Valid Solucoes SA

BOVESPA:VLID3

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, everyone. We'll start the video conference of Valid to discuss results for core quarter 2020. This event is also being sent through webcast here today, you have with us Ivan Luiz, CEO; and Joel Renno Junior, CFO and IRO.

Before starting, I'd like to make the following important announcements. This event is being recorded and being simultaneously translated. And the slide deck will be available at the website for our Investor Relations and also at the webcast platform. [Operator Instructions]

Forward-looking statements made during this webcast concerning the company's business outlook, financial and operating targets and financials are based on beliefs and assumptions on the part of our management team and also on currently available information. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events that may or may not materialize. Investors should have in mind that general economic conditions, industry conditions and other operating factors can also affect the future results of the company and does lead to results that will differ considerably from those expressed in these forward-looking statements.

I'd like now to turn the conference over to Ivan for his opening remarks. At the end of the webcast, will have a Q&A session. Ivan, you have the floor.

[Ivan Luiz dos Santos, executive]

Thank you, Matios. Good morning, everyone. I hope you are all safe and well. And also thank you for being part of our audio conference to discuss our results for the fourth quarter. As we've seen before in the past earnings calls. 2020 was marked not only by different business dynamics. But of course, by the way we manage the effect of the pandemic on their businesses effects, which were not known to us before.

Myself and the whole executive team would like to thank -- on behalf of the company to thank our HR team, our [indiscernible] team, our operations for the care -- our over 5,000 employees throughout the world control measures, monitoring measures. Thank you all. It was only through the work of those professionals that we were able to keep our businesses going, and at the same time, preserving value for our shareholders.

The business outlooks were marked by a few items in 2020. And then I'd like to go over the main events. The legal event, the President approved the law, changing the Brazilian transit code, extending the term for the new drivers' license. This will be affected in April 2021.

As we mentioned in our third quarter call, the annualized impact will only emerge starting in 2026. We have been receiving several questions about that, and it's worth mentioning that the operation of identification in Brazil has the variable cost structure, which has to do with a volume of document issuance. And so it will gradually adjust it throughout 5 years. Only in 5 years, it will be adjusted as per the new law. In the short run, however, the management expects a reverse dynamic in other words, an increase in new -- in issuancy once you have vaccination rolled out. In 2020, both for HR and drivers' license and IDS, the volumes were about 50% of what we had in a normal year. It's also important to emphasize the changing term in deadline only applies 2 drivers with up to 50 years old. 5 years to renew among drivers who are 50 and 60 years old and reducing the deadline to 3 years if you are over 70.

Analyzing the different cohorts, the Brazilian population of drivers who is above 50%, now accounts for 35% of the base. Typically, the penetration of drivers' license among those people increased by 10 percentage points in the past 10 years, given the higher life expectancy or part of population and better quality of life for those age brackets.

Throughout the history of Valid on most CEOs and executives got where they were after trying an internal pathway. Now we decided to innovate also in the way we appoint our leadership looking out for market professionals. So myself, Joel Renno Junior, who is here with me and Daniela Belisario joined the company. In that context, we are quite excited with this opportunity, but we are sure that along with the qualified profession that we found here, and in combination, we'll be able to pave the way for the company going forward. We strongly believe in this strong combination of different professional backgrounds and repertoires, along with the experience of those already know the asset.

And it's been around for longer we'll be able to overcome the challenges that lie ahead. This new team intends to rescue the company's market value and prepare it for a digital transformation and a higher cost efficiency generating, thus, more value to our shareholders. We've already started on that path. For example, by closing our corporate office in Rio and the announcement of the transfer of our productions, which happened in Sao Bernardo to compare to our larger plant in Sorocaba in the state of São Paulo. As a consequence, we reduced fixed cost, and we also sold our plant in Sao Bernardo.

