Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Valid's Second Quarter 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 a simultaneous webcast that may be accessed through the 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 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'd like to turn the conference over to Carlos Affonso d’Albuquerque, CEO for Valid. Mr. d’Albuquerque, you may begin your conference.

[Carlos d’Albuquerque, executive]

Yes. Thank you. Hello, everyone, and thank you once again for being here with us for Valid's earnings conference call.

So today I would like to revisit what we talked about in March with the few quarters that we would take in 2019, but mainly the new initiatives in which we have been working hard in order to generate significant growth as from 2020.

So beginning with our New Avenue in agribusiness and after some normal start-up delays, we have already passed market fit phase and are currently in the phase of scaling our solutions in each of the 3 Agrotopus verticals, which were digital farm, smart warehouse and direct to trade, where we have recently concluded the market fit. In 2020, we expect to reach revenue in this business of approximately BRL 40 million, with more than higher than the average margins recorded in our current business.

In the first half of 2019, we started another important partnership with a coffee cooperative and began negotiating with 2 other co-ops that operate with other co-ops.

Now speaking a little bit about digital transformation, solutions of financial institutions and retail. We have done a good job in formatting the offer for our current clients and are accredited to digitalize the process change a relationship that is currently based on the physical delivery of documents to a dynamic and digital relationship with their clients.

We also have several ongoing opportunities, and we are using our abilities in identification, digital certification and secure transactions to add value to open banking and all the opportunities arising from it by offering tools and technology that provide legal validity in user identification.

Now in education. We have been working hard by means of our skills and transforming process, integrating and covering technologies that are our core business such as identification, digital certification, document dematerialization, e-certificates and tests. So Valid's [ prominence ] in the industry have become more evident with its activities related to the preparation of national tests and exams in an environment with a strong, secured framework, which enables us and accredits us to provide solutions and service that improve the use of digital tests and exams with security and reliability supported by the expertise of a company with strong operations in hidden identity and in the data capture process for driver license and for those who are deeply aware of additional certificate issue procedures.

Now regarding the new biometric identification initiatives. Valid seeks to meet a growing demand from its clients and its clients' clients, aiming to ensure that they are increasingly protected in order to interact in physical and digital environments either by using biometrics, digital certificates or other means of identification, provided that they do not conflict with the agility necessary to [ carry ] out the transaction and that they are appropriate to each situation. For this reason, we have been expanding our Valid Bio platform to a broader one, where we will carry out a digital identity management. As this expansion is under development, I would probably be able to provide you with more information at the close of the third quarter.

These are the main initiatives that we have been working over the past years. They are part of Valid's strategy to gain ever more markets with digital solutions to guarantee consistency as of 2020. But it's also clear that we cannot neglect the business we could have. We understand that this business will last for some time yet, and we need to be absolutely efficient in the certification of daily activities.

Accordingly, I would like to comment about our performance in the second quarter of 2019. So I understand that it is important to separate the results we achieved Brazil and abroad, and we will begin talking about our performance abroad.

The most positive aspect was the excellent performance of the EMEA region, basically with the Mobile business. We leveraged our results in this region by canceling some agreements with very low margins, which, together with the sales mix in regions with better margins, allowed us to post record results in the Mobile division. Our performance was similar in the U.S.A. and in Lat Am due to a well-grounded management whilst operating efficiency based on the redemption of cheap costs.

It's also from the EMEA region that the first advents of eSIM will come. We signed our first agreement to bring our operating system to eSIM in the consumer devices market with an European handset manufacturer in partnership with a silicon supplier. It is certainly an extremely important first step regarding our participation in embedded work of consumer electronics. We are on the right path. We have also supplied our operating system to eSIM to the Chinese founder and we are waiting for the regulatory agency to define the required specifications. Due to the delay of certain business specs, we expect to begin providing chips and customizing eSIMs in the second half of 2020. Consequently, we expect revenue from this new business to reach approximately $10 million to $12 million in 2021 without cannibalizing the demand for traditional SIM, although average prices may fall.

In the United States, we have been having difficulty in delivering financial cards that are migrating to dual interface. Despite the quarter-on-quarter recovery, we have been analyzing alternatives to reduce seasonality in the region and finally able to achieve stable results. Regarding ID division in this region, we will begin providing service in the more late August, totally in line with the schedule. All in all, we expect to reduce part of the gap seen in this region during the first half of the year in the third quarter of this year.

