Good morning, ladies and gentlemen, and welcome to the audio conference call about the earnings results of P3 for the Q2 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. As a reminder, this conference is being I would now like to turn the conference over to Mr. Daniel Sonder, Chief Financial Officer of B3.
Hello, everyone. I would like to welcome you to B3's Q2 2019 earnings call. I'm here with Rogerio Santana, Head of Investor Relations as well as the Finance and Investor Relations teams, and I'd like to thank them all for preparing the documents you have in front of you. Additionally, on behalf of the entire executive team, I'd like to thank you for your continued trust and support. Starting the presentation on Slide 3, I'd like to highlight some important achievements and figures
of the Q2 of 2019.
Once again, the quarter was marked by the expansion of the business opportunities for our clients and by high activity in the financial markets in Brazil. In this context, we saw strong numbers in the listed market. ADTV in cash equities of BRL14.7 billion and ADV of fixed income, currencies and commodities of $3,900,000 contracts. There are 2 other aspects that deserve mention. 1st, the incentive programs in the equity market and in TreasuryDirect aiming to expand individual investor base.
The rebates and discounts related to these programs totaled $57,800,000 in the quarter, and we'll discuss this topic in more depth later in the presentation. 2nd, the revision of our guidance for adjusted expenses as a consequence of the inclusion of expenses from BLK, Systemos Finaceros and Portales de Locomentos, 2 companies recently acquired by V3. As you know, we do not have revenue guidance out to the market, but the acquisition of these 2 operational companies will have a positive impact on revenues as well. Regarding our financial performance in the quarter, the diversification of our business across different markets again demonstrated its strength and our revenues reached BRL 1,600,000,000, an increase of 14% when compared to the Q2 of 2018. Our adjusted expenses reached $250,000,000 in the quarter, 5.3% higher than in the Q2 of 2018, which we will explain in more details later in the presentation.
EBITDA adjusted for non recurring items reached $999,000,000 an increase of 3% over the previous year with an EBITDA margin of 70.3%. Recurring net income reached $785,000,000 dollars a reduction of 8%. This decrease is mainly explained by higher income tax with no cash impact in the Q2 of 2019 and the increase in non cash expenses connected to our own share price. We move now to Slide 4. We think it's important to highlight the level of activity of the local capital markets.
We are seeing an unprecedented positive scenario for the development of capital markets in Brazil with important factors contributing to the structural change. First, the current level and a consistent outlook for low interest rates, which creates demand for diversification and more risk appetite from investors. 2nd, there's a significant and hopefully permanent change in the policy adopted by Brazilian state owned banks regarding lending for corporates. This creates an opportunity for the capital markets to become the main source of funding for these issuers, which is leading companies to alter their capital and ownership structures. The result of these changes can be seen on the chart, which shows that we already reached more than BRL200 1,000,000,000 in equity and fixed income offerings, an impressive amount when compared with previous years.
Now Rogerio will give some more details about our performance by segment.
Thank you, Daniel. Hello, everyone. I would like to ask you to move forward to Slide 5, where you will see the performance of the listed equity markets. Revenue in this segment grew 26% year over year, mainly driven by growth in revenues from trading post trading services in cash equity and equity derivatives markets. The ADTZ in the cash equity market grew 22% from BRL12 1,000,000,000 in the Q2 2018 to almost BRL15 1,000,000,000 in the Q2 of 2019.
This performance reflects the increase in the turnover velocity from 89 percent 1 year ago to more than 95% in the Q2 2019, coupled with the increase of almost 16% in the average market capitalization of listed companies in the same period. Still we've seen the trading post trading revenue, the ADV of stock index future contracts increased by almost 110%, reflecting the growth in trading of mini contracts, notably by individual investors and high frequency traders. It's worth mentioning that revenues from our equity depository were impacted by incentive programs, as Daniel mentioned, offsetting the increase in the number of accounts in the quarter. I will go in more details on that later in the presentation. Moving to Slide 6, you will find details on the performance of the listed fixed income, currencies and commodity derivatives, which grew 7.6% in revenues.
The main factors behind this performance were the high single digits growth in the average volume in this segment coupled with the appreciation of the U. S. Dollar against the real in the period, which had a positive effect on the RPC of U. S. Dollar linked contracts.
Next, on Slide 7, we present the performance of the OTC segment. In the fixed income revenue line, the increasing volumes of bank and the instruments, mainly certificate of deposit was offset by 2 things. 1st, the decrease in the treasury direct revenue due to the incentive programs implemented in January 2019 to foster growth of these products and we will go in more details later. 2nd, the redemption of debentures issued by leasing companies following regulatory change that offset the growth seen in the local corporate debt markets mentioned by Daniel earlier in this presentation. This is not a new aspect.
