B3 SA Brasil Bolsa Balcao
BOVESPA:B3SA3

Watchlist Manager
B3 SA Brasil Bolsa Balcao Logo
B3 SA Brasil Bolsa Balcao
BOVESPA:B3SA3
Watchlist
Price: 10.54 BRL -1.03%
Market Cap: 56.3B BRL
Have any thoughts about
B3 SA Brasil Bolsa Balcao?
Write Note

Earnings Call Analysis

Q3-2023 Analysis
B3 SA Brasil Bolsa Balcao

B3 Reiterates Strong Diversified Performance

Despite a challenging global market and lower cash equities turnover, Brazil's B3 maintained flat consolidated revenues by leveraging its diversified model. ADTV in cash equities dropped by roughly 10%, yet overall revenues stayed stable, even excluding the full consolidation of newly acquired Neurotech. Expense growth was contained below inflation due to long-term initiatives, aligning with the company's guided lower expense band for the year. Strategic advancements were marked by a BRL 2.5 billion debenture issuance at a historically low rate and the favorable resolution of a tax discussion yielding a financial benefit. EBITDA margin reached 72.3%, with a net profit of BRL 1.1 billion. Shareholders benefited from BRL 1.3 billion in total distributions, and the company looks forward to the introduction of new trading platforms and expanding business with a new agreement with NBO in technology.

Expense Management and Incorporation of Neurotech

The company saw accelerated expenses this quarter, exacerbated by annual salary adjustments. However, this increase was anticipated and accounted for in their expense guidance. The full impact of Neurotech, an acquisition completed in May, was included this quarter, leading to expenses growing below inflation when excluding Neurotech's influence. Management remains confident that they will be able to align expenses with the very low end of their expense guidance.

Expectations for Revenue and Expense Impacts in the Fourth Quarter

The revenue and expense sides have not experienced material impacts thus far. Some investments have been made in the company's platforms to accommodate new infrastructure without breaching previously issued guidance. While it's too soon to predict exact outcomes, some effect is anticipated in the fourth quarter.

Strategic Realignment and Growth Post-Neurotech Integration

The strategic integration of Neurotech is underway and is expected to combine with B3 and eWay to bolster the data solutions strategy. Opportunities for growth include cross-selling, upselling, and the development of new products. While specific growth metrics are not provided, the combination of these entities and their capabilities points to significant potential moving forward.

Potential Tax Implications and Government Discussions

There's an ongoing discussion regarding interest on capital which, if eliminated, could impact the bottom line by BRL 300 million to BRL 400 million, or approximately 9% to 10% of income. The outcome and timeline for these government-led discussions remain unclear, but they warrant monitoring due to their potential financial implications for the company.

Trading Margins and Block Solution Expectations

A decline in participation by high-frequency traders, who traditionally benefit from larger discounts, positively impacted margins. As for the expected block solution, it is too early for the company to set any expectations, but there is confidence in the effectiveness of the solution to be launched. Observations post-launch will determine its impact and any necessary adjustments.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
Operator

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's earnings results for the third quarter of 2023. [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 Andre Milanez, B3 CFO, who will be joined by Fernando Campos, Investor Relations Associate Director. Please go ahead.

