Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2021-Q3

[Olavo Vaz, executive]

Good morning, everyone, and welcome to the earnings call for Q3 Valid. I'm Olavo Vaz, Head of Corporate Finance, and I'll be the moderator of this presentation. Before moving on with the presentation, I would like to make a few announcements. We'd like to inform you that this event is being recorded. [Operator Instructions] At the end of the presentation, we'll start the Q&A session. Questions can be sent at any moment during the event and should be posted through the website checkbox on the lower left-hand side with the blinking light. Forward-looking statements made during this conference call concerning the company's business outlook, financial and operational targets are based on beliefs and assumptions on the part of the company's management and also on information currently available.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to pure events and therefore, depend on circumstances that may or may not materialize. Investors should have in mind that industry conditions, in addition to other operating factors, can also affect the company's future performance and lead to results that will differ materially from those expressed in these forward-looking statements. Having said that, I'd like now to please introduce the participants of today's call. Ivan Murias, our CEO; Renato Tyszler, CFO and IRO.

I'll now turn the floor over to Ivan. And at the end of the presentation, we will be going to the Q&A session to start our conversation. Good morning, Ivan. Please, you may carry on.

[Ivan Luiz dos Santos, executive]

Thank you, Olavo. Good morning, everyone. I'd like to thank you all for participating in our earnings call, and we hope you are all well and healthy. I'd like to now mention the main highlights of our Q3 results for 2021. In this quarter, we are delivering the highest revenue in our history for year-to-date results. And along with those results, we are also delivering the highest EBITDA on a quarterly basis in the company's history.

Also, we are reversing year-to-date loss, and we're now -- have come back to posting a net profit. When we unfold those results across different verticals in the Government Solutions segment, the issue volume has resumed pre-pandemic levels. In August alone, we saw the highest volume since January of 2020. In other words, before the start of the pandemic.

On the Smart Card front, we are leveraging volumes and revenues across that business vertical. At the same time, we have completed, as we promised earlier in the year, the transfer of operations from São Bernardo do Campo to Sorocaba as part of our manufacturing efficiency agenda. As for Digital solutions, our VDS segment, as we call it, we closed another quarter with a growth in revenue of 40% year-on-year. And in the International segment, we've seen a sharp improvement in margins for the telco business.

I'd like to turn the floor over to Renato, who will continue with the presentation and go into detail about the numbers. And then at the end, I'll come back not only for my final remarks, but also to answer questions or comments that you may have. Renato, over to you. Good morning.

[Renato Tyszler, executive]

Thank you, Ivan. Now moving on to Slide #4. We can see an important performance in the third quarter of 2021 with a sequential growth of revenue and EBITDA, especially the highest EBITDA in the company's history in a quarter, BRL 99 million, as mentioned by Ivan. And the main highlights here for the third quarter are also considering year-to-date numbers, we have an increase in document issue, also considering the pandemic effect, which was higher in 2020, but we are already resuming levels which we filed in 2019 pre-pandemic. It is largest -- larger amount of bank cards and an increase in capacity to meet the growing demand from the bank market. Our VDS segment continues to show continuous growth in revenue at 42% year-on-year, representing 17% share in South American revenue.

And our telco global business remains strong with a growth in revenue of 18% and a gain of 68% of EBITDA when compared to 2020, coming from a better mix and client and operational gains in logistics. It's worth mentioning that the telco business continues with a very positive outlook for growth for 2022, considering the global migration from 4G to 5G networks. That is a transition that will happen gradually throughout the coming years. We're also managing in a positive way the shortage of semiconductor chips globally, moving in the upstream in a more quality and added value and without relevant impact on our volumes for 2022.

Moving on to Slide #5, I'd like to share something very relevant in our EBITDA's snapshot. Throughout the past 3 years, we saw a very important diversification of results across business units, thus reducing, on the one hand, dependence on government contracts and distributing that [revelance] across telco, global and Business Solutions and also our digital segment already contributing with a positive EBITDA. That evolution is in line with our history of reinventing our business lines throughout the decades.

Moving on to Slide #6 and talking about our Government business unit solutions, we see a continued recovery of document issue throughout the quarters, already reaching a high volume -- highest volume of the year in August. The physical volume of documents in the third quarter 2021 was the equivalent of the first quarter of 2020, which was before the pandemic and quarantine. That sped up the growth of 30% of our revenue in year-to-date numbers and 122% in EBITDA year-to-date. As for that business unit, the volume effect has a very high impact on fixed costs and fixed structures that we have across different states.