As for the year's dynamic, on top of the change in the management makeup, we also accelerated the company's digital transformation through the use of new platforms. Digital ID in São Paulo, the acquisitions Estacionamento Digital and Mitra, which will strengthen our front on smart cities. To make our cash flow more clear, and also to provide a better guidance for those digital initiatives, we hired bank who helped us in our strategic planning and reassessing the assets that the company already had. Trying to find and identifying synergies across the different areas where we operate in different locations as well. Also, the idea is to point to new businesses that make sense, and also those who no longer make some sense in our service portfolio.

We are now in the final phase of that work, and we'll close that on our Capital Markets Day in April. We'll announce that very soon, and where we have more details around those initiatives. Lastly, we also announced early in January, a capital increase move after the [indiscernible] phase on March 5, we raised BRL 99 million, 75% of delivers from our share base, which was a strong sign of confidence from the shareholders. Those resources will be allocated to strengthening our capital structure and improvement in our cash position reduction in the company's consolidated leverage and other corporate purposes.

Also to work on the profile of our short-term debt, we have put together our debtors under a syndicate. As we move ahead, we'll forward we will communicate the market about that. Once again, thank you very much for participating, and I'll give the floor over to Joel, who will go into the details about our financial numbers.

[Joel Renno Junior, executive]

Thank you, everyone. Good morning or good afternoon, everyone. It is a pleasure to be with you here today. As for our financial numbers, we reached in the fourth quarter of this year. 2020 rather total net revenues of BRL 538 million. This was the second quarter in a row, the strongest in terms of net sales since the first quarter of 2019, which goes to show the good strong recovery of our businesses. In the year, we reached a net revenue of BRL 1.9 billion, a drop of 3.5% vis-à-vis the same period of 2019.

That's an interesting piece of data because on a relative basis, in other words, when we compare our performance in terms of sales, 2020 compared to other businesses which were highly impacted by the pandemic, we see that we were able to recover businesses fast even during 2020, which also shows the very good performance of our businesses. Some lines were not so directly affected by the COVID-19 situation.

You can see here on this slide, on the right-hand side of the slide, we see the evolution of our document issuance, our ID areas, something close to 20% of our total revenues for that year, and something close to 50% of our total EBIT. From the bottom of the crisis in April through the last month of the year in December, we saw an increase of 12fold, an expressive growth. Once again, that emphasizes my argument that we've seen a level of recovery, which was quite strong, albeit gradual of our operations.

Another important data point is that our payment means business, as you can see here, based on the revenue mix, the green bar is performing really well, actually expanding quarter-on-quarter.

Next slide, please. In terms of economic results, financial results in 2020 in the fourth quarter in 2020, we reached a total EBITDA of BRL 15 million, which accounts or which represents a drop of 37.5% when compared the adjusted EBITDA for the fourth quarter 2019. In terms of full year, in 2020, we reached a total EBITDA of BRL 202 million, a drop of 34.5% when compared to 2019. It is important to emphasize here that, that number, that EBITDA level for 2020, not only for the fourth quarter, but throughout the year, had an extraordinary event, nonrecurring or nonspecific cash effect of BRL 19 million. But throughout 2020, we cleaned out our cash. That cleaning service led to impairments, accounting write-offs. And so all those nonrecurring extraordinary effect with noncash effects totaled something close to BRL 170 million. BRL 170 million. So from a more organized point of view as we have cleaned our slate, our normalized EBITDA for 2020 would come around BRL 372 million. EUR 372 million, which would represent something close to a positive 20% when compared to 2019.

Of course, I cannot look at the past all the time, but it's important to have a guidance for the future based on those numbers. So today, as we understand here, looking forward, except for usual isolated adjustments, which are also normal, those impairments, those extraordinary one-off events, which are nonrecurring, will no longer negatively impact our operating performance starting in 2021.

So that's how we understand that picture. That's what we agree on based on our confidence that we are starting from a clean slate now. Our focus now is looking ahead, growing the company.

