Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Good morning, everyone, and welcome to Valid's Q1 2023 Earnings results. My name is [ Marcus Oliveira ], and I will be the MC for this presentation. First, I have a few important disclaimer. This presentation is being recorded and all members are only listening to the translation. This is being translated into English and the material is available at Valid's IR website. The replay of the this will be available soon after it completes.

After the presentation, we will start the question and answer session. Questions can be asked at anytime during the event and can be sent in using Zoom's chat.

We also clarify that any statements that may be made during this videoconference concerning the company's business prospects, projections and operating and financial targets are beliefs and assumptions of our board as well as information that is available to the company today. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions in the industry as well as other operating factors can also have an impact on the company's future and therefore, depend on circumstances that may or may not occur.

Today with me are Ivan Murias, CEO; and Renato Tyszler, CFO and IRO. Ivan, I now pass the floor to you.

[Ivan Luiz dos Santos, executive]

Good morning, [ Olavo ] and to everyone who's with us following this earnings call. Because what we are about to present is a result that fills us with pride on behalf of the entire Board and the Board of Directors, I'd like to personally thank each one of Valid's more than 3,000 employees around the world. Without their effort, dedication and team spirit, we would not be able to write this new chapter in the company's long history. Many thanks to you.

Starting with the highlights in Q1 '23, the turn of the year marked the beginning of a new stage for Valid. We now have a company without significant nonrecurring items having any effect, which will facilitate analysis by all our shareholders and investors in general. For the data that we will show throughout today, material makes it clear that the efforts of all our employees led to robust results in all 3 verticals. This shows that we are moving in the right direction to deliver a better company for everyone.

It's worth remembering that in 2022, we finished selling the ID, Pay and data assets in the United States. As a result, Q1 '23 results will no longer include numbers from that region, and we will adjust historical data accordingly to compare the different periods. Now let's get to the numbers. We closed the first quarter of '23, with BRL 529 million in revenue. That's [ 80% ] (sic) [ 18% ] growth compared to Q1 '22 and 10% compared to Q4 '22. This double-digit growth shows the valid current state. We have top line growth while maintaining sustainable margin.

The main contributions to our top line came from the ID and Pay businesses. In terms of EBITDA, we reached BRL 149 million, which becomes a new quarterly record for Valid, representing growth of 51% year-on-year. EBITDA growth was achieved in all 3 verticals in the company, especially in the Pay segment. We should highlight the EBITDA margin at 28.2%, which is the best result ever achieved by the company in any single quarter in its entire history. As we've already mentioned in previous calls -- after the adjustment we made in 2022, Valid would have a clean DRE, especially in the entries comparing EBITDA and net income.

In this quarter, without any impact from nonrecurring entries, we present net income of BRL 65 million. In the same period in 2022, we had posted loss of BRL 16 million. The quarterly result we've achieved is also a historical record for the company and represents about 3x the entire net profit obtained in 2022.

In the 2022 closing call, we mentioned we'll be looking in more detail on some of the new metrics starting in '23, such as ROIC, which Renato will talk about a little bit later and also EPS. In the case of EPS, the results we obtained in this quarter indicates that BRL 0.75 per share is the correct value. In view of this result, the Board approved yesterday the payment of BRL 0.18 per circulating share, which represents about BRL 14 million. This payment will take place on May 22, considering the shareholding base as of May 15.

And in terms of leverage, Valid continues to have its net debt-EBITDA ratio both to the lowest historical levels ever with a comfortable cash position, factors which have made the company very well positioned with negotiations with partners in an environment with greater volatility and [indiscernible] in operations in the debt market. Now let's look at the highlights for each of vertical, starting with ID, where we had significant growth in issuance compared to Q1 '22. That is 7.3 million documents with 26% growth. We've seen strong volume due to new contracts that began in the second half of '22 and by capturing restricted volumes during the pandemic as well as a significant strong EBITDA -- good results -- a good part of these results come from our efficiency and as well as the economic scenario in Argentina, which has been continuing for a few months now, but which has given some very interesting short-term opportunities for Valid in that country.