Moving on to Slide #7, I'll be talking about our Business Solutions segment. Here, the demand for smartcards remains strong in Brazil, in line with the increase in our production capacity. On the lower right-hand side, the volume of cards went up 35% year-to-date. That led with a growth of 33% in year-to-date revenue. Despite the expressive growth in revenue, we grew not so much in EBITDA, especially because of a weaker result in Argentina given the local economic situation and also due to press -- cost pressures coming from imported raw materials and also coming from other expenses for 2021.

Outlook for 2021 -- '22 are positive with a high demand for smartcards next year as well and also with our investments in increased capacity.

Moving to Slide #8, we'll talk about our Digital Business Solutions. Another quarter of expressive revenue growth at 42% when compared to 2021, strongly impacting Valid certificate or Valid ID or Valid cities and also Valid Link, our traceability solution. Even though the focus is on revenue growth, we still presented a positive EBITDA in year-to-date numbers showing that digital business are financially sound.

On Slide #9, we present results for our international businesses. Here, the Telco global, the most representative, especially in margins, we had a slight reduction in revenue when compared to the third quarter of last year, due to a drop in the number of semiconductor chips, as can be seen on the lower right-hand side. In year-to-date, we see expressive growth of 14% in revenue, even with a flat volume when compared to the same period of the previous year. That was driven by better product and client mix and price increases. In terms of margin, we saw year-to-date numbers, which is quite strong, a growth of 23%, even with a flat volume, as mentioned before.

We see an important recovery in the net income in the next slide in the first month of the year. We moved from a loss of BRL 70 million year-to-date 2021 and reverted that to a profit of BRL 8 million. Most important, though, is that the positive assessment comes mainly from EBITDA gains. In other words, showing that the business is sustainable and growing quarter-on-quarter.

Moving on to Slide #11. We see positive cash flow in year-to-date numbers with a net generation of BRL 105 million and showing once again that from the point of view of cash generation we are very sound and have been so in 2021 when compared to 2020.

Linking cash generation to what we present on Slide 12, we show an update of our debt schedule. Amortization, no major change when compared to what we filed last quarter and already showing the positive impact of our reprofile of the debt, which happened earlier in the year. Also important to see was the consistent decrease in our company's leverage ratio with a drop from 3.5x net debt EBITDA in the first quarter, down to 2.3x in the third quarter 2021. That reinforces the fact that we are resuming our operations, also reflects our gains in operational efficiency and the better profile for our debt that, of course, validates continuity and sustainability for the company's results.

Moving on to Slide 13, I'll comment on subsequent events. The first one is the transfer of our Caju operations in Rio to Sorocaba in the state of São Paulo. Basically, we are centralizing our operations, which before we had 3 manufacturing units until early 2021, and we've closed the year with this announcement, thus consolidate all our manufacturing operations in one single unit in Sorocaba. This will provide us with relevant operational gains, and we intend to have everything up and running at the end of the first quarter of next year.

Lastly, we also sell our Caju property, which is our own property, and that will provide some inflow in the cash flow for the next years. And also our new buyback program, we are basically buying back 2 million shares. And the objective is simple: for us to have funds for our stock option plan, long-term plan, which we have announced earlier this year, and we are already offering that to some select executives of the company.

So those are the 2 main subsequent events that we have on Slide 13. Having said that, I turn the floor back over to Ivan for his final remarks. Ivan, over to you.

[Ivan Luiz dos Santos, executive]

Thank you, Renato. Before we move to the Q&A session, I have 4 important takeaway messages to share with you. Going back to the beginning of the presentation, we had the highest revenue in history for a quarter and for the year-to-date number, September for the company. We also reported the highest quarterly EBITDA in the company's history excluding nonrecurring events, which was something we were always asked about by market analysts. If we recap briefly on the company's results, we have a solid uptrend for those results. So we reported about BRL 50 million EBITDA in the fourth quarter, BRL 60 million in the first quarter, BRL 70 million in the second quarter and now we are reporting BRL 98 million.

Obviously, we cannot control the macro situation. But as we've said before in previous calls, the inflection point for Valid's reports -- results are past. We already can see that range from BRL 90 million to BRL 100 million per quarter is the new run rate for the company's EBITDA because of the results dynamics and because of the way we have been managing the company. This new level is very, very important because it mitigates in a very forceful manner the balanced risk -- so-called balanced risk, something we're asked by market analysts, given the fact that our debt measured by the ratio, net debt EBITDA is now sitting at lower levels when compared to pre-pandemic periods. And we plan to close the year at a ratio below 2x for that indicator.

