Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Valid's Second Quarter of 2018 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.br/en/ir and the MZiQ platform. 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 made -- 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]

Thanks, and hello, everyone, and thank you for attending, once again, this conference call to disclose Valid's earnings. It's great to talk to you again and report another quarter of growth, the fifth consecutive quarter. It shows that we definitely have reached our goal to reverse our results.

It is because our traditional market faced, over the last 2 years, several challenges and it was not different with Valid. However, due to the clearness of what we should do together with the exceptional ability of executing and transforming of everyone in Valid, we were able, at the end of 2017, to be ready for 2018, which was seen as a year of opportunities. It has not been such an easy year, however, with the important foundations, we recover our growth, and we are ready to seek for new business opportunities to Valid.

In this regard, we are strongly working in 3 main growth opportunities: the first one, IoT, and specifically, the vertical of automotive, health care and agri business, object tracking and biometric validation. To the extent that the products relating to these initiatives reach their respective reversal points, we will provide you with further information.

I believe it's very important to emphasize that none of the opportunities I have just mentioned is a disruption of Valid's traditional markets but a natural evolution of our core business, which is the identification of people and their [ OEMs ]. The efforts of Valid's executive officers to meet our customers' needs and the correct and timely reading of this market evolution have allowed us to be absolutely aligned with the near future.

I cannot fail to mention the specific recovery of each business area. First, the Payment division, both in U.S. and Brazil, had a fantastic turnaround. From very low results and sometimes even negative to some -- benefiting from efficiency and the [ forward results ]. The Identity division in Brazil is already expanding its business model of tracking and biometric validation. In U.S.A., as the result of new identification of [ remits ], we are moving towards a more robust market share that in medium term, we are pretty sure, will bring the opportunity similar to those we have in the Brazil.

Regarding our Mobile division, we are seeing significant expectation of changing from the Mobile SIM to embedded SIM, and with respect to this issue, I should provide more details. So we do not expect the traditional SIM will completely disappear in short term, and I would say not even in the medium term.

At the same time, we are absolutely ready for the evolution towards the eSIM, for which we already have our product, operational system and sales consolidation platform. That is the subscription maintenance.

With this new set of service, hardware, software and platform, we are already able to actively participate in -- and innovative with -- in the IoT markets, which every day becomes irreversible reality. When we look to these events of each of these 3 billion areas, it is clear that in medium and long term, these areas have a strong convergence trend and will act as a single solution. However, without moving their identity and need of individual development.

Finally, I'd like to thank our team that strongly contributed for this transformation. Now I will give the floor to Rita, our CFO.

[Rita Carvalho, executive]

Thanks, Affonso. Hello, everyone. Thank you, once again, for joining our conference call. I would like to make some brief comments about the second quarter results. One is about net income, which was BRL 13.5 million this quarter, substantially higher than the one in the second quarter of 2017, but 31% lower than the first quarter of 2018.

The main impact on the net income this quarter was a noncash effect related to the negative exchange rate variation of BRL 7.2 million in Valid's Spain results, related to the $100 million loan that we raised in 2017.

Further the [ solution ] of currency of Valid Spain is the euro and the lower was U.S. dollar. The adjustments after that in Spain's balance sheet have happened -- has been affecting the company's results.

In the first quarter of 2018, the exchange rate variation impact was positive in BRL 8.7 million. So when we analyze the year-to-date CAGR, we can see a positive impact of BRL 1.5 million. And in May this year, in order to mitigate this situation in Valid's results, the company adopted the accountancy -- accounting policy of hedge accounting of investment and began recording these variations in the shareholders' equity. Therefore, the company's results have not been affected by this impact since then.

Another relevant comment about the net income refers to the effective income tax rate, which was, in the first half of 2018, due to certain expenses we -- was 38% in the first half 2018, due to certain expenses that we incurred, which are not deductible for income tax proposals. And also, because we did not distributed any payments of interest on equity, which should happen at some point in the second half of this year. So we expect our effective income tax rate for full year 2018 to be around 30%.

Now talking about operating cash generation, which came to BRL [ 60 ] million this quarter, another excellent result. Year-to-date, our cash generation totaled BRL 107 million, confirming the company's expectation to be a strong cash generator again.

In the second quarter of 2018, we raised BRL 350 million in debentures, which mostly were -- went to refinance the debt in Brazil. In the first 6 months of 2018, we amortized BRL 125 million in debenture related to the installments during the first half of this year. There are BRL 52 million related to the amortization of debt of -- out of Brazil -- outside of Brazil. In the second quarter of 2018, we also spent BRL 32 million on CapEx and paid BRL 11 million in dividends related to 2017 results.

We closed the quarter with a cash position of BRL 570 million, and our net debt to the last 12 months EBITDA was 1.8x, which is slightly higher than the 1.7x that we recorded in the first quarter of this year. This is mainly due to the impact of the FX rates applied to convert the U.S. dollar debt to the equivalent amount in real. So assuming the exchange rate will remain at current levels, we expect the company's investments to close 2018 at around 1.5x.

So talking about debt. In July, we repaid the company's fixed issue of debenture that would be due in June next year. Therefore, our gross debt is currently composed by BRL 360 million in debentures related to severance issue and $130 million related to U.S. dollar debt of our subsidiaries outside of Brazil, of which, $23 million will be amortized throughout the second half this year.

So finally, we affirm our commitment to distribute at least 50% of our net income, which, in 2018, will be made most through payments of interest and equity. So once again, I would like to thank you very much, and we are now open to take your questions.

[Operator]

[Operator Instructions] At this time, we will conclude the question-and-answer session. I'll turn the call over to the company for final considerations. Sir, you may go ahead.

[Carlos d’Albuquerque, executive]

Thank you. So thank you very much all. And we really believe that we are in the right track and at the right pace, so let's keep moving. Thank you very much.

[Operator]

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