Next slide, please. As I mentioned, 2020, our EBIT suffered from nonrecurring one-off events. And as a consequence, during 2020, for the fiscal year, we saw a net loss of BRL 201.6 million. In addition, it is also important to mention a few other relevant factors. You can see here on the slide that from 2019, when compared to 2020, we tripled nonoperational revenues that is coming from the foreign exchange variation, which had a positive impact when we compare both years, '19 and '20. Across the other lines, we see a relatively flat variation when we compare 2019 with 2020. The main difference, the main gap is our starting point in '19. We start from an EBITDA of BRL 309 million. And in 2020, our starting point is EUR 219 million. Once again, as I just mentioned, if we could exclude the one-off effects we had in 2020, that number would be sitting at around BRL 370 million.

On the next slide, please in the fourth quarter of 2020, we also had a cash -- operating cash generation at EUR 144.8 million in the fourth quarter of 2019. That number set at BRL 94.4 million. So a sharp increase of 53%, even though 2020 was a year, again, as it was said before by Ivan, where we had several different challenges for the company still, we totaled 2020, an operating cash generation of BRL 294 million as opposed to BRL 299 million in 2019, which accounts for an increase of something close to 15%.

The company saw a substantial increase in its cash management, especially around working capital. And that, of course, is driven by initiatives which were put in place by the whole company by the management irrespective to efficiency gains, specifically, also in accounts receivable, renegotiation of average receiving terms, the extension of average payment terms that has really benefited our working capital dynamics, and also a much more efficient management of our inventory.

So those actions, when combined, led us to a relevant gain, as I mentioned, just now in terms of operating cash generation. Also important to mention about this line has to do with targets. In 2020, we had BRL 128 million in new investments and CapEx. That's a very relevant data point that exceeds the total CapEx we had in 2019, which was BRL 115 million. So that's something we did on purpose, strategic decision as we invest or invested with a lot of discipline in our current businesses, our existing revenue streams, but also as we pave the way for new growth avenues going forward.

We closed the year with a cash position of BRL 543 million, BRL 225 million above our end cash position in 2019. And that number does not contemplate the recent funding, which was mentioned by Ivan, that happened just now in March.

Next slide, if you will. In terms of the debt profile, it is a priority for the company. My -- and specifically for the whole company, it's a priority that we have. The level of debt, we reached the end of 2020 with a net revenue of BRL 647 million. That net debt does not take into account our capital increase. In other words, that cash of BRL 544 million, which you can see on the slide. Today, after the capital increase, it is closer to BRL 600 million.

So consequently, one of our most important financial covenants, the net debt EBITDA ratio dropped from [ 3.2 ] to something close to [ 3 ]. In light of our capital increase, as I mentioned, that's an important data point as well and provides us with some comfort level. Not only in terms of the fact that we were successful in our capital raising, but that the company's cash generation was also at a good level. And also it proves that we are recovering our performance level across our revenue streams, and we are fully capable of meeting our financial obligations with our creditors.

Next one, please, next slide. Subsequent event, a brief summary of what we talked about, capital increase, it was successful around in March. We brought into the company's cash, BRL 99 million in new funds. It's important to emphasize 2 things. Number one, our institutional shareholders, which are more relevant, 7 of them participated very actively in this capital increase. That's an interesting piece of data as well. Another important form information is that our capital increase -- you will remember that there was -- we issued share together with a underwriting bonus. They are already being negotiated at the VLID11, that's the ticker. Those bonuses will be able to be converted into company shares in March and in September of next year. In other words, assuming the company's sharp share price in March and September of next year be above BRL 10.96. We will automatically have the raising of BRL 120 million in the company's cash because of a capital increase, which has already been implemented.

So when we add up those BRL 99 million with the expectation that if we have a good performance in our share price above BRL 10.96, we will have an increase of around BRL 218 million. So for 2022, we will be bringing into the game, another BRL 118.8 million. As I mentioned before, our priority today is to renegotiate our debt or restructuring that we are in advanced phase of negotiations with our creditor pool.

We have been successful in renegotiating and expanding rather the debt we have with [indiscernible] Bank at BRL 30 million total amount. That's what I had as my opening comments with all of you. Ladies and gentlemen, I'd like now to start and open the mic for our Q&A. Thank you all for participating so far.

[Ivan Luiz dos Santos, executive]

The first question from Petro [ Salobo ].

