Good morning, ladies and gentlemen, and welcome to the audio conference call about the earnings results of B3 for the third quarter of 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and broadcasted live via webcast. The replay will be available after the event is concluded. I would now like to turn the conference over to Mr. Daniel Sonder, Chief Financial Officer of B3.
Hello, everyone. Good morning. I'd like to welcome all of you to B3's third quarter 2019 earnings conference call. I'm here with Rogério Sant'Anna, Head of Investor Relations, as well as the finance and investor relations teams, and I'd like to thank them for preparing the documents you have in front of you. Additionally, on behalf of the entire executive team at B3, I would like to thank you for your continued trust and support. I'll start the presentation on slide three, where I'd like to highlight some important achievements and figures of the third quarter 2019. The quarter was marked by strong activity of clients in our markets, as shown by the record volumes in cash equities and listed derivatives. ADTV in cash equities of BRL 17.1 billion and ADTV of fixed-income currencies and commodities of four million contracts.
Additionally, B3 has continued to work to make sure the local capital market develops into the best source of funding for firms in a scenario of low interest rates and reduction of loans by state-owned banks. In the first 10 months of this year, we hosted 32 public offerings in the equity markets, totaling BRL 70 billion. We also saw more than BRL 214 billion raised in the local debt capital markets, and the number of accounts held by individual investors in our equity depository reached more than 1.5 million. In this context, our revenues reached BRL 1.7 billion, an increase of 34% when compared to the third quarter of 2018. Adjusted expenses reached BRL 281 million, 12% higher than in the third quarter 2018, which we will explain in more details later in this presentation.
EBITDA adjusted for non-recurring items reached BRL 1.109 billion, an increase of 42% over the previous year, with an EBITDA margin of 72.5%. Recurring net income reached BRL 351 million, an increase of 38.7%, reflecting the improvement in operating performance, which was partially offset by the increase in income tax and social contribution. Before exploring in more details our results, I would like to move to slide four and talk briefly about our current business environment. The positive trend in the Brazilian capital markets that we have witnessed in the last quarter seems to be more consolidated after the approval of the Social Security reforms. The significant reduction in lending offered by Brazilian state-owned banks, coupled with lower interest rates and higher valuation, has had a meaningful positive impact in companies' decisions of accessing capital markets for financing. This has increased the offer of financial instruments available to investors.
On the demand side of this equation, the historically low level of interest rates with a consistent outlook for the future has led to a desire by investors to diversify their portfolios away from government fixed income and has also led to greater risk appetite. These movements can be seen in the chart in slide four, where we show the total AUM of local institutional investors. There was an inflow of more than BRL 200 billion in both equity and debt capital market instruments in the first nine months of this year, increasing their participation in the fund's portfolios from 15% at the end of 2018 to 18% at the end of September 2019. We believe B3 is positioned to benefit significantly from this scenario. Our priority is the execution of our strategy, which combines operational excellence with the ambition of prioritizing our customers' needs.
Rogério will give you more details about our performance by segment.
Thank you, Daniel, and good morning, everyone. I would like to ask you to move to slide five, where you see the performance of the listed equity market. Revenue in this segment grew 73% year-over-year, mainly driven by growth in revenues from trading, post-trading services in cash equity market and equity derivatives market as well. The ADV in cash equity grew 79% from BRL 9.6 billion per day to BRL 17.1 billion in 3Q 2019. This performance reflects the increase in turnover velocity to more than 102%, coupled with growth of almost 30% in the average market capitalization of listed companies in the period.
Here we see in trading and post-trading revenue line the ADV of stock index future contracts increased by more than 163%, reflecting the growth in trading of many contracts, notably by individual investors and high-frequency traders. Lastly, there are two other lines that are worth mentioning. In the equity depository, the increase in the number of accounts was offset by incentive programs to brokerage firms, similarly to what happened last quarter. In the revenue line listing and services for issuers, we can see the positive impact of the higher number of equity and debt offerings in the quarter. Moving to slide six, you will find the details on the performance of the listed fixed income, currency, and commodity derivative segments, where we had a 36% increase in revenue.
