Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2022-Q3

[Olavo Vaz, executive]

Good morning, everyone, and welcome to Valid's Q3 2022 Earnings Webcast. My name is Olavo Vaz. I'm Head of Corporate Finance, and I'll be moderating this session. Before we begin the presentation, I'd like to make a few important remarks. We'd like to say that this event is being recorded [Operator Instructions]

This webcast is being made available with simultaneous translation into English, and the video will be available on Valid's website, and also here on the webcast platform. A replay of this event will be available right after its conclusion. At the end of our presentation, we'll have the floor open for questions. Questions may be asked at any point during the event, and must be submitted via the chat tool of the platform on the right-hand side of the screen.

We would also like to say that any statements made during this call with relation to the company's expectations, forecasts and financial and operating projections are based on assumptions of our management team as well as information currently available to the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions, since they refer to future events and therefore, rely on circumstances that may or may not come to pass.

Investors must understand that general economic conditions in the industry as well as other operating factors may affect the company's results and lead to earnings which are materially different than those expressed in such forward-looking statements.

I would now like to introduce the participants of our webcast of today. We have with us Ivan Murias, our CEO; and CFO our IRO, Renato Tyszler.

Now I'll turn the floor over to Ivan, and after that, we will open the floor for questions. Good morning, Ivan, you may please proceed.

[Ivan Luiz dos Santos, executive]

Thank you, Olavo, and good morning, everyone. I'd like to thank everyone for joining us. I hope you're all doing well. So during the first part, I'd like to go over the main points about our earnings results for Q3, 2022. We ended the quarter with BRL 667 million in revenue, the highest quarterly revenue on record for us, up 15% versus Q3, 2021, and BRL 135 million EBITDA, up 37% over Q3, 2021.

It's important to stress a very important aspect. Our year-to-date results in the first 3 quarters of 2022 exceeds the EBITDA result for the entire year 2021, which had been Valid's highest EBITDA value in all of its history. That in itself shows how consistently we have been generating results, and everything that we had anticipated to the market that Valid would be able to achieve exactly 1 year ago, as we released the earnings results for Q3 2021, as well as the efficiency instruments that we were able to introduce. That was only true because, in Valid, ID revenue grew 21% and our EBITDA 22%, coming to BRL 53 million during this quarter, a result of Valid's highest volume of documents.

In the year-to-date, our revenue grew 25% and our EBITDA 57% in this vertical. On the V-Pay vertical, even though the demand was weaker in Brazil, our revenue increased 21% because of higher value-added cards that we sold, as well as greater sales in Argentina, which led to an 80% higher EBITDA in Q3 and 120% higher in the year-to-date.

On the V-Mobile vertical, we increased 10% in revenue, and our EBITDA grew 9% in Q3, 2022, with an absolute EBITDA of BRL 34 million a result of a better mix of chips and better allocation across different locations, as well as the continued improvement of our operations. Even though the volume was lower than in 2022, our V-Mobile vertical increased its revenue in 16% and its EBITDA in 27%.

Now moving on to the fifth box, it's important to say that regulating agencies in the United States have just given a goal for us to move forward with our sales of assets in the United States, our ID and payment sectors, to a German company. Transaction, we expect to conclude later in November of this year. Once this transaction has concluded, the funds from this sale will be combined with the sales of our data assets in the United States as well as the capital increase we had in September.

Moving on to the sixth and last box as a result of all of these operational deliveries, in the first 3 quarters of 2022, we've already reported a BRL 334 million EBITDA, again, higher than what we had for the entire year 2021.

The sales of all those assets I mentioned before, will be fully devoted to improving Valid's capacity, which in 2 years has gone from 3.2x its net debt-to-EBITDA to 1.1x, which is where we expect to end 2022. That, combined with the strong operational efficiency for this year, the leverage we expect to have at the end of 2022 is the lowest on record for us in the last 10 years.