Of course, last but not least, in Brazil, the behavior of sales in the quarter was greatly affected by the economic scenario in the country, generating a negative impact, mainly in June. This effect can be mainly observed in the 12% decline in volume document issuance in the Identification division in June when compared to the same period in 2018. It's worth noting that another probable reason for the decline was the widely [ notes of bill ] submitted to the National Congress on June 5 that proposes an extension to the driver's license validity. This project may have created an expectation for drivers whose license were about to expire and decided to wait for such change in order to benefit from the new license validity.

In the Payment division in Brazil, in addition to the effects from the economy, we were heavily impacted by rainfall in late March, which also affected April, causing a larger decrease in sales and strong increase in prevention costs, which were totally controlled in May and June. It's really important to emphasize that July already shows volume recovery and results in expected levels.

Now I'll turn the floor to Rita.

[Rita Carvalho, executive]

Thank you, Affonso. Hello, everyone. Thank you for being here with us today.

In this semester, our net income was BRL 20 million versus BRL 33.2 million in the same period of last year. This reduction was due to the results presented in the period and also by an increase in -- of BRL 10 million in the financial results line, where the main values was related to the IFRS adjustments related to the lease agreements in the company of the group, also related to the exchange rate difference when we translate the interest we pay related to our debt in U.S. dollars when we translate this to real. Last year, the average rate of 6 months was BRL 3.42. In this year, in 6 months was BRL 3.84. And in this semester, we also had expenses related to the refinance of our debt outside of Brazil.

In relation to cash, we presented an operating generation of BRL 69 million in the first half, which is a reduction of BRL 38 million when we compare to the BRL 107 million we generated in the first half of last year. This was mainly due to the working capital increase in order of around BRL 40 million, where the biggest impact was on the inventory line to support the national exams project, whose deliveries and invoicing will take place during the third and fourth quarter of 2019. We also had an increase in our inventories due to the acquisition of chips to produce the contactless cards, the dual interface, which is a more expensive product than the conventional chip.

Regarding the CapEx, which is in line with our expectation, we spent almost BRL 41 million in the first half versus BRL 32 million in the same period of last year, where BRL 20 million was invested in the national exams project and BRL 4 million in -- on the development of platforms, and the rest was invested in the maintenance of our current business -- of the traditional business.

In 2019, we also paid -- we paid approximately BRL 37.4 million related to interest on equity from the 2018 results, and we also paid BRL 256 million related to the amortization of our debt and interest. And we also raised BRL 275 million to refinance the company's debt outside of Brazil. And during the second half of this year, we have to pay around $14 million related to our debt outside of Brazil and without the need for any additional funding.

We ended the first half of the year with a cash position of BRL 306 million and net debt of 2x our accumulated EBITDA of the last 12 months, which is an increase when we compare with the 1.8x from the -- that we presented in the first quarter of this year. This increase in net debt was mainly due to the results of the first half and also related to the working capital increase, as I mentioned. By the end of the year, what we expect is that our leverage will be reduced to 1.6 to 1.7x our EBITDA.

So those were my comments. Thank you all once again, and now we are ready to take your questions.

[Operator]

[Operator Instructions] I'd like to turn the conference back over to the company for final considerations. Please go ahead.

[Carlos d’Albuquerque, executive]

So I would like to thank you very much for your attention. And as you can see, our market has not been easy at all, but my message is that we have a very strong team working in 2 fronts, which are very clear. One is to keep pursuing efficiency in the traditional business and also bringing more sales. But it is a war every day. In parallel, we are working very hard to take off the new business focused in our core business, which is secure identification. And as for identification, I'm not talking about the sales of driver license but the identification of people, transactions and objects.

It's not an easy task, and it won't be fast either. But as we've been telling you for the last 3, 4 years, we are evolving in this path, and we are sure that, once again, we will show Valid is a very important player in the digital world that will demand more and more secured identification.

So once again, thank you for joining this call and for your support.

[Operator]

Thank you. This concludes today's Valid earning conference call. You may disconnect your lines at this time, and have a wonderful day.