A
Andre Milanez
executive

Thank you. Good morning, everyone, and thanks for joining our call for the third quarter results. I'll start with a few remarks about the quarter. So we had a quarter where we finally saw the beginning of the easing cycle here in Brazil with 2 rate cuts that took place during the quarter and after the quarter, more recently, a third cut that was done to the interest rates. But as we have been saying that that's the beginning, we should see activity picking up when interest rates are lower. And with that, we had a quarter that was more influenced by the external environment, by the global environment with the performance of the more mature economies remaining with tightening cycles and higher interest rates for longer. That has had a negative impact on the equities market, not only here in Brazil, but across the globe. And to add to that, we typically have some seasonal impact here on the third quarter, especially when compared to the second quarter, given the holiday period in the northern hemisphere. With that, in that context, we posted consolidated revenues, which were pretty much flat. We saw another quarter that reinforces the strength of our diversified revenue model, even with a decrease of approximately 10% in the ADTV of cash equities against both the second quarter of this year and third quarter of last year. As I said, we were able to post stable consolidated revenues even if we exclude the addition of Neurotech during this quarter, where it was consolidated in full for the first time. Fernando, will discuss revenue performance in more detail. On the expense side, as we have been saying, we continue to reap the benefits and the results of the long-term initiatives that we began to implement last year. And I think the expenses for this quarter show a little bit of that. If we exclude the Neurotech expenses, which were not part of the comparison with the last quarter and the same quarter of last year, our expenses would have grown below the inflation for the period, even considering that in August, we had the annual inflation adjustment of our salaries, of our personnel expenses given the collective bargaining agreement that happens every year. It is also worth highlighting that the increase that we see in personnel line in relation to the third quarter of last year, above inflation also reflects not only the inflation that we have on salaries, but also another important line on our personnel expenses, which is the health plans. We will talk into that in a little bit more detail, but remain focused as we have been staying closer to the lower band of our expense guidance for this year. I'm going to call Fernando now to talk a little bit about the operational performance, and I'll come back afterwards.

F
Fernando Tavares Campos
executive

Thank you, Andre. Talking a little bit about the performance by segments, starting with equity. And we saw ADTV of BRL 23.7 billion in the cash equities, which was a drop of 12% quarter-on-quarter to 9% year-on-year. The turnover stood at 134% and was impacted by the reasons that I mentioned before, the market via a challenging market environment here with interest rates in mature economies. Regarding margins, fees, the slight recovery that we saw compared to the second quarter of '23 reflects mainly the customer mix for the quarter. And still in equities, 2 other important aspects in the revenues. First, the performance of indices derivatives [indiscernible] futures, which presented solid volumes in line with the volatility of the period. And it's a little further from the results that we saw from the cash equities market. And we saw lower segmenting revenue mainly as a decrease on the rate. Talking about listing derivatives, we saw a decline in revenue in low single digits, but it's still a good and solid performance with the strong volumes in interest rates in BRL in other terms that has a lower RBC as a driver for the segment's results. In OTC, another good quarter, benefiting for an environment of higher interest rates. The volume of new insurance is in the average outstanding balance of bank funding instruments, grew 3% and 7% compared to the third quarter '22. And 2 other aspects that are worth mentioning here. Corporate debt, that we saw favorable conditions in this market, and we saw a growth of 12% in the outstanding balance year-on-year for this project and also the growth in very direct, with our outstanding balance growing almost 30% when compared to the third quater of last year. So as a result, we saw our revenue growing 14% year-over-year and 3% quarter-over-quarter. And finally, in technology, data and access, the aspects that are worth mentioning here is the growth in the OTC notification line, nearly 14% versus the third quarter '22 and 1% in the second quarter '23, and basically grow with the funds industry. And I think just to compliment what Andre mentioned, there was the data we saw the consolidation for the full part of the Neurotech, and that represented revenue of approximately BRL 24 million. Now I'm going to give the call back to Andre talk about some of the other highlights of the results and some strategic events in the quarter.

