B3 SA Brasil Bolsa Balcao

BOVESPA:B3SA3

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's earnings results for the third quarter of 2022. [Operator Instructions]

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.

[Andre Milanez, executive]

Thank you. Good morning, everyone. Thanks for joining our third quarter results. I'm going to start here with a few remarks about the quarter. From a macro scenario standpoint, we saw a quarter with continued uncertainty, especially globally with inflationary pressures continuing to be present in the main economies around the world. Their governments taking measures from a monetary standpoint to address that, uncertainties surround the war in Ukraine and also some concerns about China's economic performance.

In Brazil, even though we are still with interest rates at very high levels, we are starting to see signs of a potential end of the rate cycle, given the latest decision of the Central Bank to keep interest rates at 13.75%. That scenario had different impact in the various segments of our business.

In general terms, we could say that the reductions that we saw on the segments that are more exposed to the economic cycles have been almost neutralized by the performance of the other segments.

On the equities market, we closed the quarter with ADTV of BRL 26 billion, given the scenario that I just described with a high level of interest rates that impacted the volumes that reduced 17% in relation to the third quarter of '21. And in relation to the second quarter of this year was a reduction of 9% and which is mostly explained by seasonal factors. Typically, July is not a very strong month, given the hot days in the northern hemisphere. This year, it was particularly weak, but we saw a recovery of volumes already in August and September.

On the listed derivatives segment, we closed the quarter with an ATV of 4.6 million contracts that represented a small reduction of 2% in relation to the third quarter of '21, but an increase of 6% in relation to the second quarter of this year.

Again, as I already mentioned, reinforcing and highlighting the efficiency of our diversified business model the OTC segment was favored by this environment with higher interest rates that has favored the volumes, and we saw an increase of almost 31% in the outstanding balance of fixed income instruments in relation to the third quarter of '21 and of almost 33% in the outstanding balance of Treasury Direct.

With that, I would like to call Fernando to talk in a little bit more detail about the quarter results.

[Fernando Tavares Campos, executive]

Thank you, Andre. Regarding revenues, it totaled BRL 2.5 billion in the quarter, stable when compared to both 3Q '21 and 2Q '22. I think here it's worth mentioning that the impact felt by the more cyclical business, which had a rougher quarter, as Andre mentioned, was practically offset by the performance of the other segments, reinforcing the efficiency of B3’s diversified business model.

Expenses grew by 19% compared to the 2Q '21, reflecting mainly the consolidation of Neoway, which has an important impact on personnel, technology and marketing expenses. Regarding B3's expenses, we can highlight the increase in personnel due to the increase of 80% in the number of employees and the impact stem from collective bar game agreement, which took place from August.

It is also important to mention the increase in data processing with new initiatives being accounted for as expenses in detriment to investments, given how these initiatives are developed -- with gen methodologies, quads, MVPs, in comparison to the second quarter of '22, their expenses remained stable. With this, our recurring EBITDA amounted to BRL 1.7 billion, 80% lower than in the third 3Q '21. The margins amounted to 74%, and the EBITDA was stable when compared to the second quarter.

Recurring net income reached BRL 1.2 billion, 11% and 5.5% lower than 3Q '21 and 2Q '22, respectively. The net income was impacted by the financial result with financial income affected by the cash position during the quarter, the impact of inflation-linked public bonds, government bonds and in a lower cash position from third parties from collateral of third parties.

Financial expenses were also hit by higher interest rates and the impact of the prepayment of the debt that occurred during the quarter. Regarding distributions, dividends amounted to 100 distributions of for the quarter. Dividends amounted to BRL 164 million, interest on own capital of BRL 320 million and buybacks BRL 750 million, totaling BRL 1.2 billion in distributions.

So I would like to turn the call back to Andre to talk about the strategic developments for the quarter.

[Andre Milanez, executive]

Thanks, Fernando. I'm going to mention a few events that took place during the quarter. On the -- on the strategy of continuing to strengthen our core business and launching new products and services. We've announced the launch in September of federal government bonds, repos and lending services for institutional investors. This was a market demand. Our role here in this service as a CCP reduces the risk for participants, and we believe that could end up turning this market more active, more dynamic.

On the regulatory front, perhaps it's worth mentioning that during this quarter, the CVM published the methodology for -- and the definition of the minimum size of large blocks -- this complements supplements actually the Resolution 135 that was released in June that, as you all know, allowed large blocks to be traded outside of an exchange environment. The definition of what a large block was, it was something that was missing from that regulation and that was defined during this quarter.

