Good morning, ladies and gentlemen, welcome to the audio conference call about the earnings results of B3 for the first quarter of 2018. At this time, all participants are in a listen-only mode. Later, we'll 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.
Good morning. I'd like to welcome you all to B3's first quarter 2018 earnings conference call. I'm here with Rogério Sant'Anna, Head of the Investor Relations team, as well as the Finance and Investor Relations teams. I would like to start by thanking them for preparing the documents you have in front of you. Additionally, on behalf of the entire executive team of B3, I'd like to thank all of you for your continued trust and support. Let me take a moment to highlight that in order to preserve comparability, the year-over-year analysis is based on a non-audited combined income statement for first quarter 2017, which includes BM&FBOVESPA and Cetip's figures for that quarter. I'll start the presentation in slide three, where we show the operational and financial highlights for the quarter.
As we will delve into further details throughout the presentation, we had a very strong performance this quarter, with four out of five of our major revenue groups growing at a double-digit pace. Average volumes grew around 40% from both BM&F and Bovespa segments and reached all-time highs. While the numbers of vehicles financed increased in the high single digits, positively impacting our liens and loans segment. Our systems were fully prepared to deal with these unprecedented volumes witnessed in some of our markets. This was only possible because over the past years, we have made significant investments in our IT infrastructure, raising the bar in terms of performance, risk management, and systems availability. On the right side of the slide, we see that our revenues grew by 18% year-over-year, reflecting the very strong operating performance in the first quarter of 2018.
It is important to mention that first quarter 2018 had two working days less than in the previous year, which offsets part of the volumes growth previously mentioned. Adjusted expenses reached BRL 225 million, 2.9% lower than in the first quarter of 2017. Since the positive impact from synergy gains more than offset inflationary adjustments that apply on wages and contracts, which represent a significant portion of our expenses. EBITDA, adjusted for non-recurring items, was BRL 760 million, more than 18% increase versus the previous year. Despite such an increase, EBITDA margins were stable, around 68%, since they were impacted by the increase in provisions for legal disputes, in which part of the amount under discussion is updated according to the market prices of our shares, B3SA3. Additionally, the increase in revenue-linked expenses also led to stability of EBITDA margins, and we will go into more details about that later on.
Recurring net income reached BRL 448 million, a 15% decrease, mainly explained by a lower financial result, as we currently hold a smaller cash balance versus last year first quarter as a result of the transaction with Cetip, which was paid for at the end of the quarter in 2017. Rogério will give more details about our operational performance.
Thank you, Daniel. Good morning, everyone. I'd like to ask you to move forward to slide four, where you see the revenue performance and breakdown for the first quarter of 2018. In the bar chart on the left side, we see that revenues from all five segments grew year-over-year, leading to an 18% growth in total revenues. The highlights were the BM&F and BOVESPA segments, as well as the Cetip liens and loans segment. This last one was impacted by changing the business model of some services. We will go into more details in the coming slides. In the pie chart on the right side, we see the breakdown of revenues for the quarter, which shows once again how highly diversified and well-balanced our business is.
Moving to slide five, you will find details of the financial and commodity derivatives market performance, where we had a 24% revenue increase year-over-year. As you can see, we experienced significant volume growth in all groups of contracts. The two most significant groups of contracts, the interest rates in BRL and FX rate contracts, grew around 30% year-over-year, while stock index contracts more than doubled in the period. On the other hand, the average RPC fell 4.7%, reflecting a higher share of day traders and high-frequency traders that are eligible to discounts. These two groups of investors are becoming more relevant in the mini FX contracts and mini stock index contracts, putting more pressure on the average RPC of those two groups, as you can see in the table on the bottom right of the slide.
In slide six, we have the performance of the equities market in the Bovespa segment, where we also saw revenue growing more than 30% year-over-year, driven by a 40% increase in the ADTV, which went from BRL 8.0 billion in the first quarter of 2017 to BRL 11.3 billion in the first quarter of 2018. All-time high for this segment. This performance reflects the continued recovery of the Brazilian equities market, which is evidenced by the 29.4% increase in the market capitalization of Brazilian-listed companies. Turnover velocity also shown a solid growth from 71.1% in the first quarter 2017 to 77.7% in the first quarter 2018. Both performance are shown in the bottom right charts. Trading post-trading margins fell 3.6% year-over-year due to lower participation of equity derivatives and discounts triggered by higher volumes traded.