Although we do believe that this is a recurring result, we do not believe that it is sustainable in the medium and long term because it's associated with the macroeconomic framework that we cannot specify how long will it last. But we have been frequently and diligently studying the Argentinian economic scenario with our local team there, who has been doing excellent business and operational work and also with financial partners in that country.

Finally, at Valid Mobile, we had another good quarter with a low chip volume, but without losing any top line results. In terms of EBITDA, this was the best real result achieved by the company in the last 4 years. We will continue to keep our eyes on the development of the global semiconductor market, paying special attention to the reincrease in volume, which may lead to pressure in terms of price and margin in the near future.

I now pass the floor to Renato and will be back at the end for our final remarks. Renato, good morning.

[Renato Tyszler, executive]

Thank you, Ivan, and good morning to everyone who is with us today at our results presentation. As Ivan mentioned and also as I mentioned in the last quarter, we started monitoring the ROIC again as a measure of the company's evolution, especially after removing nonrecurring items that is thanks to work done throughout 2022, and that made our balance sheet more appropriate from now on with regard to our operation and also for monitoring the syndicator throughout the different quarters.

In 2022, we ended the year with 17.7% ROIC. In the first quarter of '23, we moved to a 12-month accumulated ROIC of 19.3%. This is due only to improved operating margins in this quarter compared to Q1 2022. Now on Slide 6, we highlight the method that we published during Q4 '22, where we reached the lowest leverage level in the company's history at 0.6x. We also show on the chart on the bottom left, the development over the last 2 years, where you see that we moved from 3.2x to 0.6x. This effect is even more important because we also reduced net debt year-over-year by 45% to the current level of BRL 321 million at a time when structural interest rates are so high and the market suffered from high financial expenses.

Valid reduced those by 35% compared to the first quarter of '22. And that is already after removing the effects of the negative foreign exchange rate compared to the last year. This puts us at a very comfortable position for rewarding our shareholders and investing in the company's future. We can also continue to manage long-term debt with sufficient tasks to pay practically all the titles that mature in '23 and '24. But of course, we will continue to talk with our partners and banks about the possibility of rolling over some of the stats with longer maturities and lower costs.

On Slide 7, I'll move a little bit more quickly because Ivan has already commented about the company's main results in the beginning of the presentation, but it's never too much [ 3 and 4 ] that we have 18% growth and 51% EBITDA versus Q1 '22, which is a historical record for our quarter right now. We'll talk in the next slide about the business units, but this consolidated result reflects the growth and development of all our businesses.

Now on Slide 8, I just want to show these 2 graphs illustrate 3 main points. First, throughout all of these years and even with a pandemic right in the middle, we've always posted positive quarterly EBITDA. Secondly, with the resumption after the pandemic, we can clearly see the quarterly evolution of our EBITDA results, especially with our consistency over the last 8 to 10 quarters. And thirdly, our net profit was quite negatively impacted in 2020 by the pandemic and in '21 and '22 by the foreign exchange effect after the restructuring and some other balance items that we also created during the restructuring, but which again give space for healthy profit, especially given that the last 12 months at the first quarter of '23, with all the nonrecurring adjustments in Q2 within it already represents a result that is practically the best in our entire history. This makes us very positive for the whole year.

In Slide 9, we start looking at our 3 business units. In Valid ID, we had 31% revenue growth compared to the first quarter of '22. This is due to the fact that in '22, we still had a strong COVID wave in Q1, and this had an impact in the volume of documents issued during that period and the new contracts that ramped up during Q3 '22 and are already in full effect in this quarter.

In EBITDA, we had 69% growth compared to Q1 '22. In addition to the increase in volume we already explained, we also had gains in operating efficiency obtained by the different implementations throughout '22 and by greater dilution of fixed costs for greater volume.

On to Slide 10, we have the results of the Valid Pay [ BU ]. Here, we had 26% revenue growth, mainly due to the expressive increase in revenue in Argentina where the country's closure ends up having a positive effect for local producers like Valid. In EBITDA, we had even greater percent growth, reaching 87% compared to Q1 '22. Despite a small drop in the volume of cards this quarter, Argentina had expressive gains in EBITDA, driven by the increase in revenue and in Brazil, driven by gains in operating efficiency and portfolio management and client management. We, therefore, closed out the quarter with a 21.6% margin, which represents 7% higher than the same period last year.