I will now turn the floor over to Renato, who will give you more details about our earnings in Q3 as well as our year-to-date results till September. After that, I'll come back to answer all of your questions. Renato, good morning.

[Renato Tyszler, executive]

Well first of all, good morning to everyone joining us in this earnings call. Well, all of this that Ivan summarized in 1 page led to the privileged position that Valid achieved since 2021. Today, our leverage is 1.1x and could potentially -- which could potentially go down in Q4 after we conclude the transaction in the United States and lower our net debt in about -- by about BRL 2 million. In a scenario of extremely high interest rates, we see the reduced net debt as a potential way to generate more profits with a lower debt service.

We have a cash position that's enough to honor all our obligations for 2023, not considering the funds from the transaction in the United States, with which we will settle much of that debt. It's important to say that 1 thing we focused over the last 24 months was in balancing our capital structure, lowering our leverage and allowing cash generation to monetize our investments, paying IOE, announcing repurchase operations, and more importantly, opening up the possibility for future M&As, which our current balance allows us to do. So in short, we are financially ready for the future.

Moving on to Slide 5, our Q3 was defined by a strong EBITDA by BRL 135 million because of the seasonal period for our international business. Q3 is usually weaker because of the lower volume in Mobile in the United States. In LTI, our EBITDA is already BRL 155 million. Our revenue grew 15% over Q3, 2021 and 14% versus year-to-date 2021. And our EBITDA went up 37% over Q3, 2021 and up 62% versus year-to-date 2021 with a positive impact across our businesses.

I'll go into more details in the next few slides, but we saw a higher volume of documents. We saw a strong result from card sales in Argentina as well as stable margins and profits in Mobile. I would also like to say that our 2.3% margin in Q3 goes to 23.8%, not considering the operations in the United States and reinforces our margins after this conclusion.

Now moving on to our business lines in Slide 6. Starting with Valid ID, we saw a record volume for this quarter with 7.4 million documents being issued. Bear in mind that this business includes portfolios, digital certification, digital parking lot, digital seals as well as other adjacent businesses. Our revenue increased 21% over the quarter and 25% in the year-to-date versus 2021 in this vertical, and our EBITDA, 22% in the quarter and 57% versus year-to-date 2021, much because of the lockdowns earlier last year.

There's also a seasonal period in Q3 because of the greater number of working days compared to other portfolios. However, Q4 has fewer working days, considering that this year we will also have the World Cup, which will negatively affect that number of working days compared to Q3. Even -- despite of that, we continue to sustain strong performance.

In the next slide, we talk about the pay unit whose result was lower than in 2021, but with significant gains in EBITDA, much because of our operations in Argentina, which brought a strong volume and prices going back to healthy levels. In addition to that, we also saw gains in Brazil because of the operational efficiency we've been talking about over the last few quarters. Revenue went up 21% over the quarter and 16% in the year-to-date.

EBITDA in turn was up 87% in the quarter and 120% of the year-to-date. As I said, most of this growth compared to 2021 comes from Argentina, which during this period last year was showing very low, even negative results in a few periods.

Last but not least, our Mobile unit on Slide 8. Here, we had another solid quarter of earnings with our revenue growing 10% over the quarter and 16% in the year-to-date versus 2021. Our EBITDA went up 9% over the quarter and 27% in the year-to-date versus 2021. Volumes were lower than in 2021 because of the shortage of semiconductors worldwide, which pressures the supply in the market and allows us to pass along cost increases to consumers as well as increasing our portfolio in other regions.

It's important to say that Q3 also had an impact in earlier purchases by operators, which wanted to secure the volume for the end of the year. This tends to affect the volume in Q3 and the EBITDA for this business unit as well. And in 2023, we are beginning to see the shortage of chips be mitigated, which will bring on the one hand greater availability of volumes, but also a pressure on prices for this region. We are monitoring this on a day-to-day basis with our team in anticipation of what's to come next year.