In the first quarter 2018, the ADTV was above BRL 9 billion in every month of the quarter. As you know, this is the first threshold that triggers volume discounts to the market. In slide seven, we present the performance of the Cetip Securities segment. The value register of fixed income instruments was up 12%, driven mainly by increasing issuance of bank deposit certificates or CDBs. This increase, in turn, propelled the outstanding value of fixed income securities on which maintenance fees apply, which reached BRL 4.5 trillion in the first quarter of 2018 and raised 13% year-over-year. Revenues generated by monthly utilization fees paid by our clients grew more than 20%, mainly reflects the new pricing policy implemented in January 2018.
Finally, it's worth note that the first quarter of 2018 revenue in this segment reflects the full impact of the sharing of expense synergies that arose from the business combination with Cetip. Which was translated in price discounts amounting BRL 7.8 million and applied on different revenues in this segment. In slide eight, we show revenue for the Cetip liens and loans segment , which grew 16.1% over the first quarter of 2017, propelled by a 8.5% growth in the number of vehicles financed in the period. The company's market share in the contract system contracted to 66.7% in the first quarter of 2018 versus 74.4% in the previous year first quarter. This reduction is explained by the fact that B3 has not offered a contract system service in the state of Minas Gerais since September 2017.
The most relevant issue in this segment has to do with the new business model for the contract system adopted in the state of São Paulo, which positively impacted the revenue from this segment. I will go in more details on that in the next slide. As you can see in slide nine, the contract system service was impacted by the adoption of a new business model in the state of São Paulo, which introduced a new player in the chain used to register a loan in the local DETRAN of each state. Under this new model, B3 transmits on behalf of its clients, detailed information about loans to an accredited registering company, which in turn register the contracts with the local DETRAN. In the previous model, B3 transmitted this information directly to the local DETRAN, which executed the registration of the loan.
Under this new model, we now bundle in the price charged by B3 from financial institutions, both the fees related to our own services and the fees related to the services provided by the registering company. This had a positive impact on the revenues reported under the contract system, as we discussed in the previous slide. On the other hand, the amount related to the services rendered by the registering companies booked as an expense by B3 under the expense line, third-party services. Thus, while revenues went up, so did expense. B3 worked with its clients and other partners to adjust several aspects of the economics of this business. In the end, there was a negative impact for B3. In summary, under this new model, the total fee per contract transmitted will increase from BRL 55 per contract to BRL 90 per contract.
While revenue-linked expenses will increase from BRL 14.9 per contract to BRL 57.6 per contract, growing proportionally more than revenues. This explains why the earn from each contract transmitted will decrease to BRL 26.34 per loan transmitted after paying the costs of the services provided by the registering company, the sharing of revenues with other partners and the taxes on revenues. It means a 30% reduction in our gain. In the previous model, B3 used to earn BRL 37.5 per contract. These changes are fully reflected in the first quarter of 2018 results. Additionally, B3 has worked on initiatives to offset most of the negative impact from this new business model, and the rollout of those initiatives is expected for the coming quarters. Finally, if other states migrate to the same model adopted in São Paulo over the next quarters, B3 revenues and expenses will be impacted again.
I will hand over the presentation back to Daniel, who will detail our expenses and other financial highlights.
Thank you, Rogério. In slide 10, we have updated information on expense guidance for 2018 and the actual expenses for the first quarter of 2018. B3 reviewed its guidance for 2018 full year adjusted expenses and started to disclose also the range for revenue-linked expenses. We believe that given the changes in the contract system described previously by Rogério and the relevance of such expenses and the total expense of the company, it will be helpful for investors to have an additional breakdown of our expense guidelines. This will allow investors to track the adjusted expenses of B3 over time, making consistent comparisons of those expenses which are not linked to revenues, while also having visibility of the expenses that are tied to the performance of our revenues, particularly of the contract system.