This is something that is impacting our business for the last few quarters. In derivatives, higher revenue were propelled by the increase in volumes of FX linked swap agreements and by depreciation of the U. S. Dollar against the real in the period, which impacted FX related derivatives. In Slide 8, we show revenues for the Infrastructure for Financing segment, which grew 36% over the Q2 2018, reflecting the effect of change in the business model of the contract system adopted in some states of Brazil during 2018 early 2019.
To clarify the impact of these new models in the contract system, we show in the charts the breakdown of revenues as well as the breakdown of revenue linked expense among these services in the segments. As you see, the growth in contract systems revenue has been more than offset by higher revenue linked expense, resulting in a small compression of our gains in this service. Besides that, the National OEM System or SMG was positively impacted by the 7.2% increase in the number of vehicles financed. Additionally, there was the annual price adjustment by inflation applied on our fees that also had a positive impact on revenues. It's also worth mentioning that we completed the acquisition of the portfolio documents, as Daniel mentioned in the first slide, which we trust will have a positive impact on revenues from this segment going forward.
Moving to Slide 9, we can see the performance of the Technology, Data and Services segments, which grew 8.7% in revenues. The growth seen in the technology and access line is related to the entry of new clients in the OTC markets, which pay monthly fees to access our platforms. In the case of the data and analytics line, the solid performance reflects depreciation of the U. S. Dollar against the real, given that almost 50%, 80% of this revenue line is U.
S. Dollar denominated. On Slide 10, we give more details on the incentive programs to expand individual investor base in B3. Like Daniel mentioned before, the lower interest rate environment is shifting investments from more conventional fixed income products to more sophisticated ones. In this context and aiming to fulfill our essential role in the development of the capital markets in Brazil and supports the outstanding work done by brokerage firms, we have 2 incentive programs to expand the individual investor base in Brazil.
1 in equities in the equity depository and the other in the TreasuryDirect, a platform that allows individual investors to buy government bonds directly. This is consistent with B3's stated objective of sharing with market participants and clients in our ecosystem, part of the economic opportunities that will come from the growth in volumes in our markets. And here, we are combining this objective with clear growth targets for these participants and clients. Both programs reward brokerage firms based on similar goals, growth in number of investors and growth in outstanding positions, where the higher the target achieved, the higher the rewards. In the case of depository, brokerage firms receive discounts, while in the case of the Treasury Direct, they receive rebates.
The amount returned to these market participants totaled BRL57.8 million in the Q2 2019 and BRL80 million if we consider the first half of the year. These are good examples of price incentives can introduce to foster market development. We consider that expansion of individual investor base in our markets and products will be extremely positive for the market and for B3 in the medium to long term. Examples of potential benefits from a larger individual investor base are positive impact on turnover loss of the cash equity markets and increased liquidity of in CPM products like ETFs, REITs, single stock derivatives and small cap companies. We will continuously use these programs and also seek new ways to further develop our markets in close partnership with our clients and intermediaries.
In the next slide, number 11, we show the company's adjusted expense, which reached 249,900,000 dollars a 5% increase year over year. The manufacturers were the increase in adjusted personnel expense as a consequence of the annual collective bargain agreement in August 2018 and in third parties, is mainly related to advisory services in connection with product development. Now I will hand over the presentation back to Daniel, who will show other financial highlights of D3.
Thank you, Rogerio. In Slide 12, we demonstrate our financial robustness with a solid position in cash and a very healthy balance sheet, which is an important part of the business of being a credible counterparty in the financial market. On the left side, we show total cash amounted to $10,900,000,000 at the end of the quarter composed by B3's own cash as well as 3rd party cash, mainly related to collateral pledged in cash by clients. In the light blue bars on this chart, you will find B3's own cash position amounting to BRL7.6 billion in the Q2 of 2019, which includes R601 $1,000,000 of Intersome capital and dividends already paid out in early July 2019. On the right side, you see the company's debt profile and amortization schedule.
As previously announced, our guidance for financial leverage for 2019 is 1.5 times total debt to last 12 months recurring EBITDA. In line with this guidance, this quarter we concluded the issuance of 3 year debentures amounting to BRL1.2 billion, paying an interest of 102.8 percent of CDI. Finally, we reaffirm our payout ratio guidance between 120% 150% of IFRS net income. With this, I'd like to conclude the presentation here and open our Q and A session. Thank you.