Moving on to Slide 9. It's important to separate our net profit from everything that's one-off. We had a very significant impact because of the higher EBITDA compared to the first 9 months of 2021, all of that coming from recurring revenue. However, we had 2 items that draw us back, the first 1 being our intercompany loans in Spain which created a negative pressure in -- earlier in the year.

Once we conclude the operations in the United States, we will settle that intercompany loan, and therefore, this will no longer be a recurring expense. And also, we have the funds from the sale in the United States, which will also be a one-off revenue and will not continue to affect us. So we would have BRL 900 million as a result at the end of the year, which will be very positive for the company.

And in net profit on Slide 10, we can see the increment in our operational cash position of BRL 127 million, including the net finances which are recurring. We generated BRL 100 million before the capital structure. That, and also the fact that our cash position is very comfortable, we decided to lower our debt by paying BRL 71 million over these 9 first months of 2022.

And as I said in the first slide that I presented, we will also lower the debt even more until the end of 2022 by pre-paying the eighth installment, including the funds from the sale in the United States, that not including our comfortable position.

Moving on to Slide 11. We have 3 items listed. One is the raising of EUR 4.2 million in Spain. The second is, we concluded the purchase of 10% of our minority share in Vsoft. This is something that we had already talked about in previous calls. And lastly, the excellent news, as also mentioned before, that the regulating agency in the United States, which was overseas, the sale of our assets in that country, which granted us approval.

With that, I conclude my participation and turn the conference back to Ivan so that he can give his final remarks about this quarter.

[Ivan Luiz dos Santos, executive]

Thank you, Renato. Well everyone, before I move on to the question-and-answer session, I'd like to stress 2 very important messages to you. The first one has to do with our deliveries in 2022. This is the fifth consecutive quarter that we delivered strong and consistent EBITDA and revenue results.

We see a higher top line and even stronger growth in our EBITDA because we see the company structurally more prepared to structurally leverage its core operations and as a result, of the effective introduction of an efficient management operation as well as an efficient commercial operation.

On V-Mobile, even though our 9-month result was really strong, close to what we had in 2021 as a whole, it's important to warn you that we are still cautious about the global shock and semiconductors, especially in the telecommunications industry. And lastly, excluding the United States, which is how we will begin to look at the company starting in 2023, our quarterly EBITDA has come to about 23%, and our year-to-date margin has exceeded 24%.

The second point is our capital structure. We take a lot of pride in having worked so hard on our capital structure for the last 2 years because -- precisely at the time where the environment in Brazil comes to the peak of its monetary tightening cycle. We hear Valid are running in the opposite direction and expect to deliver the lowest leverage rate in the last 10 years this year.

This was because of the discipline that this administration adopted in the last 3 years and will allow the company to stand in a very privileged position, and starting in 2023, we will translate all this turnaround and earnings per share, seeing as expenses, and debt amortization will decline significantly in the next fiscal year.

Lastly, before turning the conference back to Olavo, I'd like to thank and congratulate Valid's team. Everything that we were able to report during this call is a result of everyone's efforts in our different businesses and different locations. I'd like to thank -- to personally thank everyone of you as -- with the entire team.

With that, myself, Olavo and the rest of the team are available for any question, or anything you guys would like more details on. Olavo, you have the floor.

[Olavo Vaz, executive]

Well, everyone, your questions must be submitted using the platform's chat. I will start to organize them. And next, we will start by reading the first one, if you can give me just a couple of seconds. Well, Renato we will start with Fabio's question.

He says great job on the results. I have 2 questions. First of all, without giving us any guidance, could you please tell us what do you expect for Q4 '22 and Q1 '23? And second question looking at the profit for the end of 2022 in this fiscal year, will we see any vesting of shares?

[Renato Tyszler, executive]

Fabio, well, starting with the guidance issue. Of course, we cannot provide any guidance in our calls, but if you've noticed over the course of my presentation, I gave you a little bit of color about, especially Q4. So when we look at our operations, historically, if you consider the operations in the United States in the U.S., we usually have a Q4 and Q1 very weak and Q2 and Q3, they're very strong.

