Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and at this time, we would like to welcome everyone to Valid's Fourth Quarter of 2018 Earnings Conference Call. Today with us, we have Mr. Carlos Affonso d’Albuquerque, CEO; and Ms. 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 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 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 also 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. Albuquerque, you may begin your conference.

[Carlos d’Albuquerque, executive]

Okay. Hello, everyone, and thank you for attending, once again this conference call to disclose Valid's results. So 2018 was marked by the upswing of Valid's traditional operations with revenue growing by around 10% and EBITDA by 24%. The company also reported growth in all regions in which we operate. In line with the increasing EBITDA, we also recovered the generation of net income and maintenance, the commitment to distribute at least 50% of this profit.

We also have good expectations regarding the New Avenues. 2018 was also the year in which some projects were put into practice such as traceability, agritech, [indiscernible] with [indiscernible] Valid Bio solutions for digital transformation of financial institutions and [indiscernible] and markets.

I believe it's worth noting that literally all of our traditional markets should report growth we are projecting for 2019. Based on these New Avenues, we have projected significant growth as for 2020, and much of this business experience will have reached higher relevance. Additionally, all revenue from these New Avenues refer to the solutions of services model.

All these avenues such as connectivity and embedded SIM are expected to occur later this year. Our solutions to this new business have a strong recurrence component. Consequently, the next few years, we will have -- we will see the company's revenue more than twice, a profile similar to Identification division, which is fully paid according to the service provided.

Specifically, regarding the Identification division, over the last few months, we have seen several discussions about government's reduction of red tape and more specifically, about a possible change in drivers' license renewal term and the definition of new element to issue the license. Thus, we understand that these discussions are still being considered, but Valid is aligned with the expected reduction of the red tape and ready to present efficient solutions and the maintenance of the division's profitability.

At the same time, the government initiatives to reduce red tape give us several opportunities for new business that had been on hold for a long time. We are tempted to these opportunities and we will keep you informed.

Another item that I would like to discuss with you is our management model, which should be based on a simplified management focus on each region where we operate.

Accordingly, our management is organized in 3 regions: Brazil, United States and rest of the world. Each region has a head person in-charge of the region as a whole. Only Brazil, where Identification is extremely relevant, we have dedicated a head. In the 3 regions, we have the Mobile and Means of Payment divisions. Only Brazil and the United States, we have the Identification division.

We defined strategies per region because we need to take into consideration the demand of each region. We use the local concept that means we are local in strategies to offer service and products, which is fully aligned with the demand of the region, and we are global regarding shared service and procurement.

We have 4 regional heads, 2 of whom in Brazil as well, 1 technology head in Brazil to address the new opportunities around [ NAPAT ], 2 corporate heads, HR and financial and me. We also have a clear vision about what has been planted in 2018, not only regarding the recovery of the operational efficiency but mainly results we expect to create in 2020.

Finally, I would like to say that we are very optimistic about 2019, despite a very challenged first quarter, although entirely aligned with our expectations. So again, thank you for your support. And now I'll now turn the call to Rita.

[Rita Carvalho, executive]

Thank you, Affonso. Hello, everyone. Thank you, all for participating in our conference call. Regarding 2018 results, in the last quarter, we had a net income of BRL 42 million, totaling BRL 100 million in the accumulated for the year. Net income of 2018 was positively affected in the amount of BRL 22 million due to the success in a lawsuit, which granted the company the right to adjust the balance sheet figures which had been imposed by a law from 1989 called Plano Verão, an economic plan, considered unconstitutional by the Brazilian Supreme Court, resulting in the possibility of offsetting tax paid in excess during that period.

During 2018, we had a negative impact of BRL 46 million in other operating income expenses where the main expenses were BRL 23 million with cost reduction projects, BRL 9 million related to the fair value on the acquisition of Fundamenture. And we also had expenses related to the issuance of debentures in Brazil in 2018 and also expenses related to Valid China and Valid Nigeria units, which were still preoperational. And also -- we also had the legal expenses from the lawsuit I just mentioned.

For 2019, the expectation is that this line will significantly reduce. So the net income of BRL 100 million is solid, sustainable and we are optimistic on growth in 2019.

Regarding cash, our objective for the year was to pursue the company's historically strong cash flow generation, which we achieved with a total of approximately BRL 201 million of operating cash generation in the accumulated for the year.

For this year, 2019, we will certainly continue with the focus on generating very strong cash flow. Throughout 2018, we invested almost BRL 76 million in CapEx, where BRL 43.5 million were spent on acquisition of equipment for the maintenance and extension of our traditional business. And BRL 32.2 million, we invested in acquisition and development of software, which were used not only in our traditional business but also to prepare us for the new business which we are calling the New Avenues, as Affonso just mentioned.

For 2019, what we are expecting is to invest BRL 117 million, where BRL 64 million will be invested on machinery and equipment, mainly for the renewal and maintenance of the contracts of the Identification Systems division in Brazil and also to implement the infrastructure related to the contract we won in the United States last year. We also will invest BRL 45 million on acquisition development of software and certification of platforms such as Agro, Valid Bio and subscription management, among other platforms.

In 2018, we paid approximately BRL 493 million to amortize debt and pay the interest. We raised BRL 439 million in new debt, where BRL 360 million was issued to debentures in Brazil with the objective of refinance the company's debt in the local market. And the rest, we used to refinance part of the debt allocated to -- in the balance sheet of our subsidiaries outside of Brazil.

We will not amortize any debt in real in Brazil in 2019. And outside of Brazil, we amortized $1.5 million of our debt at the beginning of 2019, and we still have $53.5 million maturing by the end of the year, of which $3.5 million will be paid with the company's cash and $50 million we are working to refinance. And our expectation is to have this matter solved by the beginning of the second quarter 2019.

Last year, we paid BRL 10.6 million in dividends accumulated to the results of 2019, and we also paid BRL 20.5 million in interest on equity related to 2018 results. So we ended the year with a cash position of approximately BRL 312 million and a net debt of 1.6x the accumulated EBITDA, representing significant deleverage in relation to the 1.9x EBITDA that we ended in 2017.

With the results that we are expecting for 2019, we are aiming for -- to have a net debt ratio close to 1.5x by the end of the year, which is the ratio that we understand as comfortable in terms of debt level for the company.

So finally, we are committed to distributing at least 50% of our net income, which -- in addition to our results in 2018 and the payments I just mentioned. We also paid net amount of BRL 37.4 million at the beginning of this year, totaling 55% payout ratio in relation to last year's results. So thank you very much, and we are now open to take your questions.

[Operator]

[Operator Instructions] And this will conclude our question-and-answer session. I'll turn the call back over to the company for final considerations.

[Carlos d’Albuquerque, executive]

So again, thank you very much for your support. And I think it is important to reinforce that we have expectation of growth for this year of 2019, and we strongly believe that we are very, very ready for this opportunity that we have in front of us. Again, thank you very much.

[Operator]

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