Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Valid's First Quarter of 2019 Earnings Conference Call. Today with us, we have Mr. Carlos Affonso d’Albuquerque, CEO; and Mrs. Rita Carvalho, Chief Financial and Investor Relations Officer.

We would like to inform you that this event is being recorded. [Operator Instructions] We have simultaneous webcast that may be accessed through Valid's IR website at www.valid.com/en/ir. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay facility for this call on the website.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Valid management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Valid and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Carlos Affonso d’Albuquerque, CEO for Valid. Mr. D’Albuquerque, you may begin your conference.

[Carlos d’Albuquerque, executive]

Thank you, and hello, everyone. Thank you to attend again to the teleconference of Valid's results, and we recorded EBITDA of BRL 67 million during the first quarter of 2018 (sic) [ 2019 ]. And this number is are considering the effects of IFRS 16. It represents a reduction of approximately 3% EBITDA margin compared to the first quarter of 2018. This result is in line with the expectations I had already shared with you in the call of results in 2018.

But I think a very important remark that this reduction in the first quarter did not result from any change in the company's values but mainly due to specific events, such as the postponement of orders from [ BI ] and U.S., the flooding in the unit in São Bernardo do Campo forcing us to discontinue the operations practically across the entire month of March and also some lowered current expenses that we incurred by the Identification division to maintain an efficient structure. But on the other hand, we have been increasing by approximately 35% in the foreign operations that are U.S. dollar denominated and by 92% in the mobilization compared to the first quarter 2018. So we delivered -- we reinforced the importance of diversification, not solely in the company's different business, but also in the geographic areas where we operate. So in spite of the difficulties, our expected expansion in the year remains as the EBITDA margin in March has direct impact of 19%.

So now I would like to talk a little bit about the New Avenues that are meeting -- first of all, they are meeting the expectations, and we have included our New Avenues that we are calling Education Avenue. As we announced in April 30, Valid won the tender with the Inep. That is the institution under the Ministry of Education in Brazil for issuance of many exams like Saeb, Encceja, Enade, et cetera. In addition, Valid was also invited, and we have [ accepted ] annual invitation to print the 2019 exams for what called here Enem. It's one of the biggest exams that we have here in Brazil. The earnings from this service will depend on the number of students enrolled for each exam. However, such earnings are not being considered in the estimated expansion of our company that I mentioned before. It's also important to clarify that in this avenue, our proposed value will be the offer of an integrated portfolio of same identification and logistics solutions for the education market that basically comprises the offer of safe access control using biometric and data management and for storage system with digital certification throughout the chain.

Once again, thank you for the support. Now I give the floor to Rita.

[Rita Carvalho, executive]

Thanks, Affonso. Good morning, everyone. Thank you for joining our conference call.

Talking about the first Q results, this quarter, our net profits were BRL 14.5 million, without considering the impact of IFRS, versus BRL 19.7 million in the first quarter 2018. This represented a drop of BRL 5.2 million, which is equivalent to 26.4%.

I would like to remind that in the first quarter last year, we had a positive impact with respect to the exchange variation in the amount of BRL 8.7 million in Valid Spain's financial results related to the debt that we have in Spain's balance sheet of $100 million. We raised this debt in 2019. So since the operating currency in Spain is the euro and the loan was taken in dollar, this debt adjustment in Spain's balance sheet impacted the company results up to May 2018, when we decided to adopt the investment hedge accounting and we started recording these variances in the shareholders' equity. So the total impact of this exchange variation in 2018 was positive BRL 1.5 million.

In relation to other operating expenses, [ line ], this quarter, the total amount was BRL 4.4 million, which is a significant reduction of 62.4% in relation to the same period of last year, which is in line with our expectation of reducing this line for 2019 since the main expenses were related to the cost reduction projects, and this had been completed by the end of 2018.

In relation to cash, we presented an operating cash generation this quarter aligned with the results in the amount of BRL 43 million versus BRL 47 million in the first quarter 2018. We also spent approximately BRL 19 million in CapEx out of a total of BRL 117 million that we are expecting to spend in 2019, which will be used to purchase machineries and equipment for the renewal and maintenance of our contracts in the Identification Systems division in Brazil and also in the United States. And we also would spend the money in acquisition, development and certification of the softwares related to the platform that we are developing.

In 2019, we created approximately BRL 37.4 million in interest on equity related to the 2018 fiscal year, and we also paid BRL 26 million to amortize our debt plus the interest. So we closed the first quarter 2019 with some BRL 291 million in cash and a net debt of 1.8x on EBITDA, which is higher than the 1.6x net debt to EBITDA that we ended the year of 2018. But what we are expecting for 2019, that the improvement of the results in the upcoming quarters, we will end this year with a net debt to EBITDA representing 1.5x.

And as I mentioned in the conference call of the first quarter 2018 results, we are working more on refinancing and -- our debt outside of Brazil, and we are almost finishing all these transactions, and we just had the approval of our board to raise $79 million, and this will be used only to refinance our U.S. dollar debt, and this does not mean that we will increase our gross debt outside of Brazil.

So those are -- were my comments, and now we are open to take your questions.

[Operator]

[Operator Instructions] Our first question is from Vitor Tomita of Itaú.

[Vitor Tomita, analyst]

So 2 questions on our side. The first one is if you could elaborate on how you view the Education segment in terms of profitability and returns compared to the other verticals of Valid's business.

And our second question would be about your view on potential M&A opportunities and if you believe there are any targets -- any potential acquisition targets in Valid's pipeline currently. And if so, what kind of targets you would be looking for if you are looking for acquisitions?

[Carlos d’Albuquerque, executive]

Vitor, thank you for your question. So about education. Regarding [ new ] -- consequently, the margins that we are going to have in this new business will depend on the number of enrollments that we are going to have which we don't know yet. But of course, we have some projections. And I would say that these margins will be around -- not around the new range, higher than the [ transitional business ] that we have in transactions, but a little bit lower than what we have seen in the ID business. It can cater for our [ store ] right now, what will be, but around this range, okay?

And about the M&A, M&A, acquiring companies, no, I don't think so. We are pursuing new opportunities through our -- through the New Avenues. We are trying to close more and more partnerships. So that's what we are pursuing to do. M&A per se, no, I don't believe so.

[Operator]

[Operator Instructions] At this time, this concludes our question-and-answer session, and I would like to turn the conference back over to the company for final considerations. Sir, please go ahead.

[Carlos d’Albuquerque, executive]

So thank you very much for your attention. We are very confident about the growth that we have been expecting for this year, but we have noticed that the economy in Brazil is still not back on track, and so we need to be even more attentive. And also, we are working hard regarding the New Avenues, and I believe that by third quarter of this year, we will be able to show you the potential that this New Avenues that we are working hard can reach.

Once again, I would like to thank you, and we are open for any further questions that you may have. Thank you very much.

[Operator]

Thank you. This concludes today's Valid's earnings conference call. You may disconnect your lines at this time.