in September last year. Following this regulation in state of Brazil, adopting its own model differently. And so far, we can say there are 3 different models adopted by these states. In one of these models, for example, B3 is no longer offering its service, and this is the most negative one for us.
A second model adopted in the states of São Paulo, Santa Catalina and Pernambuco introduced a new player, and the change were lower, and as a consequence retrieved earning roughly 30% land, and in the model in place before the regulatory change.
Finally, we have the case of [indiscernible] that adapted its model to the new regulation without any significant impact, which that will be treated. The model that we will be adopted by states that haven't changed its own regulation is still unclear and we need to monitor how it will evolve going forward.
We can go in more details on that in the Q&A section. It's also important to highlight that the company's market share in the contract season contracted to 65% in the third quarter '18 versus 72% in the third quarter 2017. This reduction is explained by the fact that we did not offer a contract season service in the state of Minas Gerais in the third quarter 2018.
Now I will hand over the presentation back to Daniel who will detail our expenses and other financial highlights.
Thank you, Rogério. In Slide 9, we show the behavior of the company's adjusted expenses. Our adjusted expenses reached BRL 250 million, a 4.2% increase year-over-year, reflecting mainly the increase in personnel expenses from provisions, for annual, salaries adjustments. Also employees, profit sharing and reduction of expenses capitalized as our projects impacted the personnel line.
As we disclosed in December 2017, all the decisions and measures that were necessary to entirely capture the expense synergies of the merger were made and executed by the end of last year. As a consequence, since the first quarter of '18, we can see the full impact of the synergy gains from the combination with Cetip.
In the next slide, Slide 10, we demonstrate our financial robustness with a solid cash position, which is an important part of the business of being a credible counter-party in the financial market. Total cash amounted to BRL 8.9 billion at the end of the quarter, composed by B3's own cash and third-party cash, mainly related to collateral pledged in cash by clients.
In the light blue bars, you'll find B3's own cash composed of restricted and unrestricted cash amounting to BRL 6.2 billion in the third quarter of '18. This amount includes necessary cash to run the day-to-day activities of the company that totals between BRL 2.5 billion and BRL 3 billion, and BRL 360 million in interest on capital that's already paid in early October 2018. It is worth mentioning that this level of cash position reflects also the amortization of BRL 1.5 billion in debentures scheduled for December 2018.
The bars on the left side of the chart show third-party cash, which amounted to BRL 2.8 billion, mainly composed by market participants cash collateral of BRL 2.1 billion. It's important to highlight that the company earns interest income on most of this cash balance.
Moving to Slide 11. You can see the company's debt profile and amortization schedule. Currently, our financial leverage is temporarily higher, with a gross debt to adjusted EBITDA ratio of 1.8x in the third quarter of '18. Our target is to reduce to 1x by the end of 2019, following the debt amortization schedule you see in the bar graph on the upper left side. As mentioned before, we have a BRL 1.5 billion debt amortization scheduled for December 2018. Considering the company's existing cash position and the cash generation we forecast for the remaining of the year, we believe we'll be able to amortize the step while at the same time keeping a sales ratio between 70% and 80% of IFRS net income.
In the first 9 months of 2018, our payout ratio was 67% of IFRS net income, which means we are likely to increase distributions to shareholders to meet our payout guidance subject to board approvals.
I'd like now to conclude the presentation and open up the Q&A session. Thank you.
[Operator Instructions] Our first question comes from Carlos Macedo, Goldman Sachs.
So a couple of questions. First, on your product pipeline, and so you kindly laid out in your website, 40 products out there. I think in the past, you've obviously come out with new products. The problem is that many times the materiality of the impact on your financials on your net income and revenues wasn't that significant. Could you highlight for us which products you think have the biggest chance of actually having a big impact in what you do? And again, there are 40 products out there, so maybe, just in general you could name the category of product instead if a specific product and have the response. Second question, you talked about amortizing, taking the net debt down to the net debt EBITDA level, down to 1x by the end of 2019. Does that mean you expect to roll over the debt that is due in 2020? Or is that decision to be made in terms of paying it down?
Okay. Thank you, Macedo. This is Daniel. I'll start with the product pipeline and Rogério will jump in to also complement on that answer. It's -- I think that the product pipeline should be seen, obviously, as a way to generate additional revenues for the company, but also as a way to tighten the relationship and align the views about market development between our clients and ourselves. We have, as you know, from following us for quite some time, invested a lot of effort over the last few years to build a very robust infrastructure in terms of the trading platform, the post-trading platform, the system, the data centers and just the overall capacity of our company to deal with larger volumes and an increasing complexity and speed of transactions. Now the next phase that we foresee for our development is to put more ideas on the shelf and to allow the markets to have greater sophistication in terms of the choices of products and strategies that they can use to transact in our markets. And that is very much the, I'd say the context in which we have worked for several months with our clients to align those product priorities. I'm giving this bigger answer or broader answer to your question because it is actually quite hard to say that one of these products or 2 of them are going to be the most successful ones and are going to responsible for the majority of the revenue that come out of that pipeline. It's a combination of ideas that, I think, together will bring benefits to us and to our clients. And it's quite difficult for us to really know which one of these volumes, products will have a greater volume in the future. So maybe Rogério wants to...
Maybe another way to think about it is which one -- I mean, probably there are some that your clients have asked for more frequently. So we only had this would really help us. Is there any there that you could point to?
Yes. I would say that the -- I mean, all of the futures are things that people have been asking for, also the securities, the improvements in stock lending have been something that we've been talking about for quite a while. So maybe those 2 clusters or things.