A
Andre Milanez
executive

So I guess from talking about financial results, we saw a quarter without any significant surprises. So I don't think there is any major highlights here. But on that topic, I think it is worth mentioning that we concluded, at the end of October, the issuance of debentures that we had announced to the market. We raised BRL 2.5 billion taking advantage of a very favorable market window to do some liability management, to have more flexibility. We have maturities coming due during the first half of next year. So we saw that opportunity, took advantage of that. We had a very good demand for these issuance, almost 3x the size of the amount that we were willing to raise. And as a result of that, we ended up maintaining the best rate in the company's history for that period for that term, which was CDI plus 1.45. In relation to the taxes, I think it is just worth explaining a little bit. We had some nonrecurring effects that impacted our tax line this quarter. So in summary, every time you have a tax credit that is monetarily adjusted, that generates a financial income, and there was a discussion around whether that financial income should be taxed or not from 2016 to 2021, we've paid taxes over that financial income. In 2022, we've obtained an injunction which allowed us to stop paying those taxes. Since that injunction was obtained, we started to recognize only a provision for that tax amount in our books. And during the quarter, we finally had a decision on that discussion, which was favorable to us. And of that favorable decision, we reversed the provisions that have been made during that period since 2022. Part of that was reversed against revenues, as you probably thought. And in relation to the tax that were paid in the 5-year period before the injunction was obtained, we will have a tax recovery, and that's why we had a tax credit, let's put it this way, being recognized during the quarter. So those were the, I'd say, the nonrecurring impacts that we had on the tax line and on the revenue side in relation to that favorable decision. Our recurring EBITDA totaled BRL 1.6 billion during the quarter, with a recurring EBITDA margin of 72.3% and our net profit reached BRL 1.1 billion during the quarter. We had distributions in the total amount of BRL 1.3 billion during the quarter with almost BRL 700 million being deployed in share buybacks, BRL 280 million in dividends that were declared during the quarter and BRL 322 million and 20 million in interest on capital that was also declared and paid right after the quarter end. Up to now, we have already distributions of over BRL 3 billion being returned to our shareholders through these 3 instruments that I mentioned. I guess just to finalize here in relation to our platforms or solutions for trading of large blocks. As we mentioned, we recently received the regulators approved for our platform, and we have already announced the launch of those solutions to the market still this month. So our expectation is that by the end of this month, those solutions will already be operating and being used by our customers. Let's see how it goes. And another thing that, I guess, is worth mentioning is the agreement that we announced during the period as well, more recently with NBO, which is a technology company specialized in electronic screens. It is aligned with our diversification and expansion of business adjacent to our core business. The agreement also includes a minority investment by B3 MBO. With that, we do believe that we are joining efforts with a player that has a very good product and very good technology to offer a more complete and better solution to our clients, giving also MBO access to those clients. So I think that there was an important announcement in advancing and increasing the value of our solutions to our customers. I think that's what I wanted to highlight for the quarter. I'll leave room now for Q&A. Thank you.

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session from investors and analysts. [Operator Instructions] The first question comes from Tito Labarta with Goldman Sachs.

T
Tito Labarta
analyst

Andre, Ferando, a couple of questions if I can. Just I guess now on expenses now that you've incorporated Neurotech, is this sort of the recurring level of expenses we should go forward? And should we think the recurring expenses from here kind of grow roughly in line with inflation and this is sort of the margins to roughly expect? And the second question, just any update you can give on just the other lawsuits goodwill and FX, if there's anything new there.

A
Andre Milanez
executive

Tito, thanks for the questions. In relation to the expenses, as we mentioned, I think we had a quarter where we saw expenses accelerating a little bit in relation to what we've seen during the previous quarter, but that was already expected. As you know, we have the impact of the annual adjustment of salaries, which takes place in August. Every time you have that, we ended up to adjust provisions like for holidays and these sort of things. So it tends to have a bigger impact initially during the first month where we recognized that adjustment. That explains a little bit why these expenses accelerated. We have now a full quarter with Neurotech, as I mentioned, if we were to exclude Neurotech from that, we would be growing expenses below the inflation for the period. Remembering that we are carrying already an adjustment of almost 10% from last year. So our inflation dynamic in the expenses does not necessarily follow the more recent trends that we are seeing in the inflation index. Our expectation is that we will be able to deliver, as I said, expenses much closer to the lower end of our expense guidance. We do have some acceleration of expenses as well during the last quarter, some projects that are picking up in terms of activity, then we have the full quarter with the correction with the new base of salaries adjusted going through. But we are confident that we will be able to meet the very low end of our expense guidance for this year. In relation to the litigations, unfortunately, there hasn't been any developments that we could share with you, unfortunately. But again, nothing has changed. We remain very confident in a favorable outcome of those discussions, but no major developments.

Operator

The next question comes from Arnon Shirazi with Santander.

A
Arnon Shirazi
analyst

My question is related to the [indiscernible] program that's going on in Brazil. It's been announced that B3 is operating the platform that makes it possible. And I want to know if there had any impact in the third quarter? Or if it is expected to happen in the fourth quarter? And which magnitude of this impact is expected?