Our first question comes from Chitula Barta, Goldman Sachs.
Hi, Daniel and Rogerio. Good to speak with you again. Thanks for the call. A couple of questions. I guess, first, if you could maybe give some more color on the potential positive from the acquisitions that you did.
You mentioned they should contribute positively to revenue. So just want to get a sense of how you feel it will benefit the business in general and any color you can give on the potential impact? And I guess second question just in terms of margins, right? I mean, we saw expenses rise, although partially due some revenue linked expenses and stock options. So margins fell a bit in
the quarter. So how should
we think about your EBITDA margin? Because you do have operating leverage, but given some of these expenses are tied to some things, I guess, outside of your control in a sense. Is it reasonable to assume that margins can increase as volumes continue to go up? Or is this 70% EBITDA margin sort of the peak? So just want to get a sense on your thoughts on that.
Thank you.
Thank you, Tito. This is Daniel. So on the acquisitions, we're not providing details and guidance on the revenue side. Again, these are very small businesses compared to the total revenues of the company. We find that they are long term opportunities for us to strengthen our relationship with key clients.
In the case of BLK, as you saw by the numbers in the transaction, this is quite a small company, but which we think provides a pretty nice service to the brokerage as well as the buy side asset management community. We don't expect a meaningful financial impact from this in the near term. Portales de Compencos has a slightly bigger size, still very small compared to overall revenues to us, which, again, shouldn't make a big impact on anything going forward in terms of projections in the near future. But it does, again, speed up our deployment of real estate related products in the finance unit and brings us closer to the retail side of these large financial conglomerates, which we already serve under the auto union loan platform, but which traditionally historically has been a smaller client of ours. So we want we typically serve the wholesale side of financial institutions with the treasury and brokerage areas and trading areas and so forth.
So that's what we can say for now about these transactions that are not, again, very meaningful. We did, however, want to disclose the expense impact because, as you know, we have established a pretty tight budget policy internally for us as well as disclosing that to the market in terms of our adjusted expenses. So we wanted to ensure that everybody understood that any changes in the expenses for the year were to these acquisitions rather than to any sort of more flexible position with respect to expense management in B3. Okay. Yes.
With respect to the margins, again, it's as you mentioned, the impact in margins was mostly due to these expenses that are linked to our stock price. These are non cash expenses, provisions and adjustments in our in sort of the value of our stock based compensation programs. So this is what happened this quarter. It's very hard for us to give any sort of guidance on margin. That's not how we think about the business in terms of putting a margin objective.
We as you know, we have operating leverage. We have systems and platforms and personnel that can deal with much larger volumes. And what you see is that we are implementing new programs, new projects as well as partnerships in coordination with the brokerage industry to push our volumes higher and their volumes higher if possible. One thing to note is that going forward, you should see less volatility on these expenses linked to stop compensation because as of the beginning of this year, we've implemented a hedging onto those expenses by signing swap agreements with financial institutions, where we basically have the negative position visavis those banks with regard to our stock price. So that should be a more stable and you can take the 2nd quarter expenses as a reference a better reference going forward because you should see less change in that line.
Hi, Tito. This is Rogerio. Just adding to this last comment made by Daniel. Remember that we had 2 expense line that moves according to the share price. 1 is related to personnel expense, more specifically, long term expenses for the management and other employees.
This revenue line is the one for which we hedged the share price exposure. But the other expense line related to provisions for legal disputes, for this one, we will still see volatility because we do not have
a hedging for that. Although Okay. Thank you.
Yes. It's another part. A last important comment is that there are, as you know, different treatments for shares that we have in treasury. And in fact, we already have that, but the share price change does not impact our earnings. But at the same time, these provisions impact our earnings because we need to mark to market our exposure to the trading price every single quarter.
Right. Okay. Yes. Thank you. That's very helpful.
Just one follow-up on the acquisitions. Since you do give guidance on the cost side, should we think about that the impact on revenues is marginal, so there's no impact on revenues? Or do we think that there's some offsetting revenue, so the impact on earnings is marginal? Just want to get a sense of
it,
given that you did give some guidance on the costs.
The companies have revenues. They're not just not very big. And in terms of both their revenues compared to total revenues is not very big. And the net impact of revenues minus expenses in the total EBITDA or net income of the company is very, very small at this point.
Okay, perfect. Great. Thank you for clarifying.
These are operating companies that have real revenues and clients.
Our next question comes from Domingos Falavina, JPMorgan. Mr. Domingos, you may proceed.