Yes, if you allow me to add some things, and addressing the second point by Carlos regarding products. So each of these products, some of them address the need or the demand from different group of clients and some other -- address the needs of specific group of clients. So for example, single stock futures is something that we have heard from brokers specializing repaying investors, that it would be a very interesting product for the client. And if this product was true and the ability to grow, probably, it's going to have a side effect, a positive side effect by allowing all the institutional investors to implement different kinds strategies and so forth. The secured planning platform that Daniel mentioned address, lastly, the needs of and the demand for local institutional investors that are demanding more transparency in the rate of discovering process in this business. So as Daniel mentioned, we -- when you look at it, at this pipeline, we have the idea in this process to launch as much as publicly as we can, with low CapEx related to that, with low additional OpEx and since we are leveraging on the existing infrastructure that we have. And each of these products, you'll have a different, let's say, maturity period. Some of them you will move forward very fast, some others will take a while to move in this direction. And this is something that we need to monitor. And the idea is to be fast and cheap in developing this kind of things. Yes, touching on your second question of the growth regarding...
Sorry, guys, yes, so you -- maybe I'll pick up on the second question regarding the debt schedule, right?
Yes.
Okay. So the company, as you all know, took on some additional debt for the acquisition of Cetip. We have been amortizing this debt to have a big payment this year and a big payment next year, and by the end of next year, we should be below or around 1x debt -- total debt to EBITDA. And that is the target that was established at the time of the merger for us. Then we would stay around that level, which we think we would do by either rolling the existing maturity and the bond or retiring that debt and issuing a new debt. That is more of a question of pricing and currency exposure and so on. We don't intend to change our current policy of not having currency exposure on our liabilities. And so if we were to issue another bond, we would hedge that, if we can access the local markets, which we have done successfully recently in the large debenture that we should then probably to that and do it directly in reais. And that is basically the plan at this point. This is something that we frequently review. And we constantly analyze whether we should have more or less that. 1x total debt-to-EBITDA is an extremely conservative number, and that is definitely a job of us of frequently analyzing and reviewing that. If there's any definitive decision by the board, we'll obviously communicate that.
The next question comes from Alexandre Spada, Itaú BBA.
I have 2. First one is, can you provide an update on the arbitrage process involving your potential competitor? We haven't been hearing anything about that for a long time. So is that process maybe halted somehow, or is that still ongoing?
It's ongoing and it's confidential. So that's why we don't talk too much about it. So it's ongoing and there is movement on both sides in terms of putting forth their claims and it's -- we don't have a very clear view of when we should expect the conclusion. But it's likely that it's going to be 2019 at some point.
Is there some sort of a deadline, or that can just proceed for much longer?
There is no formal deadline. The parties and the independent arbiters determine, basically, the flow of the procedures, and that's why the view from today is that this should be concluded by next year at some point.
Okay, clear. So allow me another subject. The payments of the investments in IoC have been not following a clear pattern since the acquisition of Cetip, which is distorting EPS growth year-over-year almost every quarter. So do you plan to have a more predictable pattern for this IoC distribution going forward? Or should we expect this type of uneven distributions throughout the year in the following years?
Look, we changed a little bit the procedures this year for IoC to sort of have a little bit more efficiency and make sure we can use the maximum amounts during each one of the quarters. So we moved it a little bit ahead of the actual closing of the quarter. But -- and as of now, we expect that to be the way that we do it, to continue to sort of indicate to the market what our payout ratio for the year is going to be and then, do the distributions a little bit ahead of the closing of each one of the quarters.
And then, on a quarterly basis and probably each quarter pursuing the payout that you have is a target for the company, does that makes sense?
Say it again.
I mean, so I understood you will be paying out every quarter.
Yes.
And in each quarter your payout is supposed to be between 70% and 80%, which is what I think it would be pursuing. Then the markets should expect each quarter to have the payout somewhere between those 2 amounts?
Correct, correct. Absolutely correct. That's exactly what we want to do. We want to even -- make it a little more even and during the year among the different quarters.
The next question comes from [ Florian Gerith ] from [ Equity ] in the webcasting.
Could you please expand a bit more on the acquisition you announced in terms of its size, the business model, competition? What are the benefits of combining your businesses?
I'm sorry, I couldn't quite hear it. Can you repeat that, please?
Sure. The question comes from [ Florian Gerith, Equity ]. He asked, could you please expand a bit more on the acquisition you announced in terms of its size, the business model, competition? What are the benefits of combining your businesses?
Okay, sure. This is a small acquisition, both in terms of the amounts that are being paid to the founders of the company, as well as the revenue impact. We have agreed with the sellers not to disclose those amounts. And because of the lack of materiality for us, we also think that's fine at this point. The -- however, the rationale for this is quite compelling for us. BLK is a very respected company that's been operating for several years in Brazil and has been one of the leaders in developing software and algorithms for the buy side/asset management industry as well as for brokers. They have a relevant market share in that segment and a solid business model, again, recognized by the innovation and the resilience of the platforms and the algorithms that they have built. We find that this is a -- an activity, an area and a business that's, in one hand, is adjacent to what we already do. It helps in terms of developing our markets and bringing additional liquidity and sophistication and strategies into it. And finally, it adds value to important clients of the company and brings us closer to the buy side and to the brokers by complementing the suite of things that we do for them. So we found, again, a good team, a solid reputation and an attractive opportunity for us to enter in this activity, which is to the benefit of our clients.
[Operator Instructions] This concludes today's question-and-answer session. I would like to invite Mr. Daniel Sonder to proceed with his closing statements.
I just wanted to thank everyone for joining the call, for following our Investor Relations releases, and please feel free to reach out to anyone on the team if you have further questions. Thank you very much and have a good afternoon.
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 Video.