A
Andre Milanez
executive

Thank you for your question, Arnon. You're right. We are helping with that important project. We are acting as the provider of all the infrastructure that is being used to deliver that project. We haven't had any material impact coming from the revenue side or from the expense side, just some investments that we had to make in our platforms to deliver that infrastructure, but we were able to accommodate that within the guidance that we had previously given to the market. I think it is early to comment on any impacts, but we should see some impact coming from that during the fourth quarter. But I guess, it's early to give you an estimate of how much would that be both from a revenue standpoint and also from an expense standpoint.

Operator

The next question comes from Antonio Huete with Bank of America.

A
Antonio Huete
analyst

So 2 questions on my side. So first, on tech and data, if you could discuss a little bit your perspective for revenue growth here and what should be the main drivers following the inclusion of Neurotech? And so what do you expect in terms of synergies growth, it should be sort of rely on inflation and new customers? Or is anything new here? And that's pretty much then I can ask my second question.

A
Andre Milanez
executive

Thanks, Antonio. Look, we are going through a period where we are now organizing organizing those things. So as you know, we recently added Neurotech to the portfolio. The acquisition was concluded in May. We have now the elements that we believed were important to deliver our strategy on data, B3, Neurotech and eWay now combining efforts. We do feel that we have the tools necessary to deliver our strategy on data solutions. And I guess we are seeing opportunities here in combining those efforts and increasing the value of those already existing solutions that they have with B3's data, cross-selling between these companies, opportunities of new products that can now be developed leveraging from the skills and capabilities of those 2 companies and the valuable data that we have. So I guess those are going to be the main drivers of growth in the upcoming years, opportunities of cross-selling and upselling in existing customers, opportunities of increasing the value of existing solutions with additional data and, therefore, being able to extract more value from those solutions increasing the penetration of some of those products now with, I guess, I would say, an easier access to certain customers now that these companies are part of the B3 group and a lot of opportunities for new product development. So I cannot give you now how much of the growth will come from each one of those initiatives. But we are still seeing a lot of potential to explore those opportunities now that we have Neurotech on board.

A
Antonio Huete
analyst

And also my second question on the end of interest on capital, if you could discuss a little bit the potential impact and the potential outcomes from this discussion for you.

A
Andre Milanez
executive

Look, if the IOC goes completely away, as you know, we have an impact of between BRL 300 million, BRL 400 million to our bottom line, around 9%, 10% of our income. It is a discussion that has been on the plate for a while now. More recently, that was the project that was presented by the government with, let's say, an urgent system, which has already been taken. There's some discussions around that. The proposals that are being discussed that potentially to have some adjustments to the existing mechanism rather than its full extinction. But we do not have visibility now that this is going to go through this year. I think it is a discussion that will remain on the radar. Last time around, that discussion came together with a discussion of taxation on dividends and a reduction of corporate income tax rates. It seems to us that this potentially is the best way to deal with that because you need to look at taxation as a whole, doesn't make a lot of sense to look at one individual item. But we will have to keep monitoring those discussions and that situation. So far, I don't think there is anything new in relation to what we have been discussing with you guys.

Operator

The next question comes from William Barranjard with Itaú BBA.

W
William Barranjard
analyst

Two quick questions here from my side. So the first one regarding trading and post-trading margins. If you could comment on the reason for the sequential improvement from last quarter to this quarter, especially considered that the colocation gained some share in total volumes. This would be nice to know the reasons. And the second question here is regarding the large block solutions you'll be launching in November. So I'd like to understand your expectations for the product now that it is a little bit more mature. If you could go through your view would be nice.

A
Andre Milanez
executive

2 main things here. So first, the share of the ADTV that is traded through colocation, we typically use that as a proxy for high-frequency traders. But as we have been discussing, there are other types of participants and clients that are using the colocation for some low-latency strategies. They are not necessarily a high-frequency traders. So although it is a proxy that we use, that does not reflect necessarily the full activity just from for the high-frequency traders. So what we saw during the quarter in the mix of clients, there was a decline in the participation of those clients of the high-frequency traders that ended up being less or we have access to larger discounts and that had a positive impact on our margins, okay? In relation to the second question, the second question was the block solution. Look, I think it is too early to give you any expectations. We are confident in our solution, but I think we will have to see how this is going to be. We are hopeful that this could help to unlock some volumes, potentially some value offer a better solution for trading of large blocks to the market. But that remains to be seen. I think we will launch. We will have to test that with the market and keep monitoring that closely to see if there is need for any adjustments, et cetera. We want this to be a successful initiative. And as I said, hopefully, to help to unlock or add some value to our customers. But I think it is too early to give you an expectation in terms of volumes or revenues coming from that new product and new initiatives.