So if we had the U.S. results with us, that would be the case. But also, our mobile business also has a stronger seasonal period in Q2 and Q3. And this year, specifically, we also had what I mentioned during the presentation, which was, there were purchases made earlier in Q3, which is why our volume in Q3 was a bit lower. That, combined with the semiconductor shortage, leads us to the lower volumes. And what we brought to Q3 -- to Q2, we were not able to trade in Q3.

Now also with regard to Q4, we have the issue of fewer working days. Q4 traditionally has fewer working days. But this year, we, on the one hand, have the holidays on the weekend, but we also have the World Cup with the matches taking place during the week, which also means people leave the house less often to deal with their documents. So these are issues that may affect Q3 with some seasonal effect compared to Q3.

With regard to Q1, 2023, we will continue to see strong daily volumes in identification. And also on the cards business, we will see figures going up more strongly later this year and early next year. And on Mobile, we also expect to have a strong Q1 in volume, but still within the limitations of the semiconductor shortage and also with a strong leverage precisely because of that shortage.

Starting in Q2 next year, we are beginning to see a relief in that chip shortage. If that turns out to be true, we will have the impact of greater availability, but also both cost and margins could be lower to be narrower. So we will have more clarity about all of these impacts over the course of Q1 of next year. So in a way, this is what we can expect and what I can tell you in a more generic way without providing any guidance.

From the distribution standpoint, just to remind you, this January, we paid BRL 23 million for the IOE payment that we had for 2021. And next year, if we can pay via net profit or via our reserves, we will also communicate the market, if that's the case -- by December of this year, with payment taking place early next year.

That's a possibility. And another possibility, as I said, over the course of the presentation, we may return to our shareholders via repurchase operations that would be an indirect way to compensate our shareholders. So yes, if we have the opportunity from a balance sheet standpoint, we will also have that compensation in a similar way as we had in January of this year.

[Olavo Vaz, executive]

[Operator Instructions] Our next question also comes from Fabio. And I'll ask this one to Ivan. He asks, could you please tell us how is the eSIM consolidation? And how does Valid versus telecom operators versus device manufacturers?

[Ivan Luiz dos Santos, executive]

So, the pace of transition is slightly slower than we have predicted a year ago, especially because of the global supply shock in the semiconductor business. So it makes no sense because of the shortage, add a chip to a device that will not be activated because the market is not adapted yet. MNOs are not adopted yet.

However, more recently, we are starting to see good signs in that sense, both in terms of the adoption of devices that are already adapted to eSIM and also other things in the United States. So with these chips, we are already seeing Brazilians purchasing devices outside of Brazil and coming back to enable their eSIMs. This journey is now starting to be created by domestic telecom operators.

So looking at that internally, our V-Mobile team is not only paying attention to that, but prepared to remain relevant in that transition, which is to say we have, for a while, been building a strong relationship with those OMs, selling physical chips to these manufacturers. However, we are transitioning in our relationship with MOS, which will no longer be based on physical chips, but now focused on the creation of orchestration platforms, which we are already selling to some of our clients.

So when we look at the medium to long-term, we plan to continue selling physical chips, but also adding to that volume, the orchestration of platforms, which is a more technological business, so with lower volume, but a wider margin. And those 2 revenues combined will allow us not only diversification, but also continued relevance within this business.

[Olavo Vaz, executive]

So Renato, the next question comes from Alexander.

Congratulations for the great cash generation. Could you assess the market in terms of competition and potential M&A opportunities?

[Renato Tyszler, executive]

Well, Alexander, we have been looking very closely at the market on our core business industries. And we are looking at opportunities to acquire companies that would complement both, our ID business as well as our Pay and Mobile businesses. So we just announced the conclusion of the minority acquisition of 10% of Valid Soft that's already completed.