Thank you, Rogerio Sondre for taking the question. Congrats on the strong quarter. My question is more regarding the vehicle financing unit. We noticed the SMG, the contract registration revenue growing 48% year on year. And based on the monthly figures, it seems volumes of contract added grew 5% year on year.
So my question is, if you were to break down the 48% increase in revenues or 40%, let's say 40%, adjusting for the units, 40% price increase, how much of that is driven by new models where you have a cost embedded in the product? How much of that is actually net revenue gains or price increase?
Domingos, this is Rogerio. Just you mentioned SMG, but just to confirm, you are talking about the contract system, right?
I'm sorry. Could you repeat that? The line broke up.
Sorry, you mentioned SMG, the Lian system, but in fact, your question is related to mainly to the contract system, right?
Circos. Yes, the SIR cost, I apologize. Yes.
Okay, okay.
So answering your question, most of the revenue growth is related to the new business model instead of price adjustments. In fact, as we tried to show in the slides, what we are seeing is that although revenues are growing, expenses additional expenses related to this new business model are growing faster. So in fact, we have a small margin compression in our gains related to these services. Super clear. The only price just to complement here, the only price adjustment that we had was the traditional annual adjustment by inflation in our contracts, only that.
Yes. But that one usually keeps in the 1st Q, right?
Yes. It's already reflected in the 1st Q. You're totally right.
Got you. All right. Now super clear. Thank you.
Our next question comes from Thomas Teredo, BTG Pactual.
Hello?
Hi, Daniel and Rogerio and team. Thanks for taking my question. And I would like to ask about 2 themes. The first one is related to the rebates and incentives you are granting to expand the retail investor pace. Is that something we should expect to see more often from now on, eventually expanding to other products?
What is a little bit more color on the strategy here? Are you willing to share more of the profitability with the markets? And is there a maximum EBITDA margin that you're willing to surpass? Any color on the incentive strategy will be appreciated. My second question is related to competition in Citi business, mainly on the security unit, which we've seen new companies join the markets.
For instance, the CRC is already doing the registration of credit card receivables and market a market you are still not involved with as SIP from the banks are already having some registration for solutions. And feedback we have is that they are planning to expand. Smaller banks are getting together and officially launching a competitor. What is the strategy here? Could you should we expect you to lower the prices going forward or mitigate potential share losses with new products?
If you could give more color on this also, we appreciate it.
Excellent. Thank you, Thomas. It's great to hear from you and happy to know that you remain diligent on the other side of the table as you were when you were on our team. So just to talk about price and competition, I think the two questions are somewhat related. And let me try to address this.
So with respect to the incentive programs, this is something that we have used in the past and that we have continued to like as a way to bring more clients into the company as well as strengthen our relationship with the distribution network of brokers and banks and other potential partners that are out there talking to investors and talking to clients about P3's services. As a general concept, I would describe our thinking and strategy as follows. The company has the opportunity to use its operating leverage to, let's say, create additional results as volumes grow because our expenses do not grow proportionately in most of the businesses, if not all, except with the financing unit. But in most of the businesses in OTC and listed, we as we have additional volumes, we do not have expenses that grow commentrically. So we see that it's important for us to use this operating leverage to basically do 2 things.
1 is to find places in our businesses and services where there is price sensitivity. So if we can, together with our distribution channels, look at pricing as a way to bring on new investors or increase the activity of people that already use B3, that is something that we are inclined to do. Obviously, we'll try to measure impacts. We'll try to do performance related discounts. We'll try to do volume related discounts, new client additions, all sorts of the classical pricing schemes for the businesses where we see sensitivity to pricing.
The second driver will be to look at parts of the business where perhaps the competition might seem easier or the value perceived by clients is not so high given the complexity of the products and therefore. So this, I think, links somewhat to the OTC registration of bank bonds and other areas of the business, where we find that over time, we will consider, again given volumes and given the strong relationship we have with the clients to review prices gradually as we see opportunities to do so. We I think that has connection and it's a good way to sort of tie to the second point, which you mentioned, which is competition in the securities unit. We think that we have a very, very strong position in that business, but that nevertheless, there will potentially be other platforms that provide some of the services that we provide as well. I think that's a natural and a part of the dynamic of this market as it grows and becomes more sophisticated.
And we think that there are essentially 3 ways in which B3 will face this environment, right? It's basically to use innovation, service quality and pricing to continue to impress our clients, right? So we have to be flexible and creative and very close to the clients to be able to launch products and features and functionalities that they find useful for their development, either new products or by simplifying their internal procedures, trying to lower their costs and therefore. So that's kind of the innovation part. The other one is quality.