The main factor behind this performance was the growth of ADV, particularly the interest rates in DI contracts, which showed an increase of more than 100%, reflecting the change in the outlook for interest rates in Brazil, both in relation to the recent cuts and to the expectation of further change in the coming quarters. Next, on slide seven, we present the performance of the OTC segment. In the fixed income revenue line, the increase in volumes of bank funding instruments, mainly certificates of deposit, was offset by two factors. First, the decrease in Tesouro Direto revenue from BRL 28.8 million in 3Q18 to BRL 7.2 million in 3Q19, reflecting incentive programs implemented in the beginning of the year to foster growth of this product.
Secondly, the redemption of the debentures issued by leasing companies following regulatory change that offset the growth seen in the local corporate debt market. In derivatives, the neutral performance reflects the offset of higher volumes of this product by lower average fee due to change in the product mix. In slide eight, we show revenues for the infrastructure for financing segment, which grew 4.6% year-over-year. The national lien system, or SNG, as we call, was positively impacted by the 14.5% increase in the number of vehicles financed. In the contract system, we implemented a change in the business model of our services in some states of Brazil during the quarter.
In this new model that's implemented, instead of transmitting data regarding financed vehicle contracts to registering companies, now this group of companies, subjected to the previous authorization of the lending institutions, can access B3's platform in order to retrieve such data. There is an important financial impact of this new model, which is the fact that there are no revenue-linked expenses related to payments made to registering companies, reducing both B3's revenues and expenses. Given that under the previous model, the cost of the registering companies was included in the prices charged by B3. Under this new model, the average fee charged by B3 was also reduced. Lastly, we saw a positive impact from Portal de Documentos in the revenue of this segment, which is recorded under revenue line others.
Moving to slide nine, we can see the performance of the Technology Data and Services segment, which grew more than 12%. The growth in the Technology and Access line is related to the entry of new clients in the OTC market, which pay monthly access fees for us. The additional revenues from BLK and [small IP company] that we acquired earlier this year. In the case of the Data and Analytics line, the solid performance reflects the appreciation of the US dollar against the BRL, given that almost 46% of this revenue line is US dollar denominated. In the next slide, we show the company's adjusted expense, which reached BRL 280.8 million, a 12% increase year-over-year. The main factor was the increase in the Data Process expense, mainly due to the intensification of IT projects related to the enhancements to our platforms.
The adjusted personnel expense line grew 5%, mainly as a consequence of the annual collective bargaining agreement that happened in August 2019, and also due to the consolidation of personal expense from Portal de Documentos and BLK, the two companies we recently acquired. Now, I will hand over the presentation back to Daniel, who will show other financial highlights of the quarter.
Thank you, Rogério. In slide 12, we demonstrate our financial robustness with a solid cash position and a very healthy balance sheet, which is an important part of the business of being a credible counterparty in the financial markets. On the left side, we show total cash that amounted to BRL 11.7 billion at the end of the quarter, composed by B3's own cash as well as third-party cash, mainly related to collateral pledged in cash by clients. In the light blue bars of the chart, you will find B3's own cash amounting to BRL 8.1 billion in the third quarter of 2019, which includes BRL 650 million in interest on capital and dividends already paid out to shareholders in early October 2019. On the right side, you see the company's debt profile and amortization schedule.
As previously announced, our guidance for financial leverage for the year 2019 is 1.5 times total debt to last 12 months recurring EBITDA. This ratio was 1.4 times at the end of third quarter of 2019. We reaffirm our payout ratio guidance for 2019 between 120% and 150% of IFRS net income. Moving now to the last slide of our presentation, slide 11, we show the amount of cash generated by the company. As you can see on the table on your left, there was a significant increase in the amount of cash generated by B3, reaching BRL 4.6 billion in the nine months of 2019. The two main factors behind this solid growth are the strong operating performance as described in the previous slides, as well as BRL 1.2 billion raised in debt in the second quarter of 2019.