On Slide 11, we have the Mobile unit, which represented stable revenue compared to Q1 '22 in spite of the lower volume sold during the period. Here, we see an effect of price increases that were practiced throughout '22 and the chip product that has also been mentioned in previous quarters. In EBITDA, we had 11% growth compared to Q1 '22 and another semester of margins between 20% and 30%. We understand that the effects of the chip products are showing the first signs of flexibility. And as we mentioned in previous quarters, this could have a positive effect on volume but a negative effect on margin throughout the all of the quarters in this year and the next...

On Slide 12, we look at our net profit, where we see BRL 25 million (sic) [ BRL 65 million ]in profit, which is higher than the years 2020, 2021 and '22 combined. This is equivalent to a BRL 0.75 EPS in the quarter doing good profit back for 2023 and the turnaround in liquidity net profit compared to the previous year.

On Slide 13, and still on net profit, which show the development of Q1 '22, where we had BRL 18 million in loss. This development and moving on to BRL 65 million in the first quarter of '23 is mainly due to the increase in EBITDA and the reduction in financial expenses, partly because we eliminated almost all debt with our company from Spain. And as a result, we also nominated the negative exchange rate variation that occurred in '22, but also due to a reduction in interest due to a significant reduction in net debt during this period, as I already mentioned.

On Slide 14, we see the development of cash generation over the quarter, where we had operating cash generation of BRL 58 million and BRL 548 million accumulated to date. All this shows that the 2-year work we've been doing has given the expected results with consistent and growing EBITDA, even after CapEx and financial expenses and all this with significant net profit.

On Slide 15, we show that there is no better way to visualize this effect than our Itau performance effectively compared to the IBOVESPA and small cap results. Both of those had 2.8% and 23.1% decreases, but Valid had a 19.3% growth during the same period. Of course, that doesn't mean we're satisfied, but it totally the impact of everything we've been presenting so far. We paid BRL 23 million in JCP in '22 and as well as BRL 21 million in January now in '23. We've already announced a partial JCP of BRL 14.4 million to be paid this May.

Finally, on Slide 16, we present some other events. The only item that hasn't yet been mentioned throughout this presentation was that every single item was approved during our meeting of shareholders, which was held in April. Thank you all again for being here. And now the floor is back to Ivan, who will talk about the main [indiscernible] in this quarter.

[Ivan Luiz dos Santos, executive]

Folks, before we move on to the final recap and to the Q&A session, I think I should share with you this article published on the global newspaper. It's likely that many of you have seen it, but have not noticed Valid's very important presence there. Due to some of the state government's request, the official date for the new ID card implementation, we changed from March to November of this year. Now as far as we're concerned, we've already implemented the process in every state where we operate. The issuance itself is progressing at different speeds in each state. But as the issuance progresses, we will also advance with invoicing for the use of new documents. In addition, we are very well positioned in many different Brazilian states. And this has opened room for conversations between Valid and other companies, especially those that still issue their documentations in a primary manner.

Now to recap the results of the quarter. We know that the company is going through a profound change in its operating conditions. We are moving from a condition of turnaround and recovery to consistent revenue growth, maintaining EBITDA and expanding profit. This is all based on our solid capital structure. After the adjustments made to our structure, we have now -- we are looking at record EBITDA profits in this quarter and net profits, enabling these earnings to be divided among shareholders sustainably.

We continue to be alert and limiting our exposure to spreads that are high where the market is in high demand. The digital government revolution is a segment where we are particularly well positioned, seeking to leverage new customers, products and solutions, all focused on everything that's happening around the world, around the demand or going paperless, the reduction of material intermediarization and [ centrality ].

With our start-up mindset, as a company that has been reinventing itself for 65 years, we know that we are a company whose time has come. The great changes in behavior in our society as we move to an increasingly digital world have brought people opportunities, tools and customers to the solutions where Valid has been investing, albeit more quietly than we should have been in the past few years. And so it is with this mindset that our CVC team continues to study opportunities that fit with our core. You will always be notified of any advances that we make.