That, for us, in management is very important and is the result of very hard work from the management for the past 12 months. We focused on that, and we now are delivering it. That takes us to the cultural transformation point. Having changed dramatically all N1 and N2 of the company, it wouldn't be possible in such a short time horizon, and in under normal conditions, to have such a sizable turnaround process reverting in such positive results. This was only made possible because we were able to attract talent and also identify internal talents that were sort of hidden in the organization. And above all, to align the team around that vision and gradually transforming the company's culture.

Under culture, still, where do we see the major changes? I can mention a few, and I'd like to highlight a couple of them. Number one, we saw the company as very concerned and seduced by digital transformation. Just as important as digital transformation of business, which is something all companies are now being challenged to do to some extent, is also being attentive to the core business of the company. We focused majorly on that topic to do better what we do at our core. That topic can lead to several examples, but there's one example I'd like to mention. Our ID -- IT manager, somebody we brought from [Falcone] and along with the team, we already had in our documented [emission]. He's been following a new routine dedicated to ID, which is something very common in retail operators such as Renner, Riachuelo, C&A, but it's something we didn't do before this professional came.

One single cent here has a brutal impact on the business, much larger than discussing cultural digital transformation without the right framework. Also, operational and manufacturing efficiency, and we are very disciplined on that topic as well. We announced in January the transfer from Sorocaba -- from São Bernardo to Sorocaba, and we have concluded that in Q3. As Renato just said, we also announced the transfer of Caju to Sorocaba.

Renato and myself, along with the team, we continue to pay attention to new efficiency opportunities be in Brazil or outside of Brazil that might optimize the use of our assets, reduce the overstretch from -- for the management and improve the company's operating performance. Soon, we expect to be able to announce new initiatives related to that efficiency agenda. Under Digital, we have implemented a quarterly [RDO] routine in where we reassess all digital initiatives, their respective BPs and the deliverables for all of those initiatives, and we gauge investments and also time line and focus. As a result of that process, we have already discontinued a few less promising initiatives as we have accelerated other more promising ones. A good example of that is our V-Hub Engine, which was elected by Bradesco to manage all their real estate credit with fiduciary alienation for their bank. A 5-year contract, quite relevant for, us using all our identification capabilities and the V-Hub Engine as well. That has made us all very proud and confident in our capacity to identify new growth avenues for Valid.

And lastly, we have invested heavily, both focus and attention internally and externally to our Telco business. Internally, to prepare it for future challenges, to transform the industry itself, bringing in professionals to help us put together this new ecosystem, the subscription management platforms and also MNOs, MVNOs, foundries and OEMs. Externally, increasingly, we have -- we need to tell the market that we have that share of revenue in U.S. dollars, dollars which offers a natural hedge in times of volatility and also adding value to the company because we are able to generate [ $30 million ] EBITDA per quarter in a very sustainable way, something which is not always reflected in the company's valuation.

I'd like to reinforce my gratitude personally to our employees across all segments and geographies where the company operates for the robust numbers we were able to deliver in this quarter. Renato and myself are now available for questions or comments that you may have.

[Olavo Vaz, executive]

Thank you, Ivan. Thank you, Renato. [Operator Instructions] The first question we have comes from Christian, and he asks concerning the VGS. I have a question about the EBITDA margin for VGS. What has played an important role for that result? And if you continue to recover volumes, can we expect margins to continue to expand? And what would be a stabilized level for VGS margins going forward?

[Renato Tyszler, executive]

Christian, thank you for your question. I think the margin that you have posted now in the third quarter for VGS, it is driven by several of those operating efficiency measures we have been implementing with our team across different hubs in the country. As I said before, we have been implementing a very similar dynamic to that found in retail. We have been looking at the number, the amount of documents issued, the amount of FTEs and all the operational support, which sits in the background of those issues. We have a run rate now which is considerably higher than what we had before in accumulated terms. And we see a possibility of expanding that margin a bit further going forward, given that the volume which was, in a way, pent-up, will now materialize.

So a couple of days ago, we received a schedule for maturity dates for the renewal of our driver's license. They are now going to catch up after the pandemic. So driver's license that expired last year, they are now have to be renewed by December 30, and there is a cascading down effect on that schedule and that will bring higher volume. And as that volume increases, as we have explored the pandemic period to make the operation more efficient, this will reflect on EBITDA and increase the run rate throughout the quarters. We have also been dedicating some time on the commercial side, in terms of contract renewal that's also relevant as we put together the margin for that segment. We have been facing fierce competition from other agencies. But to your point, we do believe that the higher volume, the new run rate and the accumulated backlog combined with our efficiency process measurement will lead us to a higher level than we had posted this quarter for the coming quarters.