He asks about our performance in the first quarter, and how our business is being affected by the second wave of the pandemic, the new restrictions, lockdowns, how do we see 2021 going forward in terms of revenues?

Pedro, once again, thank you for your question. I think right now, we have different types of dynamics across our 3 main businesses. In terms of our ID, as it was mentioned, we had been improving gradually on an uptrend. January was better than December, February was better than January. And now in March, out of our 12 operations, we have 4, which are shutdown, São Paulo Rio, Paraná and Rio Grande du Sul. And the remaining 8 are partially operating or working remotely. And this will certainly impact our numbers for March. And the consolidated numbers for Q1 for ID, will be below the numbers we posted last year in the first quarter.

On the other hand, for bank cards, we have expressive amounts, which are offsetting somewhat the loss we are seeing in ID in the first quarter, especially because of our traditional banks, banks which are closing down branches, and they are changing, moving clients around across different branches. And we see an incredible growth of fintech. So bank cards has seen growth of around 40% -- 50% month-over-month.

The same goes for SIM cards. We see a marginal growth in volume and also an increase in average price because of an important shortage of silicon, which has led some of the players who have inventories, which are our case, we are able to at the price increase on, thus improving our sales mix. Going back to ID, knowing the curves for 2020, we expect to have Q2 under a higher pressure. April, May, it's difficult to make a forecast after that. But unlike an airline where they lose their seats, our amount of volumes of drivers less. They need to be issued because they are maturing. They're expiring. So most of those 50%, which were not issued in 2020, we expect to see them being issued in 2021. So we may have a second half of the year at a faster growth base, especially when compared to the end of last year.

We cannot now give a precise forecast, but we do believe that ID will recover in the second half of this year.

I was muted I apologize. Gabriel [ Covelo ]. Our shareholder, thank you for your question.

The question is the following. About the impairment we posted last year. Concerning our American operations and Gabriel asked the following. Was there a reversal? Or is there a chance of reversal of any other kind of future adjustment whether the company was conservative, where are you going along those lines?

Gabriel, we were extremely conservative. I'd say realistic/conservative. We had do write-off. There was -- there's going to be no leftover from that accounting write-off, in what concerns our American operations for 2021 going forward. The amount [indiscernible] was BRL 135 million. The was written off -- were written off. That, of course, impacted the company's EBITDA significantly in 2020. But that, as I said, was necessary to be done.

But that won't leave any -- in other words, we won't revisit that. That's past, past quarters. And once again, this was part of our work as we are trying to start on a clean play. As for them, it's not the bank. Bank is a strategic partner. It's not under their scope to address their impairment. They help us along 2 different fronts, which are providing support to our current existing revenue streams and helping us to better position ourselves to extract even higher value from the existing revenue streams and also providing support to new businesses in future revenue streams. In other words, new growth line so that we can unlock value and capture that value in the coming years.

Next question from Gustavo [ Baos ]. Thank you, Gustavo, an investor in the company. He asks about the mobile revenue that has increased. But if we consider the 30% foreign exchange detail, the volumes decrease.

You are correct, the volumes dropped by 30%. And thank you for your question, by the way. But that's an operation is totally pegged to the U.S. dollars. So our revenues are also in U.S. dollars. So even though we had a drop in volumes sold, the foreign exchange rate in this period. The foreign exchange rate was highly appreciated. So -- or significantly appreciated, that made a difference.

Next question, Luca [ Marchesini ] from Itaú BBA.

[Unknown Analyst]

My question has to do with mobile. We saw a significant increase in EBITDA margin in the fourth quarter. Now if we look forward, is there room to expand that margin even further?

[Ivan Luiz dos Santos, executive]

The answer is yes. We have been focusing on operating efficiency on productivity. We have already executed a series of initiatives along those lines. And we expect to increasingly work around operational and financial excellence. And if everything goes well, we'll expand that margin even further than we did in 2020, around our mobile businesses, as the question must be retaining to.

[Operator]

We have a question from [ Guilerme Passarela ].