We have to remain the most resilient and trusted platform fully complete with all the features always on and very, very reliable as well as improving our customer service, which is something that we are working on. And finally, pricing, we need to be sensitive to the demands of our clients and their value perception. And if we have this combination, I think we will keep most of the business that we already have and see significant growth as these markets continue to develop and both lending, which means more funding instruments for banks as well as all the other lines of fixed income registration. We see enormous potential for that. But we are aware of the fact that there might be here and there some competing firms that we'll have to face.
Okay. Thank you. Pretty clear.
Our next question comes from Felipe Solomont, Citibank. Mr. Felipe, you may proceed.
Okay. Good morning, Sondra, Rogerio and everyone else on the call. Thanks for the opportunity. I have one question regarding technology and access revenues, right? So this is a business segment that grew 12% in 2016, 11% in 2017, 16% in 2018.
But it seems that this revenue stream is somehow flattish over the past quarters, right? I mean, when you look to 2nd Q 2019 revenues and compare it to 2nd Q 2018, the growth was of 6%.
So my question is,
what let's say, what the company has been doing to enhance this specific business segment? And what can we expect in terms of growth going forward? Should we see the growth rebounding to the levels in 2016, 'seventeen and 'eighteen or better to keep a more cautious expectation for this specific business? Thank you very much.
Yes. Thank you, Felipe. We I don't have all the numbers for the previous years and the factors front of me, we can get back to you offline. But I if I recall correctly, I think that a significant part of that growth in the previous periods were due to currency elements, because most of this is market data and we charge market data from most of our vendors from the vendors, which are our clients in U. S.
Dollar. So that is one factor that might be, let's say, impacting the comparison that you're noting. Having said that, we do have a number of initiatives in the data and analytics segment. These are not short term things that you see right away. They depend on the development of the market, on the sophistication of our clients and on them also having, let's say, bigger assets under management that will demand more information, more analysis, more sophistication on their investment strategy and therefore also a willingness to buy these new data products.
So we are working on pricing of fixed income instruments. We're working on several, let's say, reports and different ways of packaging information that we have within B3 to serve these clients. We're testing some of these ideas with the client community to evaluate their merits. We are looking at what other international exchanges have done and trying to bring that in. We have recently created sort of a specific department within B3 with a new senior leadership to organize internal data and serve the different client areas that want and product areas that want to create new things.
So we're very, I'd say, positive about the long term prospects of data and analytics. We have to, let's say, put this whole discussion also within the context of the new data regulation that has been implemented in Brazil, which both creates some constraints, but also we find significant opportunities given what we can now do and how people are looking at data going forward. But it's not going to be an immediate result. And as we have these kind of plans and products unfolding, we will discuss that with our shareholders.
Okay. Thank you. Thank you for the answers, Sander.
Our next question comes from the webcast. Good afternoon. Could you comment a little more about the incentive programs to individual investors? Specifically, if a million more of retail investors were to be added to the treasury direct and depository base, what would be the impact on revenues?
Thank you.
We how this incentive volume works, specifically in the case of the equity depository and the TreasuryDirect. Basically, we set targets in terms of growth for number of clients and growth for the amount deposited or under custody from these clients. So and we released these targets every 6 months. So we have in front of you the impact from the program that was in place in the first half of twenty nineteen. We just revised these programs, raising the bar in terms of targets, in terms of growth.
And now we will follow how the brokerage firms will perform considering these new targets. So this is something that we will release every 6 months. The idea here, as Daniel mentioned, during the Q and A, is to foster market development. And to do that, we are willing to share part of our financial benefits. And we have total flexibility every time we revisit these incentive programs to make the targets more aggressive or to adapt that to the new reality depending on what is happening in the market.
Just one more observation. These incentive programs are published by us to the entire market. So we can speak offline and sort of help you do the math under the current program, what would be exactly the impact, but we make sure that we disclose this openly to all market participants because it's obviously something that is available for all brokers. But by consequence, also our shareholders have visibility of those of how those programs work currently.
This concludes today's question and answer session. I would like to invite Mr. Daniel Sonder to proceed with his closing statements.
I would like to thank everyone for joining the call. Thank you for the excellent questions. Please feel free to call our IR team if we left anything out or if you have any questions later on. And again, thank you for your continued support of P3. And thanks to all the team for putting together the call and the earnings.
That does conclude the B3 audio conference for today. Thank you very much for your participation. Have a good afternoon and thank you for using Chorus Call Brazil.