On the right side of the slide, we show the destination of the cash generated by the company. Distributions to shareholders through interest on capital, dividends, and share buybacks are already above BRL 2 billion for the year. Considering our payout ratio guidance, we should expect an additional distribution in the fourth quarter of 2019, subject to approval of the board of directors. With this, I would like to conclude the presentation and open our Q&A. Thank you.
Ladies and gentlemen, we will now begin the question and answer session from investors and analysts. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, please press star two. Please hold while we pull for questions. Our first question comes from Marco Calvi, Itaú BBA.
Hi, guys. Good morning. My question is on the personal expenses line. We saw a small increase quarter-over-quarter of roughly 9%. I would like to know, what is the company's view on, let's say, a sustainable level on a quarterly basis, and what should we expect for 2020 on this specific line? Thank you, guys.
Yeah. Thank you for the question. We have added some people to our team. The company is trying to do more in a very exciting time for our clients and for ourselves. As I have discussed with some of you, we have made an effort to develop a relationship model with our clients that brings us closer to them and to the pipeline of ideas that we should develop. We also added two companies to our group as we acquired BLK and Portal de Documentos during this year. We have consolidated their expenses. Finally, there is the annual collective bargaining agreement, which impacts the second half of the year vis-a-vis previous periods. In essence, these are the elements that have led us to this increase in our personnel expenses for the quarter.
As we look forward, I think this is probably a good starting point for us to look at how the company would report its expenses. We already have, for this quarter, the full impact of the two small acquisitions that we made, which added a few people, and we feel now that we are pretty much running at the level of personnel expenses that we should be. Maybe we'll add a couple more here and there, depending on how our projects develop. Again, strengthening some of the key business areas that we have identified as things that we want to do better and more of going forward.
Again, as I have said, our general expenses for the foreseeable future, which we will put in a formal guidance later this year, will probably grow going forward at a couple of points above inflation or maybe a little bit above that. We'll see. Again, we want to continue to deliver very efficiently and stay very close to clients which are growing themselves. That's, I think, a relevant point to make. For this year, we expect to stay fully within the expense guidance that we have put out.
Very clear. Thank you.
Our next question comes from Otavio Tanganelli, Credit Suisse.
Hi, good morning, everyone. Congrats on the very strong results. Really impressive, the revenue growth that we have seen. I have maybe just one question. We are seeing very strong ADTV on the cash equity segment. November data, if I recall correctly, is around BRL 20 billion already. With this high level of ADTV, do you see any increasing willingness to competition to come for the trading segment? Also, if you could give us an update on how are the discussions involving the rebalancing of trading and post-trading fees, do you still expect anything to happen within this year or not? If you could give us a timetable on that would be great. Thanks, and congratulations again.
Otavio, thank you very much. With respect to market size and the opportunity or the attractiveness for competition in equity trading, we believe that the Brazilian market already presents a size that would make another trading platform for equities viable and attractive. Right? It seems to us that the likelihood of someone coming in would not be contingent on the size of the market anymore, but rather on our ability to maintain a strong relationship with our clients and the brokerage community and final investors, ultimately. All of our efforts and our strategy are in that direction of making sure that B3 is the preferred platform of choice of our clients in any scenario of competition. As you know, the regulatory framework for competition in equity trading in Brazil is pretty much established.
We have made several commitments with our regulators and with market participants that we would offer on an equal basis, the clearing and depository services for anyone who wishes to establish an alternative platform for trading of equities. We don't see any impediment in terms of market size for that to take place. On your second point, we're currently in the midst of an arbitrage discussion with a potential entrant and that has to do with fees for the depository services of B3. We cannot comment on the details of that discussion because they're confidential. We do expect that it should continue over the next few months. Maybe we'll have an outcome by the end of the year. It's hard to say. It's a complicated procedure, and both us and the other party are devoting a lot of effort on that.
As soon as we know what the outcome is, we will let everybody know. In general, however, I just want to mention that the view of the company is that we should share with market participants the benefits of a growing volume of a growing market. We are currently working on that to identify specifically the areas of our product and services set, which will be the beneficiaries of discounts that we are looking to put in place over the next years to benefit everybody. That's the general direction. We feel that that is an important part alongside our operational excellence and our product pipeline. The pricing and the commercial relationships that we have with our clients are an important part of us maintaining the position that we seek in this market.