[Olavo Vaz, executive]

Renato, next question from Fabio. Congratulations all employees for Q3 results. The U.S. dollar will likely remain at around BRL 5.2, BRL 5.3, and that can positively impact your balance sheet. That's a question. Can that positively impact your balance sheet next year?

[Renato Tyszler, executive]

Thank you, Fabio, for your question and also for your congratulations for the whole team. In 2022, just to recap, today, our main balance sheet item that may be impacted by foreign exchange rates is the loan that we have intercompany with our operations abroad. And that was part of our strategy earlier in the year. Interest rates in Brazil were at a record low. So we removed that from abroad and brought that to Brazil in BRLs. Today, we're talking about 3/4 of our total debt in BRLs. So when the BRL devaluates that loan, which appears in our balance sheet as accounts receivable, it goes up. In other words, when the U.S. dollar valuates we have a positive impact on our results.

The results in our balance sheet, which has now just been published, includes the U.S. dollar as traded at the close of the third quarter. For the fourth quarter next year, foreign exchange rates sits at a level above. What we have now will have a positive result in our balance sheet, if the rate is lower. In other words, if the U.S. dollar devaluates, we'll have a negative result. Once again, that's a near accounting number. There is no cash move related to that. It's mainly or merely foreign exchange rate variations.

[Olavo Vaz, executive]

Renato, next question from Renan. He asked 2 questions. If you can talk about the sale of São Bernardo plant? And also a question about indebtedness. How do you see that unfolding next year, indebtedness?

[Renato Tyszler, executive]

Thank you, Renan. About the sale of the São Bernardo plant, we cannot provide many details. We are at a very advanced stage of the negotiation to sell the assets, or the objective is to sell the assets. We have no intention whatsoever to become a real estate company. So we are well advanced in the selling process, and we hope to be able to announce it as soon as possible. As for that, the good news, as you could see during the presentation is that in a very, very fast way, in 2 quarters, we moved from 3.5x, 3.6x in the first quarter, and we have announced 2 quarters later, a leverage level of 2.3x EBITDA. So that was a very fast deleveraging as we had already signaled due to the recovery of our VGS volumes mainly. And we expect that this result in the fourth quarter will maintain in favorable levels, and we expect to have an improvement in that leverage ratio in the fourth quarter. So we see that in a very positive light.

And as leverage drops, we can think about a new debt strategy for next year. We have a large payment tranche going forward, and we can try to push that forward with more interesting rates than we have right now for loans or for debt.

[Olavo Vaz, executive]

Next question from Vitor. He has 3 questions. If we could comment on Agrotopus, growth, margins, new avenues? And the second question about debt. Renato has just mentioned that. And another question, whether the company remains responsible for the ENEM, the high school tests, exams across Brazil.

[Renato Tyszler, executive]

As for Agrotopus, when I mentioned the discipline that you now have to look digital initiatives, that's one new initiative for Valid, where we see a smaller fit with our future guidance. We have a few ongoing contracts. We continue to service our clients the best -- as best we can. But we were going into an area of operation which is different from what we do. We're not as experts in that as in other words. So that particular front will likely be more latent or more dormant, if I may, than others where we have more expertise, where we have higher capacity to identify through digital certification or document issues, our ability to have deep relationships with the National Financial System.

As I just mentioned, this new contract with Bradesco, a large bank. So throughout time, we see a gradual migration to other topics that have a higher fit with the company's know-how. And as for ENEM, the high school exam, we have been preparing some exams. ENEM, specifically this year, we were not involved. But we do other ministry of education exams. We do have contracts with them going on, and we still have deliverables to make in 2022 for those exams.

[Olavo Vaz, executive]

[Operator Instructions] Renato, we have a question from Alexandre. He asks about the main risks that we see for margin sustainability.

[Renato Tyszler, executive]

Alexandre, in terms of risks, I'd say the main risk which is increasingly seem to be mitigated is the risk that we had last year and in the first half of this year concerning lockdown, quarantine, pandemic. That's the main risk. Now considering that we have a high number of Brazilians already vaccinated and also considering that the economy is resuming pre-pandemic levels and also looking at other countries which are 3, 4 months ahead of us in terms of economic normalcy, we do believe that that risk is virtually very, very low, I'd say.