I think it's worth highlighting the decision that came together with the definition of the minimum size of the large blocks of having a review of that definition at least 3x per year. This will guarantee and ensure more flexibility for adjustments that could be necessary. And also, I think it demonstrates and shows the regulators attention and concern with the quality of the market.

As we previously mentioned, we have already announced that we will launch our proprietary solutions for the trading of large blocks, and this is expected to be implemented during the first half of next year. There are still a few things that need to be defined before we can get our approval and start with the rollout of our solutions.

Finally, we also announced 2 acquisitions during this period. The first one was the acquisition of a company called Datastock, which is the technology company specialized in inventories, integration management for new and used vehicle stores. This will expand our offerings to other sectors or other activities within the value chain of vehicle financing, et cetera, but also could be adding also to our data and analytics business.

We will pay an amount of up to BRL 80 million, of which up to BRL 30 million is composed of earnouts that will be paid over the course of the next 5 years, subject to the fulfillment of certain performance targets.

And finally, we also announced the acquisition of Neurotech yesterday. Neurotech is a technology company specialized in artificial intelligence, machine learning and Big Data solution. This is -- this acquisition is very complementary to the acquisition of Neoway. It was concluded at the end of last year. It will boost our strategy and data and analytics.

As I mentioned, complementing the portfolio of data solutions in credit risk and insurance, we will disburse around BRL 620 million on the closing of the transaction. There is also an estimated payment in earnouts, representing BRL 523 million at present value, again, subject to the meeting of certain performance targets over the next 4 years. Both acquisitions, it is worth mentioning are still subject to the approval of the -- of certain conditions.

In the case of Neurotech, which is a bigger acquisition, there will be an AGM in November -- in December to approve the transaction and besides the approval of shareholders, we also need approval from the antitrust authority in Brazil and the CVM.

I think that was it in terms of the main highlights, I would like to open the floor for questions and answers. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Antonio [ Caete ], Bank of America.

[Unknown Analyst]

Two questions on my side. So the first one, we have seen a very active regulator in terms of incentivizing competition -- so I guess you have an intention of sharing operating leverage or any other way that you will protect your client base in case we see repetition coming over the next quarters?

And my second question goes on financial results. With what have seen over in October and November. Can you please share what you expect in terms of financial results for the quarter and vis-à-vis the next one.

[Andre Milanez, executive]

Sorry, can you just repeat the first question? Because we didn't get that -- I think you're talking about competition and prices. Was that the question? Sorry, Antonio.

[Unknown Analyst]

We are seeing a very active regulator in terms of incentivizing competition. And I just wanting to have an intention of sharing operating leverage with clients or any other ideas to retain your clients base, in case we see competition coming.

[Andre Milanez, executive]

Well, thank you, Antonio. Well, the first question, I think we've -- pricing is always a sensitive matter, and we pay attention to that very closely. As you know, we did a major revision of our pricing schedule over the course of the last 2 years and sharing operational leverage is part of that revision is part of the spirit that we have in terms of looking at our pricing schedules.

I think most of the -- perhaps complaints that we had in terms of our pricing schedule have been addressed. And with that major revision, -- and at the moment, we do not see the need of making any, let's say, significant revisions to our pricing schedule to address any concerns that are arising. Of course, we constantly, we keep monitoring that and are constantly making adjustments to our pricing schedule.

This is an ongoing exercise in the company, sometimes adjusting prices, reducing prices, increasing the level of discount, sometimes reviewing prices on the other direction where there is perhaps a discrepancy between different products and these sort of things. So this is an ongoing exercise here. But at this moment, we do not see the need for any significant -- new significant revisions. Our current pricing schedule already adjust for that. So the higher the volume, the higher the level of discount that our participants will receive.

On your second point in relation to the financial results, I think we had a, let's say, quarter, there was impacted by some nonrecurring items. So we did have the impact of the of the early retirement of debenture debt was issued during the pandemic. So although from an economic standpoint, it made perfect sense to do that movement. You have some impacts that are recognized upfront that impacted the financial expenses for this quarter. We also had -- this is something that we do not control, so a lower cash position from third-party cash that also impacts the level of revenue that we collect on our cash balances.

And finally, a more portion of our financial investments are in -- all of it is in federal security government bonds. But a small portion of that is invested in inflation-linked bonds. And as you probably saw that happening in other institutions in other companies, given the deflation that we had during the period that has impacted our financial revenue. So I do not expect a similar trend going forward, giving the very specific reasons for that result during this quarter.