Operator

The next question comes from Yuri Fernandes with JPMorgan.

Y
Yuri Fernandes
analyst

A follow-up on the IOC question, this is a very common topic we see with investors. And there are some discussions about what people call the European allowance for Corporate Equity, right? The ACE model for a compensation of the IOC. How do you see this model is B3 involved in those discussions? Could you see some kind of offset if that's the case? And also in other discussions you usually see is regarding the tangible equity, like IOC being paid over a tangible equity. And when we look to B3, if you adjust for [indiscernible] your tangible equity can be negative, which is dependent on the adjustment you make. So if there are discussions on tangible equity, how should we think about this like on this IOC? And my second question is regarding Pismo. Just double checking if you have a time line when the sale of this divestment should be recognized for you.

A
Andre Milanez
executive

Thank you. I'll pass on to Fernando to comment on Pismo. I'll get back on the IOC.

F
Fernando Tavares Campos
executive

So Pismo is -- the early expectations that we had was to have an approval this month in November. So we have an effect on the fourth quarter, but it's not up to us. It's up to CADE, an entity here in Brazil. So more expectations for this quarter, but it's not a certain thing because like I said, [indiscernible].

A
Andre Milanez
executive

In relation to the IOC, Yuri, really, I think it is too difficult to make those assumptions without having a lot of details. In relation to the comment that you made about the tangible equity, excluding that from the math, it will depend a lot on exactly what that proposal is going to be, right? And I think there are cases where potential internal reorganizations were used sometimes to inflate the value of your shareholders' equity. And those are perhaps the sort of things that should not be captured by that benefit. Now in relation to our case, if you consider what happened was basically one company acquiring another, and instead of potentially selling shares in the market and using the proceeds from that sale to increase capital that was done through a merger of shares. So I would argue whether this should be excluded or not. But again, I think that will depend a lot on what will be a proposal in that respect. And I think the same applies to the mechanism that the capital allowance that you mentioned. It will depend a lot on what exactly is going to be proposed. We have been hearing discussions around that. We have been monitoring that very closely. But so far, we haven't seen anything very, let's say, concrete in that respect. I think it is really hard to make any assumptions without having a more detailed proposal around that.

Y
Yuri Fernandes
analyst

No, super clear. And just to be sure, if there are discussions in 2024 and approved like the base case is that this is only valid for 2025, right? And as you said, this comes and go. This is not the first time we are discussing IOC in Brazil. But in the case, they discussed this an approval is in '24. The understanding is that this should only affect you, I don't know, depending on the impacting 2025, right? That's the base case.

A
Andre Milanez
executive

Yes. I think that's our understanding, Yuri.

Operator

The next question comes from Carlos Gomez with HSBC.

C
Carlos Gomez-Lopez
analyst

My question is about leverage. You have gradually increased your target from 1.5x EBITDA, now range between 1.9% and 2.3%. You have accumulated more debt, we have now BRL 6 billion. Is there a limit as to how much debt do you want to sustain and especially given that we are not in a period of revenue growth? So that's the first one. And second, is there any other acquisition that you have in the horizon beyond the one that you have just concluded?

A
Andre Milanez
executive

Thanks for your question, Carlos. Look, in terms of leverage, we give our guidance, but we have been working with the a leverage ratio between 1.8%, 2.3%, 2.5%. We do not believe the company will go much above the 2.5x. As I mentioned, I think here, that increase should be to a certain level [indiscernible]. We saw very good opportunity to access the market at very favorable conditions. That gives us the flexibility to do some liability [indiscernible] to potentially be ready to anticipate some of the maturities that we will probably be refinancing during the first half of next year. So that was more towards capital structure discipline taking advantage of good moments in the market and adding value to our shareholders through an efficient capital structure management. So that's basically what is behind that temporary increase in our leverage. And that hasn't to do with any acquisitions that might be on the radar as we have been discussing. We have our plates full. We've done the 2 big acquisitions that we wanted and we felt were important to deliver our strategy. We have now an execution effort here. There might be some small add-ons here and there that we could be looking at. But definitely, nothing of the size of what these 2 acquisitions were for B3.