And we will, in partnership with Vsoft, developing solutions to grow the company and also increasing our share of the market. And just as Vsoft, we have been looking at several companies in these 3 business verticals to see what would make sense for us from the business standpoint. I think this is something that you are seeing and the market is seeing, which is we have greater cash generation for acquisitions.

And this, in a way, tends to help us balance the prices for these acquisitions. We had in 2021 and early 2022 significant adjustments in pricing, which reflects how the market is doing I believe that this correction is coming precisely at a time when Valid is prepared from the standpoint of leveraging its balance sheet to make further progress in terms of looking at M&As, but now at a much more reasonable prices.

So we are still looking at that. We have Valid ventures, which we announced during our event in June. We are still looking at that and several others, but now in a much more favorable market from a pricing standpoint. So we see that as very positive.

[Olavo Vaz, executive]

So let's move on to the next question. It comes from [ Eduardo Roche ]. Congratulations on the result. My question is about revenues moving forward. You were able to recover your EBITDA margins to about 20% plus. This is also an interesting increase by 15%. How do you see your margins developing moving forward? Can you expand it even more and in revenue? Can we accelerate growth?

[Ivan Luiz dos Santos, executive]

I think that on the revenue side, absolutely, we can continue to accelerate our revenue growth. We have -- especially in the ID vertical, which is a business that you are looking very closely here, we have the national ID and driver's license, and we have the agency changing the expiration date for these driver's licenses. And at the same time, we also have in the ID vertical, the regional register, another Brazilian ID.

So we will see the beginning of the polycarbonate cards being issued, and that will also affect our average price, and at the same time, touch the value pool of this vertical in general. I think in the other verticals, we are seeing the same trend as what we have been presenting here. So our team has been paying close attention in terms of looking at our clients in different locations, both in terms of higher added value products being added to locations and clients that we are working with, for longer, as well as internally on operational efficiency.

I think what we're seeing now in the United States will only help because it goes via measurement, and we are still focusing on all 3 verticals much more closely than we had over the last few years. So there is a real possibility that we will not only continue to grow our top line, but also sustaining the healthy margins and profit levels that we've had in the last few quarters.

[Olavo Vaz, executive]

Next question comes from Patrick. He says, could you comment a little bit more about your cash cycle this quarter in terms of suppliers and clients?

[Renato Tyszler, executive]

Yes, absolutely. What we've done over the last few quarters since mid-last year is we are progressing on how we see the business from all of these perspectives. So we are now moving forward to look at our ROE and ROIC and also that from the perspective of how much we can convert our EBITDA into cash.

So when we start looking at the ROIC, naturally, we have to look at our suppliers, our inventories, our receivables. All of that helps us to improve our cash cycles. From the receivable standpoint, for example, we are now working on a short leash from the standpoint of any delays, and we are trying to avoid any type of accumulation.

So this has been a successful strategy. And actually, in the last 12 months, we have seen substantial and material sums as we've disclosed with high aging. And after a lot of negotiations, we were able to internalize. So this was very positive, and we also expect to recover the last [ PDDs ] that we had.

From an inventory standpoint, there's also an issue where we accumulated more semiconductors in our inventory, even anticipating ourselves to what we're already hearing that there will be -- would be a shortage of chips. So we increased our stocks so that we wouldn't be affected by that shortage because what we price is to be able to serve our clients with the highest service level. That's a basic platform that we work with.

So to avoid any disruption in supply, we chose to start the year with high inventories. But now moving to the end of the year, we expect to see those supplies go down significantly. And also what we are working day in, day out on, is to have better negotiations so that our cash cycle is increasingly healthier.

We will continue to pursue this strategy. We are moving further and further across the organization to look at the ROIC and cash generation, because ultimately, that is what will bring down our leverage ratio and will allow us to have a healthy balance sheet and enough cash to take the next steps and grow even more.