[Operator]

Our next question comes from Ian White, Autonomous Research.

[Ian White, analyst]

A couple from my side, please. First of all, I was interested, maybe if you could talk in a bit more detail about 2 areas and specifically, data analytics and the real estate revenues in infrastructure for financing. I guess these are 2 areas where you look to bolster the offering through M&A, there seems to be some medium-term growth potential. The progression in this quarter in the last couple of quarters hasn't been particularly strong in terms of revenue growth. Why are we not seeing more progress something a high inflation environment? Is it not more that you can do on pricing. What are we seeing in terms of in and product growth that might lead us to expect better results there over the next couple of quarters? That was the first question.

And just secondly, maybe I could just ask maybe for a little bit more help on the net finance result. Would you be prepared just to call out the size of the one-off expense that came in relation to the early retirement of the debt and tell us what portion of the securities is inflation-linked, please, on the asset side, just so we can sort of this in a bit more detail going forward?

[Andre Milanez, executive]

So the first question that you made, if I'm not mistaken, and then if I got something wrong here, you can get back to us. But you were asking about the data analytics revenues and also the real estate revenues that are on that -- on the infrastructure for financing.

I think on the real estate revenues, given the current scenario, we -- the infrastructure for finance tends to be a more cyclical segment in our business. right? So there you have the -- primarily the revenues that are linked to the activities that we perform surrounding vehicle financing and also some of the activities developed either by ourselves or by one of our subsidiaries that have to do with the real estate financing as well. Given the current scenario, we -- those business have been affected as we are not seeing significant growth in those activities. So that tends to be more cyclical than definitely than other areas of our business.

In terms of data analytics, excluding Neoway, we've seen an increase of 10% in -- as we did mention, I think both acquisitions Neoway and Neurotech, we do believe that those will help us to keep increasing and boosting our strategy in data and hopefully, to present future growth on that area and accelerate our growth in terms of data revenues and data solution revenues going forward.

In terms of the questions surrounding the financial results, the impacts surrounding the early retirement of the of the debenture that was done during the quarter. It mainly comprised of a premium that had to be paid in order to make the early retirement. So there was a premium established in the deed of the debenture, establishing a premium to be paid to the bondholders. There is also expenses that were incurred during the issuance of the debenture that were being recognized together with the interest rate using the effective interest rate method. And once you decide to early retire some of those expenses have to be recognized directly in your profit and loss account. We had around BRL 20 million involved of impact involving the early retirement of that debt. And we have less than BRL 1 billion invested in inflation-linked bonds.

[Ian White, analyst]

If maybe I could just come back slightly on the data and analytics. I guess I'm just looking at the progression of the B3 revenues ex [ NAA ] the last couple of quarters, sort of BRL 79 million, BRL 83 million, BRL 81 million in an environment where inflation has been sort of high single digit for a lot of that. What -- should I take from this aside from the potential support the significant opportunity we're going to see from Neoway and Neurotech there is kind of relatively little in the existing sort of B3 data and analytics revenue in terms of new product or client growth? And really, we're not going to see sort of significant rate of growth until those businesses are embedded. Is that a fair summary of where we are on data analytics or am I being unkind.

[Andre Milanez, executive]

Look, today, if you take most of our data revenue, this raw market data, of course, there is data surrounding more structured products, data, let's say, analytics with that. But our strategy with Neurotech and Neoway is also to use them to accelerate the development of, let's say, capital market products and data solutions involving capital markets. One of the first things that we did right after the acquisition of Neoway was the establishment of a new vertical of products within Neoway to deal with capital market data solutions. So this is an effort that we believe will be accelerated with both of those acquisitions and capital market data solutions is definitely an area that will be a focus for those companies and that we expect that their products, their solutions, their platforms will help us to be able to unlock the value of those solutions and to be able to better monetize that data.

[Operator]

[Operator Instructions] With no further questions, we conclude the Q&A session for today. I would like to invite Andre Milanez to proceed with his closing statements.

[Andre Milanez, executive]

Thank you all very much for joining our call. It's been a busy quarter. There is still -- there's still a lot of time before the year-end. The team here was asking me to issue all a good end of the year. I think it's still too early for that. I hope to be able to do that on our Investor Day, B3’s Day which will take place in December, the 12th of December. So here is a reminder and invitation for all of you to join our B3 Day. And hopefully, there, I'll be able to issue a happy year-end. Thank you very much for your continued support, and have a nice day.

[Operator]

That concludes the conference call for today. Thank you very much for your participation. Have a good afternoon.