Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and thank you for standing by, and welcome, everyone, to Valid's Second Quarter 2020 Earnings Call. Today, with us, we have Mr. Carlos Affonso d'Albuquerque, the company's CEO; and Mrs. Rita Carvalho, the Chief Financial and Investor Relations Officer; [ Michael Fox ], Commercial Director; and Mr. Mauricio de Menezes, Operations Director.

We will confirm that this event is being recorded and simultaneously translated into English. [Operator Instructions]

This event is also being simultaneously broadcast over the Internet and may be accessed through Valid's IR website, www.valid.com/ir. Feel free to flip through the slides. There will be a replay facility for this call on the website after its closure.

Before moving on, we would like to mention that forward-looking statements made during this conference call concerning the company's business outlooks and also financial and operating goals are based on beliefs and assumptions on the part of the company's management as well as on information currently available.

Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions, as they refer to future events and depend, therefore, on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors could also affect the future results of Valid and lead to results that will differ materially from those expressed in these forward-looking statements.

I would now like to turn the conference over to Mr. Carlos Affonso, company CEO. Please sir, you have the floor.

[Carlos d’Albuquerque, executive]

Thank you. Good morning, everyone. I hope you are all safe and well, and thank you for being, once again, with us at our results call. As we mentioned, in the first quarter conference, the year 2020, started with a good dynamics in terms of results. Even with the emergence of the first COVID-19 cases in China and the subsequent halt of activities in Asia in the month of January and February. But as the pandemic spread around the world, we started showing more severe impact on our operations. Due to a total lockdown of our units of Identification as of March 23, both in Brazil and in the U.S.

Let's remember, recap some of those moments where we were taken over by uncertainty in March, April and May as economic activities came to a halt around the world, thus impacting the real lives of everyone of us. And the challenge of our executives at Valid was then to preserve the company's cash, to preserve our employees' health and also to promote actions to minimize the impacts of the pandemic. So we were in a permanent war room by May to be able to react expeditely to each and every challenge that emerged on a daily basis so that we can act promptly within this new COVID-19 environment. Our team at Valid has, had and still has a very synchronized execution of duties across all fronts, revenue, cash and personnel.

The result of those efforts in the second quarter was that we reached a revenue level of approximately BRL 415 million and an EBITDA level of BRL 17.5 million, numbers, which are better than the ones forecast in our crisis scenarios that we initially drew. And while our main business division, Identification documents, physical documents, suffered the bulk of the impact with a drop of something close to 64% in revenue. On the other hand, our bank card line and our C-Card line maintained a strong performance coming to higher volumes than we had initially forecast in our budget. We'll go into detail about that in a moment.

It's also worth mentioning that the results for the second quarter 2020 was made possible also because of our diversification strategy across different geographies where we operate. And that can be observed from the foreign exchange variation, which played out in favor of our

[Audio Gap]

this quarter, all the way into this digital transformation movement, which started way before the pandemic. And also by this, as I said, synchronized operation of a team of employees who is fully, totally committed with evolution and with delivering the company's targets. So now I'll go into more detail about the performance of some of our business units.

We start with Means of Payment in Mobile. We closed the second quarter 2020, with a returning or recovering normal levels of results, both in the U.S. and in EMEA and also LatAm. As we resume volumes sold and also an uptick in profitability. That means that if we maintain this trend on Mobile Means of Payment, as we gradually return to normal levels in our Identification operations, and we see clearly that there is an uptrend for the third quarter gradual but steady. In Identification, we will most likely also resume throughout the third quarter, a normalization, if I will, for that division as well.

Of course, we'll have a higher demand for documents, which have not been issued throughout the past months. On the digital platforms front, in the second quarter 2020, we took an important, very important step in our journey to position Valid as the best company in digital identification or safe, secure Identification in Brazil as we launched services for health professionals and also patients. And I can highlight them, that's the Valid Identity as a Service, VIDaaS, which is the Valid platform, which emerges to become a universal digital passport, and it is integrated with our cloud digital certificate, which aims at making medical procedures easier for teleconsultations, as we go through a pandemic.