C
Carlos Gomez-Lopez
analyst

Okay. Again, my question was more in terms of your general feeling about leverage. Even leverage of the level that you have is relatively unusual amounting exchanges, but this is something that you would expect to continue as a feature in the company.

A
Andre Milanez
executive

Sorry, can you repeat? I didn't understand.

C
Carlos Gomez-Lopez
analyst

Yes. Yes. The idea is that you -- in your philosophy, you will continue to operate with debt and with a certain level of leverage in the company. There is no intention to reduce that leverage going forward. I think that was clear.

A
Andre Milanez
executive

No, sorry. Sorry, we had some technical problems here. I think you're right, yes. So I don't think that there's any major changes to that. We will be operating with that growth, that level that I mentioned. As you mentioned, I think there is room to make that our capital structure more efficient because at the end of the day, net debt is pretty much close to 0. But we are not anticipating significant changes to that strategy, at least not for now.

Operator

[Operator Instructions] The next question comes from Kaio Prato with Banco UBS.

K
Kaio Prato
analyst

Fernando, and the team, I have 2 here, please. My first question is just a follow-up on the solutions for block trades that was approved by CDM. To pick one here. First, do you know if other solutions were also approved by CDM or no? And second, I see when you mentioned that it's difficult to measure the potential impact because we need to see how much volumes go there and so on. But just trying to understand here, will the prices be lower for participants that use these solutions? I'm just trying to understand what could would make participants use these solutions. So this is my first one. And second if I may, is related to the tax reform that was approved in the upper house this week. We understand that it will be discussed again in the lower house, but looking to what was approved right now, what you believe could be the implications for B3 if indeed, it could be negative as it seems to be for census companies. So if you can provide a bit of your views here would be helpful. And if you foresee any special regime for B3 similar with what was discussed for bank. That's it.

A
Andre Milanez
executive

Thanks for your question, Kaio. I'll start with the one about the tax reform, and I'll get Fernando here to help me with the one on the block trading solution. So there is a provision already on the constitutional amendment that was approved, as you said, this week, of the possibility of the special regime for certain financial services. That was a discussion that we had also together with banks and other associations. So I think it is early to say because a lot of discussions will still need to take place. I mean, how those regimes will work, what's going to be the rate applicable to those regimes. But I guess it is a first step to ensure that we have a tax reform that is very good for the country, but that is taken into consideration other experiences from other jurisdictions where exceptions have been made for certain services or certain sectors to avoid the creation of any big distortions in that model. So it is already there, a possibility of having that special regime for certain financial services. But again, this is only, as I said, the first step. There still will be a lot of discussions probably next year in relation to that. In relation to the blocks, Fernando can comment on, I'll add anything relevant here as well.

F
Fernando Tavares Campos
executive

Good morning, Kaio. So no, we haven't heard about any approvals from CDM to another platform. We heard that there are other companies, firms, that are trying to -- they intent to launch a solution for blocks, but we haven't heard about CDM approving any other platform. And regarding prices, at first, the prices will be the same as it is in the cash equity market. So no change here

Operator

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

A
Andre Milanez
executive

Thanks very much for joining the call. And again, thanks for your continued support and interest in our company. I would like also to thank all the team for helping with the disclosure of our third quarter results. All the teams have worked hard to make this happen. And finally, just to remind you all that we will be hosting our Investor Day, our B3 day in December on the 12th of December. So invitation for all of you interested in joining us during that day, a day where we will have the opportunity to discuss some of the strategic developments on the company, discuss a little bit about our initiatives. So we hope it's going to be provided with useful insights and information in relation to what we are seeing for next year and the years after. So feel free to reach out to us if you are able to join us in our B3 Day. Thank you very much. Have a nice Friday and a good weekend ahead of us. Thank you.

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 Brasil.