Thank you very much. And now let's move to our Q&A.

[Unknown Executive]

Thank you, Ivan. Thank you all for being here. I'd like to ask you to please submit questions using the Zoom chat. I will now take the first question. This was sent by [ Carlos Zahra ], and I will send this one to Renato. Could you give some more detail about the consolidation and establishment of the Argentinian division? Is your balance there kept in dollars or Argentinian pesos? And whatever the case may be, when you consolidate into reals, what exchange rate do you use, the official one or any one of the many different rates that are available on the market? And also, I'd like to ask what are the consequences to potential hyperinflation or to consolidate this currency into real.

[Renato Tyszler, executive]

Well, thank you, Carlos, for your question. Now let me answer in step. Firstly, in Argentina, we operate in pesos, although a great deal of the business done there is dollarized, but we do operate in pesos and then convert into reals. We always make all necessary conversions using the official ForEx rates published by the Argentinian Central Bank.

As for your second question, we are getting ready, especially considering that in these elections that will be held during the end of the year, there is a possibility that we will see an opposition party join the government and that could result in Argentina closing its economy, at least in part. And according to analysts, this could lead to even stronger devaluation of the peso, even going beyond the so-called parallel rate, which is the parallel peso that is used there. So we've been preparing for that. What we have in cash or capital in pesos, we currently invest. This is giving out something like 70% or 80% returns per year. So all of the inflation in Argentina, we are recovering our investment. And the portion that we keep in dollars, we are currently studying the possibility of keeping some share of -- some portion of assets in dollars, perhaps at a bank or other partner such that if there is some kind of ForEx variation, our USD supply would be protected.

Now all that being said, our Argentinian working cash is currently rather low. So even if today, there were a huge deflation or devaluation of the peso, it would not have a significant impact on our bottom line. That is due to the sum of all these numbers. So our exposure is low. But despite being low, we are taking steps in the event that foreign exchange risk in close in Argentina.

[Unknown Executive]

Thank you, Renato. The next question is also for you. This question comes from Fabio. Without giving guidance, could you please tell us what your expectations are for Q2 '23 and for the first semester of '23. And also, with forecast for profit at the end of 2023, is there still within this fiscal year, any going to be any dividend payment.

[Renato Tyszler, executive]

Well, Fabio, when we look at our projections over the rest of the year, let's look at business units. The ID business unit is still strong because it came from a strong fourth quarter of last year, remained strong in the first quarter. And so the trend is that we'll remain strong over the rest of the year. Now as far as documents go, this is the largest business within the ID business unit with large volumes and all the operating efficiency remains and all the other work that we've been doing that will continue to drive us toward growth.

Looking at Pay, we still see that the rest of the quarter and the rest of the year are going to remain strong. And that's mostly due to the fact that Brazil has good healthy volumes when it comes to portfolio, product and client management. They have a very good profitability for us. And convert to Argentina, as we've been mentioning earlier, because of this transition, let's say, the government -- the Argentinian government closed some visa border.

This has an impact on foreign producers, but it has a positive impact on local companies. And as we are a local company there, our current results are likely to remain at least for the time being, especially given that the election is only going to happen at the turn of the year and early next year. And again, Argentina is a country whose profits have some stability. Everything that we have there is recurring. No results from Argentina are nonrecurring, but they do have highs and loads as the Argentinian economy opens or closes compared to the [indiscernible].

So depending on how the country opens or closes starting in January '24, our results can feel some kind of impact, but that's only for next year. For this year, 2023, our forecast is absolutely positive. And for Mobile, we had a very good Q1. And that's also due to our management of higher added value products within our portfolio. It's also slightly explained by our inventory management and reduction in cost. Now the question is how much flexibility will be seen in the global chip shortage scenario that has been dragging on for the past few years. We expect that over the second semester of this year, the chip shortage will start becoming a little bit more flexible.

And so that means that there will be some change in price as we start with more offers but again, our volumes over the past year and this year suffered a significant reduction in volume as a result of the global chip shortage. So we don't yet know how this will be translated to our results, but we are getting ready in the event that the chip shortage starts to become less for now. If that happens, we are ready to jump on the market. And I think that should give some perspective with regard to your question.