[Unknown Analyst]

Hello, what is the expectation for 2021, considering the work provided by [indiscernible], any change for digital services in the horizon?

[Ivan Luiz dos Santos, executive]

Thanks for your question, Guilerme. As we see it, no investment made in the company's digital track was wrong or badly positioned. We have a very important work going forward to implement a more agile, cultural -- and digital culture. And that implies conducting rigorous quarterly assessments and then change course at a more expedited pace, more strategic and to do that, we need to empower our team to be monitoring that. So as a whole, we shouldn't change our track. But as we develop those digital pathways, we will have to make choices in terms of where to concentrate our investments and concentrate those on the more promising ones. And that would be the main change in the company's culture, but not investments per se. It's rather more in digital culture.

[Operator]

Next question from our shareholders, [ Joan Santos. ]

[Unknown Shareholder]

Could you please comment on investments made by the company in the fourth quarter 2020?

[Ivan Luiz dos Santos, executive]

Well, in the fourth quarter of 2020, Joan, investments were basically made on the usual business to impart more operating efficiency on our businesses. As I mentioned during the presentation, 2020 was marked by an increase in our total CapEx, which reached BRL 128 million, vis-à-vis BRL 114 million in 2019. In addition to investing in our existing businesses, we are now also starting gradually to sow the seeds of what we expect to become our future revenue lines or streams for Valid in the future.

[Operator]

A question from [ Banesa Folia], a shareholder.

[Unknown Shareholder]

My follow on. Any potential acquisitions in your radar? What are you doing to go back to a profitable level? When do you expect the company to resume profit levels seen in 2015?

[Joel Renno Junior, executive]

I'll start, Banesa. Thank you for your question and for participating in our call. The follow-on money is not earmarked. It's an important data point. So the answer to your question is if we can use the follow-on resources to establish smart partnerships and invest in new business lines, and maybe make one-off acquisitions. As mentioned, the capital increase reached BRL 99 million. And assuming a good performance of our shares this year. Next year in March and September, we may have an increase of another BRL 150 million else. What we are doing to resume profitable levels, Banessa, is the result of a combination of initiatives. Ivan did mention some of those or several of those initiatives. Ivan, would you like to jump in and recap what you said or add to what you said?

[Ivan Luiz dos Santos, executive]

No. That's what I was saying. I agree with him. We have a concentrated efforts on the company's core assets. We have a good idea of what's going with the ID business vis-à-vis the pandemic. We expect that as vaccination advances, we have to be ready to deal with the higher demand that we'll see in terms of issuance. And at the same time, we are accelerating our digital initiatives. The implementation of the digital culture, as I said, the transformation of the company to be more expedited in terms of digital portfolio, will take us back to a more profitable level sooner than later.

[indiscernible] asks, is there a possibility of expanding digital parking lot for 2021, 2022?

The answer is very likely, no. We will concentrate on the Brazilian assets right now, which is our main asset. The digital parking lot still has a good pipeline to be explored in Brazil. And as to other geographies, we're going to analyze each one of the regions P&L scenario. And for those regions where the distraction for the management is -- and disconnected with the cost of profitability, our decision would be to leave those geographies and concentrate our efforts here on Brazil. So it's a very intense expansion dynamics within Brazilian cities for 2021, 2022.

One question before going back to [indiscernible], of course, in addition to our wireless focus on our existing businesses, and also, of course, on new initiatives, which are already being put in place by the company, concerning new revenue streams and new businesses, especially digital business, another relevant factor for us to resume profitable levels fast is, of course, that cleaning of the slate that I mentioned that we did last year that was really radical last year. And as I mentioned before, our guidance going forward is that we won't see impairments, any longer, one-off events as the ones we saw last year. Along those lines, accounting net profit will certainly be positively affected going forward.

[Operator]

We have a question from Gustavo Bajos, again.

[Unknown Analyst]

Does the company intend to use blow Pay to compete with the fintechs for their clients?