So that's the main risk. If you look at our results for the last 3 years, it was basically that. That affected our results for 2020 for bringing it down. Other aspects, for example, the shortage of semiconductor chips, that would be a risk if we hadn't worked to mitigate that risk before. So throughout 2021, throughout the whole year, ever since that topic came up, we have been talking with our suppliers. And I'd like to reinforce the importance of having a long-term relationship with our suppliers, and that's the case here. Our commercial team has been working hard with our suppliers. So when we project 2022, we see no relevant impact coming from that semiconductor chip shortage. So I wouldn't need to consider that a relevant risk for us right now. And also the lockdown issue, we -- apart from that, we see no other relevant risk. The other are normal operational risks, which we'll address during our everyday activities.

[Olavo Vaz, executive]

We have a question from Julia. Can you already anticipate the gains coming from operational synergies that we're going after now?

[Ivan Luiz dos Santos, executive]

Julia, the answer is, yes, we do have gains, which are more obvious, of course. Property tax, utility costs, security facilities, all of that can already be identified. Of course, the management overstretch is also linked to that. It wouldn't make sense for a company with such a nice site at Sorocaba wouldn't -- it didn't make sense to have 3 different sites that will be going back and forth. So that is also important. And also we can now follow the BP for CapEx, OpEx, the nonrecurring numbers for transfers and everything, and then we realize how much our BP is adherent to our deliverables. We have been perceiving that. São Bernardo results, as Renato mentioned, I encouraged us to do the same in Caju, Rio. And as I also mentioned, we continue to look at Brazil and other geographies, looking for other opportunities to optimize our assets so that we can bring those numbers down and transfer them to the company's net income and EBITDA figures.

[Olavo Vaz, executive]

Renato, question about that from Bruno. In 2021, you focused on Brazil. Now with higher tax -- higher rates in Brazil, can we expect something different by 2022 in terms of debt profile?

[Renato Tyszler, executive]

Thank you for the question, Bruno. The answer is yes. We see the increase in interest rates in Brazil, and the strategy that we used earlier in the year where, I repeat, we had a record low of interest rates in Brazil. Now with this change, now that we have this sharp increase in interest rates in Brazil, we start to revisit our strategy from the point of view of indebtedness. We are also revisiting the possibility of having a part of our debt abroad since interest rates abroad remained low, which is the opposite of what happened here. So we are reassessing that. And we'll use amortization that we have going forward in the second quarter of last year -- next year to be able to work on a new profile for that debt.

[Olavo Vaz, executive]

Ivan, a question from Carlos. We are now halfway through the fourth quarter. What can you tell us about the quarter? Is it still a recovery quarter?

[Ivan Luiz dos Santos, executive]

Carlos, just as I said in my opening remarks or closing remarks, we realize that EBITDA level between BRL 90 million and BRL 100 million can be considered as our future run rate. We realized that was possible because of the way we manage the company. When I look at the amount of documents issued on a monthly basis, the amount of cards we are issuing, VBS, international telco, we see that run rate being preserved. So we can deliver those same numbers going forward.

[Olavo Vaz, executive]

Ivan, a question from Alexandre. If you could talk about the company's strategy for smart cities.

[Ivan Luiz dos Santos, executive]

Thank you for your question as smart cities is also very important for the company. We have governmental relations on the one side. We have expertise in bidding processes and our ability to provide support to our clients in this case, public agencies, provide support in issuing documents, improve the relationship with citizens, also support and collecting property taxes, thus helping increase revenues and all those initiatives. And I think that would reflect on our results, of course.

On the one hand, we work with governments, we can also provide that solution to the private sector as well. So the idea now is to see how we can optimize that so that we can expand the access to those solutions. The idea is to also simplify those products. And then, of course, at the end of the day, we want those relationships to carry on. But that's very important for Valid's overall structure.

[Olavo Vaz, executive]

Another last question from Carlos. If we have an estimate of the impact of the sale of Caju on our balance sheet?

[Renato Tyszler, executive]

Okay. I wouldn't say those are very, very relevant. The first impact will come from the sale, of course, of the asset.

[Olavo Vaz, executive]

This was the last question. We can now move to the closing remarks.

[Ivan Luiz dos Santos, executive]

Thank you all for participating in our earnings call. Thank you for your questions. Olavo, Renato, all our managers and executives will remain available for questions or comments that you may have. I'd like to reinforce the confidence that we have and the pathway we have ahead of us. Thank you all, and have a nice day, everyone.

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