Really clear. Thank you.
Our next question comes from Eduardo Nishio, Banco Plural. You may proceed.
Thank you for the opportunity and congratulations for the results. Just one question. On a nice chart on page eight, you have the infrastructure costs and revenues there. See that you have a positive evolution margins. If you can comment on that, how do you see that developing and why you had such expansion? If you're paying less taxes because of the new model on that. If you can give us some color also on the competitive environment, if you want it, that would be helpful. Thank you.
Yeah. We changed for some states the way we have revenues as well as expenses in the contract system, the Siscom, so that we have lower revenues and lower costs. This is what we try to show here. I'm not sure we have any different taxation because of that. This was more of a, let's say, commercial and technical discussion with the different players in this segment, the banks, the registration companies, and the transit departments. We felt that this model better represents the actual dynamics of this model, where we provide a part of the services, and the registration companies provide another part of the services and are now in the position of being clients of B3.
In this segment, as you know, historically, we had the entrance of some new players that now share some of the revenue pool and profit pool that B3 used to have. We find that this now is in a, let's say, rather balanced position, if you will, that we don't expect to see dramatic changes in this going forward. There are some states where we still have the opportunity to get in and provide services again, but we don't expect any big shifts going forward.
If you allow me, this is Rogério, Daniel. Nishio, how are you doing? One last comment here is that the transition from the previous model to this new one is happening gradually state by state. The numbers you see in the third quarter reflect the move made by a few states that happened in July and August. It means that the full impact in a quarter is going to happen only next quarter, and there are other few states that moved to this new model only in October. It means that you should expect further impacts in both revenues and revenue-linked expenses in the fourth quarter. In other words, potentially lower revenues and lower revenue-linked expenses, because you see a higher chunk of our market share under this new model.
Okay, thank you. Just to clarify here, if all the states, they change to the new model, we're going to see probably the revenue-linked expenses for the Siscom to be probably close to zero, right?
Yes.
Okay.
Yes. It will be much smaller, but will not be zero because there are other revenue-linked expenses related to other players in the chain and other partners. Yes, it's going to be significantly lower.
Okay.
And the mar-
In this chart-
Sorry
we break it down, revenue-linked expenses, we break it down between the ones that are related to SNG and the ones that are related to contract system. The one that will be reduced, it's only the second one that is related to the contract system. On top of that, you have another few revenue-linked expenses related to other segments that is a smaller number.
Okay. The margin or the gross profit expansion here that we see year-on-year and for a few quarters now is mainly because of high volumes, right?
Yes.
It's not because of better contract.
We have higher volumes. Number of vehicles financed increased more than 14%. It's impacting the SNG and also the contract system. We also gained some market share in the contract system. That said, although you're going to see higher margins in percentage points, our average fee in the contract system is smaller under this new model. It's an important aspect to keep in mind. In other words, we are making less money in this business for the same amount of cars registered.
Perfect. Thank you so much.
Our next question comes from Thomas Ferido, BTG Pactual.
Hi, everyone. Thanks for the opportunity to making questions. I have two questions. The first one, we noticed that IT project expenses accelerated in the quarter. Wanted to get an update on the roadmap of products, what we can expect to be launching in 4Q and next year in terms of new products and services, which is something important for the company to continue developing to keep up with client satisfaction. For the second question, we have seen higher competition with U.S. exchanges by gaining the listing of new companies such as XP recently, and wanted to get an idea of what the management is doing to be more attractive for Brazilian companies to list here instead of abroad. Thank you.
Hi, Thomas. This is Rogério. Regarding your first question, we saw some increase in our data processing expense. It's mainly related to some internal projects that we are executing, and these projects are related to enhancements in different platforms that we have. As we are seeing, volumes are going up very fast, and we needed to make sure that our infrastructure is fully prepared to deal with higher and higher volumes in the different business that we have. This is what we are expecting. The third quarter number, it's a good reference for the coming quarters. It was something that we were expecting when we released our guidance and we are fully within that for this year.