The VIDaaS is our digital subscription platform, very secure with the best usability in the market without a doubt. And we'll continue to incorporate uses and integrating B2B platforms from other professional categories, who can also connect with other business lines of secure identification for people and digital transactions such as smart cities and instantaneous payments, which we already have. We also launched another Receita Medica Com VC -- ReceitaMedica.Com.VC, V for Valid, C for Certificate, which is our free digital platform for doctors, patients, pharmacists, which expedites teleconsultation procedures, allowing for digital prescription, digital signature for prescriptions, including controlled medications, medical office stations, examination orders. Now with higher control, safety and ease of use. This platform follows this agnostic, if I may, way to interact B2B across our platforms used by those professional categories.

As we speed up deliveries through digital platforms, in the second quarter 2020. We're still in line with our core business and with our portfolio around secure identification. We would like also to remind you that we announced on July 13, the acquisition of 51% interest at the MITRA company following our strategy to consolidate our portfolio around solutions for smart cities.

Once again, MITRA fits in our product matrix to securely identify people within Valid's portfolio. Combined with the acquisition of Estacionamento Digital, which was concluded in May that positions Valid as an important player in the management of cities, providing technology for public authorities at city level for them to base their public policies under a structured systematic matrix. And of course, to provide knowledge for citizens and their respective needs. The managers, public manager will be able to better understand citizens needs. The solution will also allow for quicker responses coming from the public management to social demand, digital inclusion, and as I just said, a better relationship between manager, public manager and taxpayer citizens, with solutions for smart cities.

We are already present in 34 municipalities in Brazil. Now all of our business were impacted by the pandemic, the one which is the highest source of concern is our Data unit in the U.S. because we don't have a total visibility of its recovery and cannot see that coming in months. Our main clients are in the U.S., our main clients for Data are in retail, clients which business are generated through in person brick and mortar stores, which were really, really impacted right now. So we have reviewed our business plans and our investments in that sector, and we decided to conduct an impairment write-off in the amount of approximately USD 22 million, which of course directly impacted the net profit in the second quarter of 2020 as you can see, but without impact on the company's cash as we mentioned. Cash was up to [indiscernible] without the measures we have adopted in the quarter, which we stopped in late March. It's important to emphasize that we have generated operating cash which is positive in the amount of approximately BRL 67 million in this quarter. With that, we recovered more than [indiscernible] amount. And also, there is a continuous movement within the company. We have restarted an internal program for operating excellence aiming at redesigning the organizational structure, which will move from being concentrated on business units to a more functional structure. And also trying to take -- bring new processes to increase agility, simplicity and efficiency to be able to support this growth strategy and also around digital transformation of our business. Once again, I'd like to thank you all for your trust in our Executive team and our employees. We all remain fully committed to the company's evolution and to delivering the company's objectives. I'll now turn the call over to Rita. Thank you once again.

[Rita Carvalho, executive]

Thank you, Affonso. Good morning everyone. I hope you are all well and safe. And thank you for once again participating about our earnings call. As for the results delivered in this quarter, I am talking a bit about the performance of each of our business units. In the second -- this quarter, we saw a consolidated net revenue of approximately BRL 415 million, 10.5% down from the second quarter of 2019 and an EBITDA, as Affonso mentioned, came to BRL 17.5 million. Accounting for a drop of 72.5% vis-a-vis last year. That drop in the results in the second quarter, can be explained mainly by the 63.5% drop in revenue and 163% drop in EBITDA coming from the Identification division due to the stop and the lockdown of operations, both in Brazil and in the U.S. as of March 23. All those operations had been come to a halt since March 3, due to measures implemented by governments to fight the COVID-19 situation.

So when we compare with the same period of last year, volumes in Brazil, volumes, again inferior at 86.5% and something close to 29% in the U.S. down. Throughout the second quarter of 2020, we are already observing a gradual recovery of activities. And the results have been getting better gradually and as states resume activity, the normal activity, we expect to see further and gradual improvement in those volumes. But we already can see that happening in this quarter.

A bit about the performance of our Mobile division in the second quarter. And here, having in mind that contracts are in U.S. dollars across all regions, I will comment on the results also using the U.S. dollar as a reference. We filed a net revenue of USD 23.3 million, down 27.2% when compared to the second quarter of 2019. And as for EBITDA, it came to USD 3.8 million in the second quarter, down 33.2% vis-a-vis the same period of last year. That was expected by the company since the second quarter of 2019. We had a very favorable mix, and we knew that, that mix was not going to be repeated this year in 2020.