[Olavo Vaz, executive]

Ivan, the next question comes from Victor. He says, which of the 3 business units are expected to grow the most in the next few quarters? And what is the company's biggest bet?

[Ivan Luiz dos Santos, executive]

I think that over the course of the last 5 quarters, we have told them -- have reported EBITDAs of over BRL 100 million. More recently, that EBITDA has stabilized in a much higher level, around BRL 100 billion and up, and that is the result of a significant effort in the company's transformation. I talked about opening. This is a transformational power that's very intense -- that was very intense over the last 24 years.

And when you are changing at this space, it's natural to see a few factors for the company to reorganize and use a few tools to continue growing. That being said, when we look at our 3 verticals, we believe that V-Mobile and V-Pay are already at extremely high levels already, especially because of that shortage. We -- at the same time, as our volumes went down. Prices saw significant increments.

And we had to maneuver that in our GPOs and [ SNOPE ] processes internally, dealing with the lower volume, but also seeing prices that were going up. So it's a slower or a less intense space because we will depend on this chip shortage, and we'll have to see how prices will behave now that the volumes will be larger.

On the other hand, I think, the logic is the same of my answer to -- this year we expect to see higher growth in CNH, the driver's license, and also in substrates with a higher average price. So I think that V-ID shows a short to medium-term prospect that's a bit brighter. And V-Mob and V-Pay, there's a trend that we still have to better understand as we look at the volumes and prices and how that develops over the next few quarters.

[Olavo Vaz, executive]

Renato, next question comes from Thales. If you could make it clear, the potential net debt at the end of the year with the funds coming in from the transaction in the United States would be just over BRL 300 million?

[Renato Tyszler, executive]

Yes, Thales, you're right. We estimate something between BRL 300 million and BRL 400 million. That seems very reasonable, yes.

[Olavo Vaz, executive]

Thales also asked another question, which was what, are the digital initiatives growing the most in the company currently?

[Ivan Luiz dos Santos, executive]

Thales, I think there are 2 important verticals in this case. The V-ID vertical, as Renato said, just a few minutes ago, we had that investment in Vsoft. We have VHub, which is our contract or real estate sale contract manager and that, combined with our corporate venture capital. So the V-ID and businesses that are close to the government are businesses that make use of the company's internal capabilities and where we have greater potency and abilities.

On the other hand, as I said before, to eSIM is also a digital transformation. So we are turning a business that was essentially based on chip physical chip sales to the management of a change in platform. So both in the V-ID and in the V-Mobile vertical, there are significant digital changes, and these are part of the results that we are already reporting. And also, we expect to see those margins improve over time.

[Olavo Vaz, executive]

So our last question comes from Alexander. He says would you consider a goal to expand internationally, especially in Latin America?

[Ivan Luiz dos Santos, executive]

Well, again, there are 2 ways of answering your question. In V-Mobile, we already have operations, not only in Latin America -- but on a global scale. We serve OEMs across all 5 continents, especially in Latin America, several of them in the Caribbean, Mexico, the South American Caribbean and also South America. So we already have those operations, which are still strong and significant within our business.

On the V-Pay vertical, we already provide a few identification and card systems to a few Latin American countries, such as Argentina and Colombia. On the V-ID vertical, I don't know if your question had that bias as well. But I think it's important to mention, because we have a significant mastery of government contracts in Brazilian states, and that's something that's difficult to replicate in other locations.

But at the same time, there is a lot of opportunity that we could -- a lot of opportunities we could explore in Brazil. So V-Mob and V-Pay, I think we could explore the possibilities that we already have on the table and where we can still grow. And in the V-ID vertical, I don't see anything in the near term to -- in terms of expanding our operations to other countries.

[Olavo Vaz, executive]

So Ivan, Renato and shareholders that have joined us, thank you so much for being with us. We will remain available to you via our IR channels and all of this material will be made available on our website over the course of today. Thank you so much, and we'll see you next quarter.

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