[Ivan Luiz dos Santos, executive]

Gustavo, thank you for your question. The answer is -- initially, the answer is no. BluPay has 2 strategic purposes for Valid. Number one, to deepen our footprint and the payment names scenario. We do electronic services for banks and [indiscernible]. And BluPay will continue to provide support to our digital transformation through the [indiscernible] facility. So our solution would be a white label for [indiscernible] for them to conduct direct billing of their students without having to go through either physical or electronic billing. That's one of the main future sources of revenue for BluPay.

As for government, BluPay might have an important role to play as a government's wallet. This week, we started distributing amounts for school books for the CIG of São Paulo through BluPay. That means that unlike what we had in the past, where the government would physically buy books, notebooks, school material in general and what result to a very complex logistics grid to distribute those materials. This year, the city of São Paulo through BluPay was able to distribute those resources to parents who were able to make those purchases directly at the participating stationary stores. So that strengthened our acquisition as a good partner, not only for school material but also uniforms, school launches and a series of other services that cities provide to citizens.

So that's one of our missions of Bupa, and we will explore the asset along those lines going forward.

[Operator]

A question from [ Tiago Arlo ] from Banco de Brasil.

[Unknown Analyst]

As for the new management, in line with the concentration of efforts on the main businesses, is there any expectation to focus on Brazil to the detriment of the company's international position and the impact on mobile, and I refer to China specifically, where we see a good growth potential.

[Ivan Luiz dos Santos, executive]

Thanks for your question. Actually, when we assess our international businesses, and this was, of course, the object of our studies along with [ bank ] and company, we assess the size of those markets and the potential of those markets today and in the future. And we also have to assess our ability to win can we win in those markets in the short run or in the long run. So 2 observations gear. When we talk about telcos, even though it is a business of worldwide geography, so instead -- we have the supply offices and commercial offices, which are spread across the world to provide maintenance services to the different telcos of different countries. Those offices are usually small. Our commercial offices have a very asset-light structure. So for that line of business. We are considering a migration from 4G to 5G and then 5G 5G to IC or embedded SIM or IC. We consider that -- we see that as the future evolution of the business, and we consider our ability to win, to be relevant enough for us to continue to pursue success in that line of business. But right now, we are looking into our plans. We are manufacturing plants where we have to monitor that very closely. And that, of course, is a source of distraction because it is an important asset that we have, especially in Brazil, and we have to look at those more carefully because they are a major distraction in terms of organization overstretch vis-à-vis what they provide in terms of EBITDA.

As we analyze those 2 fronts, we'll be making decisions to divest in the future, but they do not involve the telco businesses.

[Joel Renno Junior, executive]

Next question from [ Diego Rosa ], a shareholder. thank you, Diego, for your question for participating. Diego wants to know about the [indiscernible] is one of the companies in our group, and it is focused on agro business. And its purpose is to optimize the processes for agricultural cooperates around also credit lines, adding more technology to the whole agro businesses chain and thus, generating value to one of the main pillars of our economy. [indiscernible] today, Diego, is a line of -- it represents a very small line of revenue for the group as a whole. What I can tell you is that it's been performing really well, up [ '20], and we do have good expectations that it will gain even more traction throughout 2021.

[Ivan Luiz dos Santos, executive]

Just to add to what Joel said here ago, we will implement that evaluation track for digital businesses. We have just completed the most recent contract for agro. We already see some traceability business is ramping up in Brazil to trace coffee or to trace chemicals, those are the 2 main verticals where we operate. But again, the digital world more than having our budget early in the year and then you'll maintain that budget on a stable way throughout the year. We will be analyzing in the coming quarters, how much level of traction we'll have across those initiatives. And then we will focus our squads on whatever is more promising. We have some businesses which are ramping up, and we'll be monitoring those more closely, and then making decisions according to how those businesses perform vis-à-vis our other businesses.

I think with Diego's question, we now close the Q&A session. I'd like to once again thank you all for participating in our earnings call, myself and the company and our IR [ OG ] remain available to all of you for questions or comments you may have in the future, and we'll continue here, and we wish you all you're all safe, healthy and with your families. Thank you for being here today, and I'll see you next time.