Now as for your second question, the answer is yes, as we maintain our bottom line profit and also as we keep our reserves in our capital so that we can pay dividends. Our primary concern is to, in fact, pay out dividends over the course of the year, pay out our JCPs, but that will depend on quarterly meetings that we have here in our Board.

[Unknown Executive]

Thank you, Renato. The next question, there are actually 2 people that asked similar questions. I will combine Judy's question with Joan's question. Now with regard to the strong volumes in ID, without giving guidance, can we consider that the BRL 7 million volume is recurring considering our new contracts? Or should we discount some kind of backlog effect looking forward? And what is the quarterly volume looking like without the effect of the COVID backlog.

[Ivan Luiz dos Santos, executive]

Thanks for your questions. In practice, since Q4 '21, we reached a level a little bit above BRL 6 million, which we consider to be a good baseline for the company. And that's as we process something like 2 million documents per month. Now as we look at the second quarter of '22 and on with the inclusion of certain contracts, specifically the Minas Gerais RG, we see that the company's volume level rise to a new baseline, a new level.

On average, this has been representing 5% of our monthly volume. And the remainder is still partly attributed to this backlog. So we expect that the baseline is probably going to be something around BRL 6 million in Minas Gerais and the rest is probably explained due to the backlog. And as the Contrans deadline, which has been set for the second semester of this year, this backlogged volume should disappear and we'll go back to normal. But something like BRL 6 million or BRL 7 million per quarter is probably going to be a sustainable number for the company's operations looking forward.

[Unknown Executive]

Ivan, still on the topic of ID. [ Eduardo Nishi ] asks, what are the opportunities for growth in addition to the new ID that we can see today? And is there opportunity for gaining market share in CNH drivers' licenses and [ RGs ] IDs.

[Ivan Luiz dos Santos, executive]

Eduardo, I think in IDs, there is an important improvement in terms of products that you've been overseeing with us, as I imagine, security is probably going to improve the product, but we also have the polycarbonate operation, and that is going to start in the second semester. And as we understand the polycarbonate volumes, we'll also understand what kind of impact that will have on our revenue. There are also some very important efforts in the fields of authentication and biometrics. These are very important businesses that are adjacent to Valid's businesses. And they are very strong. The company for a long time, did not do business there.

And these are markets where we really do want to do business. This is very close to our core. Still in the topic of government, we have a very interesting opportunity to help states move toward a paperless and digital civic documentation. For instance, we've been talking to Estonia. We are -- at the end of this month, we are going to sponsor the week off in Estonia. Many different states are going to be there. And some are even very highly advanced in investigating the opportunities that we are showing here, namely to improve the civic and citizen interactions with public documentation and identification.

I think this is a very interesting factor. Now I also should mention that our opportunities are not limited to ID. So if we look at Valid Mobile, we have a very interesting opportunity to transform this market for Valid in these forms of platform. We have 43 contracts that we've signed with MNOs that use our subscription management platform. And this is, again, a great opportunity for considerable future growth for our business.

[Unknown Executive]

Thank you, Ivan. Moving on to the next question now that came from Bernardo. And this is still investigating the topic of Argentina in a bit more detail. Could you explore the effect of Argentina on the company's EBITDA? What is the representation of the so-called one-off in the reported numbers. In addition, given the restriction to capital, can we reasonably assume that the cash that was created by the operations in Argentina are being accessed by us, investors?

[Renato Tyszler, executive]

All right. Let me start answering your question. Argentina, in terms of representation, the first thing I want to make very clear. This one-off does not exist. This is all recurring. This is all part and parcel of our standard Argentinian operations, just like we have cards for every bank in Argentina. So talking about a one-off in this quarter or in any other quarter, that is not the case. What we are talking about here is our normal production and sale of cards in Argentina. The issue, again, to clarify, is that Argentina is a country that has considerable economic instability.

And this situation leads to results where we have higher margins in some years and lower in others. So in terms of representation, just to give you an idea, in 2021, our EBITDA there was very, very close to 0. Then if you look at 2022, our representation there was something around 4% or 5%. And this year, we are trending towards something like 8% to 10%. So the numbers will have variance due to the country's scenario and the competition that we find there.