The additional expense that is reflected there, it's also in line with the number that or the reference that Daniel mentioned in terms of what we expect in terms of expenses growth for the next year. As you know, we are in the midst of our budgeting process. This increase in expense is also partially related to development of products. We have a roadmap that we agreed with our clients. There were some deliveries through the year in all the segments. New options, new market maker programs in the listed market, new kind of contracts in the fixed income currency and commodities, new functionalities in the OTC platform, and new data products for all the segments. We are, at this point, discussing with the clients the update to this roadmap to include new things for 2020 and 2021.
At the point this process is concluded, we will give full disclosure in our website and through all the other channels that we use to maintain the relationship with the market. It is a very special moment that we are going through in Brazil and clients are definitely looking for different opportunities and different products and we are totally in line with that because we play an important role in providing the infrastructure or the product itself for the market.
Thomas, with respect to competition for listings, we are in a global industry and we have large companies in Brazil that have access and have businesses that are attractive to investors globally. Sometimes, there is a perception by certain companies that if they pursue a listing in a particular market, they will have some advantage in terms of value perception. That is essentially the main driver for the decision to list abroad. As you know, the U.S. has become the hub for high growth/technology-based companies, and this is something that has a very important pull effect, not only for Brazilian issuers, but also from issuers from other mature and emerging countries. If you look at the technology industry globally, the listings in the U.S. are by far the majority, including in non-U.S.-based companies. That is, I think, the main motivation that is driving that.
What we hear from investors locally is that more and more local managers are getting their arms around this segment and beginning to understand more the value drivers for such companies. I think if that becomes a real trend, then eventually we will have in Brazil a community of funds and investors that are big enough to support listings in this segment with the same type of valuation perhaps that you see in the U.S., which as I mentioned, has become kind of the ecosystem for analysts and investors in this segment. Having said that, the management at B3 is working on a few fronts. Some of them have to do with relationship and having a dialogue with the companies about the merits of listing here. One which I think is worth mentioning is a dialogue with the regulators about permitting that Brazilian Depository Receipts of
Companies that are listed abroad but have businesses in Brazil could be traded at B3. There's currently an impediment for that. If a company has the majority of its business operations in Brazil and chooses to list abroad and to incorporate abroad and list abroad, then there must not be a BDR, a depositary receipt, traded here with an underlying asset as the shares in this company, which creates obstacles, essentially, for Brazilian investors to acquire shares in these companies. A kind of an odd situation because you can have a BDR, and we do have BDRs in Google, Apple, Amazon, and any number of non-Brazilian companies, but you cannot have a BDR of PagSeguro or Sonder. We are working with the regulator to discuss this, and we hope that we will have a positive resolution to our request that this ban should be lifted.
I think that would be a first step because that would expose local investors to the existing companies and to other companies that still choose to list abroad. At least we will have the ability to invest here. Over time, we will go to the scenario, which I hope will be the long-term scenario, where through those initial investments in BDRs, investors acquire the knowledge and the experience and the, let's say, the track record of investing in technology-based companies. The future IPOs would choose to list here alone. We don't expect that for the near term. We think that the U.S. will continue to be a part of this discussion for quite some time.
Okay. Thank you very much.
Our next question comes from Domingos Falavina, JP Morgan.
Hi. Good morning, Sonder, Rogério, and team. Also, thank you for taking the question. We have seen recently certain business models that had very high margins, monopolistic-like segments, and that had a substantial rupture in profitability. Acquire is clearly one of them. There are now certain concerns around banks being disrupted. One pattern we noticed was generally very low net promoter scores within the incumbents. Clients basically didn't like their service. What we noticed is that winners seem to be doing very well on that metric. Sonder, for example, more than 60. Pag is also very high within Banco Central and they are close to 60. Players that are not doing well or basically declining to comment on the figure.