However, the division, which had been more impacted by the COVID situation in the first quarter already shows great power of recovery in the second quarter, having shown, in the period, a growth of 38.7% in revenue and 111% growth in EBITDA when compared to the first quarter of 2020, having reached a year-to-date result in EBITDA of USD 5.6 million first half of 2016 -- 2020, and that's within what we expected in terms of results for that division in this first half of the year.

The EBITDA margin, which came from -- which dropped 1.6 percentage points when compared to the second quarter of last year, however, increased 4.9 percentage points when compared to what we filed in the first quarter 2020, reaching 16.2% in terms of margin, once again, which is in complete line with what is expected for that division.

As for Means of Payment, net revenue in the quarter totaled something close to BRL 237 million, up 22.1% when compared to the second quarter driven by a better sales mix with more with sales and dual interface cards, both in Brazil and in the U.S. and also in Argentina, which compose, make up the many regions where we operate with bank cards. Besides mix, when we look at sales in reals, the depreciation of the foreign exchange rate also contributed for a growth in revenue, which emerged, of course, from our geographic diversification. We saw a margin of 7.4% in the quarter, up 2.8 percentage points from the second quarter of 2019, reflecting, once again, a better sales mix, considering that it was also negatively impacted by the following: Higher cost of BRL 2.7 million, and also by the result of our Data business in the U.S., as Affonso mentioned. We can safely say that we are -- we faced a second quarter which was quite challenging, where the main focus of our financial team was to prioritize cash management, given that our initial expectation was that we would consume something between BRL 20 million and BRL 40 million on a monthly basis, which are months where our revenues are historically lower. So we worked to reinforce our cash in approximately BRL 218 million through short-term fundraising and adopting, of course, the measures implemented by the government.

Cost reduction and mainly working to maintain a continuous flow of receivables and without relevant major cases of default, the company was able to generate BRL 68.8 million in terms of operating cash in the second quarter, vis-a-vis BRL 25.7 million generated in the second quarter of 2019. And year-to-date 2020, 6 months, the first half, the generated operating cash came to BRL 105 million vis-a-vis BRL 69 million generated in the same period of last year. Despite all challenges, we managed to advance in developing and launching new platforms, besides renewing important contracts to maintain the company's sales level. So CapEx expenses in the second quarter of 2020 came to BRL 33 million vis-a-vis BRL 22 million in the same quarter of 2019. And the first half of 2020, we totaled BRL 52.9 million in CapEx vis-a-vis BRL 40.7 million in 2019.

Still in our new business front, we have disbursed BRL 7.7 million in acquisitions of corporate interest. In this first half of the year, we raised approximately BRL 403 million in debt, BRL 219 million of which to reinforce our cash, as mentioned, and the remaining to roll our debt maturing in 2020.

We also paid BRL 27.8 million in interest, debt-related interest and BRL 22.2 million in interest over equity. And we also spent BRL 3.6 million in share buybacks.

With that, we closed the second quarter 2020 with a cash of BRL 340.2 million, which is slightly above the BRL 334 million we saw in the first quarter of 2020. When we put together that cash with the BRL 218 million relative to our short-term reinforcement of our cash, we have a final balance of BRL 558.2 million, which shows a very comfortable cash position, especially when we consider that, we seem to be over the worst. The worst is over.

Thank you very much for participating once again. And now we remain available for questions that you may have.

[Operator]

[Operator Instructions]

The Q&A session is now over. I'd like to turn the floor back over to the company's management for their final remarks.

[Carlos d’Albuquerque, executive]

Well, once again, thank you. It is important to emphasize that the year, which started as very challenging, has proven to be even more challenging with the pandemic. But our internal capacity to manage those different situations is quite resilient. Of course, the pandemic started late last year, but our capacity to organize our efforts to face this crisis has made it possible for us to minimize the impact. We have taken all the necessary measures to reinforce our cash. We have adjusted our organizational structure for scalability, we did one-off adjustments to improve our short term revenue, and we have diversified our digital presence. So we are sure, we strongly believe that this is the pathway that will take us through the next years to become the benchmark company for security or secure identification for people and transactions also with the digital world.

Once again, thank you, and we will remain available for comments or questions that you may have throughout the next days. Stay safe, stay well, have a nice day everyone.

[Operator]

The earnings call for Valid is now over. Thank you all for participating, and have a nice day, everyone.

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