So the situation is very favorable right now and our forecast for the rest of the year is also favorable. And for 2024, we forecast that it will remain positive, but that due to some situations that we cannot currently predict like the election, they are out of our control. These results may have some variance that we cannot currently as to me, but we are doing the very best to bring profits for our shareholders, rest assured.

On to your second point, we are currently the largest provider in Argentina. We have chips that we purchased around the world and that go to Argentina. So the answer is yes. We can take vendor payments from Argentina. This is all done using the official peso to dollar exchange rate without any kind of debt for anyone. And now any dividends that -- any profit that is extracted from Argentina must be done in the form of dividend. And this is true for any company that is operating in Argentina. No company can currently bring money out back from Argentina.

Right now, we are at a situation where in 2022, we had important recovery and we did not have a very, very relevant asset buildup over the past few quarters, but we are not currently concerned at all with any risk of accumulating too much cash there that has not been brought back to Brazil.

This is not an issue at the moment. But we do understand that this is a crucial point for anyone who wants to do business in Argentina and there might be an appropriate moment in the near future where we have accumulated profits and where we can bring those profits to Brazil using the official ForEx rate when that rate is at a positive point for us.

[Unknown Executive]

Thanks Renato, moving on to the next question that came from [ Mile Alexander]. Could you share with us a few of the initiatives you have in GovTech and indicate what you forecast for revenues for the coming years, just a ballpark estimate?

[Ivan Luiz dos Santos, executive]

Good morning, Alexander. I would currently prefer not to give you any guidance because we don't yet -- we're not yet familiar with the format of these deals because the official requests have not been published. When they are published, they may include CapEx, they may include other aspects. But those initiatives are all centered around the idea of the civic journey. And we see that -- for instance, in the distribution of public services, such as distributing school material, public school uniforms and other examples.

We see this type of access to public service that is we can say for sure that overall, it is moving very significantly in different states overall. And it's not just a matter of creating a web portal and putting all the ministries and departments there. There are certain ways for all this to happen. And a very strong ID is a key element for this profit. That means that using an official document issued by the state that includes biometric data for a given citizen. That's what I mean. So we see many different states now moving to implement even wallets and electronic IDs. This is all centered around the idea of government listed ID.

At this time, we have sent its documentation to many different policymakers. For instance, the state of Minas Gerais has recently -- very recently consolidated all the [indiscernible]. That means the DMV there into the Poupatempo structure there where we already operate. And you can see in this page that they've made, that they are concerned with providing better service for their citizen. We also see in other states, especially in the Northeast -- the Brazilian Northeast, very strong initiative to ramp up the adoption and issuance of polycarbonate ID. This is designed -- this is something that they designed as a way of bringing more access to all the different citizens.

And this is, again, all very goes hand-in-hand with what we're going to see in Estonia in the end of May. So we're going to have a lot of content for the whole market. And as we see each different initiative coming to fruition, we will share with you specific results.

[Unknown Executive]

Alexander Brazil had a second question as well. I will ask you, Renato, because it's about capital. Is there an estimate for the maintenance of our leverage at levels lower than 1%? Or can we expect M&A movements in light of the very healthy capital structure we see right now?

[Renato Tyszler, executive]

Well, Alexander, we are currently very, very happy with our leverage status, especially given the high in structural interest in Brazil, which should persist at least for the next few weeks. So we're very happy that we designed the strategy and implemented it and that we reached very -- year that could have been very difficult. And instead, we arrived with a very comfortable position.

With regard to M&As, we don't currently have anything that we can point to and say, Oh, yes, this thing is going to have a result on leveraging because all the discussions that we are currently in right now, they happen to not have any impact on leverage. And if there were anything different from these guidelines, they would certainly be discussed ahead of time.

[Unknown Executive]

Thank you, Renato. That brings us to the last question that was asked in the chat. I'd like to thank all of you for being here, Renato, Ivan and the rest of the team. We are available through all the IR channels. If you have any questions or comments, please don't hesitate to reach out. Have a great day, everyone.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]