They know it's important. They say it's moving up, but they won't mention. Given the natural monopolistic industries of characteristics of the exchange industry, my question is, what's your net promoter scores within different clients? I understand you have brokers, you have the back office or an absolute number. How has this been evolving and how much does that figure as a priority to you? If it is bad because of pricing, which is an often comment we hear, what are you doing to address those things? Thank you.
Thank you. We are using net promoter scores to measure the relationship with our clients. It is an important metric for us. It's not the only one. We have a number of things that we're tracking. We have, as I mentioned, strengthened our relationship teams, and we have, compared to what we used to have in the past, more people that are dedicated to this with a clear mandate, and we have more information in the company about how clients are feeling, and we are deliberately expressing to them that we want to know about their perception. We do not plan to communicate to investors and to the market in general and to our clients what our net promoter score is.
Our business is different than a retail mass business, and that could create some differences in the analysis of NPS, which is traditionally more linked to retail or to not retail individuals only, but let's say, businesses that have hundreds and thousands and millions of customers. We made a decision not to discuss that in public, but it is a very important metric for us internally. This is part of a, let's say, broader view, Domingo, of the ways in which we interact with our clients. These different ways are, again, very critical to the perception. We have different "clients" within each client, right?
We have the business people, let's say, the front office teams that develop products and that think about, let's say, market activity and how they will serve their clients in turn. One of the big efforts in the company is to have these close relationships and discuss product pipeline and make sure that we are working on things that are important for the future growth of the business of our customers. The second area is the support teams, the operations teams, and the technology teams in each one of our clients. Those discussions have much more to do with resilience of our platforms, speeds of our platforms, throughput, and the availability and capacity of our systems to handle clients' volumes.
This is another front where we have, over the years, I think, invested a lot, and that's why we are able today to handle much higher volumes than we had just 18 months ago or 2 years ago. This was not a rushed decision. We invested in the years prior so that we can deal with the current environment, and we're investing today so we can deal with, hopefully, even higher volumes further down the road. This is a very important part of client perception. Finally, the third area is, let's say the day-to-day management of customer concerns and customer requests for operational adjustments and potential glitches that may take place on a day-to-day basis, small stuff. We have reorganized that effort as well in the company.
We have now a head of customer service in the company that oversees these activities, let's say, horizontally across several departments. Finally, referring back to a comment I made earlier, we deal with pricing and how we price our products. We are not, let's say, managing our business to look at a particular margin, but rather to look at each one of our products and ensure that the benefits of scale are being shared with the clients, that they perceive that we look at international benchmarks and make sure that we are in line with what is customary for other exchanges of similar sizes, adjusted for the particularities of the Brazilian market structure and packages of services.
That for each one of the products, we are in the right position in pricing, and we are not perceived as anyone that is, let's say, overcharging or taking undue advantage of the relationship that we have with our client. We try to look at experiences that we see, either from competition in the exchange business or competition in other industries. Really, this is a very hot topic in B3 today. We are very aware of the fact that as our market continues to grow, we need to focus on the areas that I just mentioned, product development and client relationship, systems efficiency, customer service on a day-to-day basis, and pricing to be able to be successful in the long term.
Thank you, Sonder. Just for what it's worth, it is helpful to us. I understand that you have a perception that you're doing very well with all your clients, but that's like a benchmark that allows us to compare different business models. It's adjusted by each business model because you're asking your own clients how you would recommend or not. We see that with investments, investment confidence, and et cetera. If you do decide further down the road, we would appreciate, but I understand you don't want to. Thank you.
All right. Thank you.
Thank you.
Ladies and gentlemen, as a reminder, if you'd like to pose a question, please press the star key followed by the one key on your touchtone phone now. This concludes today's question and answer session. I would like to invite Mr. Daniel Sonder to proceed with his closing statements.
I'd just like to thank you all for joining in the call. Thank you for the questions and for staying updated with us and helping us send the message to all investors. I appreciate, and thank you all to the team for putting together the materials. Please feel free, everyone, to give us a call if you have further questions.
That does conclude the B3 audio conference call for today. Thank you very much for your participation. Have a good afternoon, and thank you for using Chorus Call.