The 2018 guidance for depreciation and amortization and expenses related to the business combination with Cetip are reaffirmed and have not changed. I will skip the explanation on adjusted expenses because I will cover this in the next slide. Starting at the depreciation and amortization line, the main highlight is the fact that in the first quarter of 2018, the numbers include BRL 187 million in amortization of intangibles recognized in the context of the combination with Cetip. The amortization of these assets started in April 2017, so were not there in the first quarter of 2017. In the case of the expenses related to the combination with Cetip, we see a significant drop in that line, reflecting the fact that we have moved forward in the integration process.
When we look at revenue-linked expenses, as Rogério explained a minute ago, we note that this group of expenses was impacted by the new business model adopted in the state of São Paulo for the Sistema de Contratos. From now on, these expenses will be more exposed to market activity in the Cetip loans and loans segment. Also, if other states adopt the same business model, the guidance of BRL 200 million to BRL 220 million is likely to be revised, as will be the case if the performance of the segment differs significantly from our forecasts. The only two groups of expenses for which there is no guidance provided are stock grant expenses and provisions. In both cases, a significant portion of these expenses is directly linked to changes in the market price of our share B3SA3.
The significant year-over-year reduction in these two groups of expenses is mainly explained by non-recurring provisions booked in first quarter 2017 in the context of the combination with Cetip. In slide 11, the next one, we show the behavior of the company's adjusted expenses. Adjusted expenses reached BRL 225 million, a 2.9% decrease year-over-year. Personnel expenses were close to flat, despite the 3% annual salary adjustment and lower amount of personnel expenses capitalizing projects. The synergy gains from the combination with Cetip is offsetting this growth pressure. As we disclosed in December 2017, all the decisions and measures that were necessary to entirely capture the expense synergies of the merger were made and executed by the end of 2017. As consequence, the first quarter of this year is the first quarter when we see the full impact of the synergy gains from the combination with Cetip.
Between the years 2018 and 2020, expense synergies will amount to BRL 100 million per year. In 2021, after the conclusion of the data center integration process, total synergies will increase to BRL 110 million yearly. Moving to slide 12, we show our financial robustness with a solid cash position, which is an important part of the business of being a credible counterparty in the financial market. Our total cash amounted to BRL 7.5 billion at the end of the last quarter, composed by B3's own cash and third-party cash, mainly related to collateral pledged in cash by our clients. In the light blue bars, you will find B3's own cash, composed of restricted and unrestricted cash amounting to BRL 5 billion in first quarter 2018. B3's own cash includes the necessary cash to run the day-to-day activities of the company that totals between BRL two and a half billion and BRL 3 billion.
This amount includes approximately BRL 1.1 billion in clearing houses' required safeguards. The remaining adds to the liquidity that supports our activity as central counterparty and general corporate needs. The cash balance at the end of the first quarter of 2018 includes BRL 200 million in interest on capital that were already paid in early May 2018. The bars on the left side of the chart show third-party cash, which amounted to BRL two and a half billion, mainly composed by market participants' cash collateral of BRL 2 billion.
It is important to highlight that the company earns interest income on most of this cash balance. In slide 13, you see the company's debt profile and amortization schedule. Currently, our leverage is temporarily higher, with a gross debt to adjusted EBITDA ratio of two times in first quarter of 2018. Our target is to reduce this ratio to one time by the end of 2019, following the debt amortization schedule you see in the bar graph on the upper left side. As you see in the chart, we have a BRL 1.5 billion debt amortization scheduled for December 2018. Considering the company's cash position and the cash generation we forecast for the year, we believe we will be able to amortize this debt at the same time that we keep a payout ratio between 70% and 80% of the IFRS net income.
With that, I would like to conclude this part of the presentation and open up our question and answer section. Thank you.
Ladies and gentlemen, we'll 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 touch-tone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Rubens Oliveira, Banco Plural.
Hi, good morning. I have two questions. They're related to the Cetip liens and loans segment. First, you mentioned that you were working on a series of initiatives which will be rolling out in the forthcoming quarters. Could you give me a little bit more clarity on what exactly these initiatives are that you'll be implementing, and if there will be any new initiatives? Also, my second question, I see on your slide here that you have two states that are transitioning to the new business model. In your negotiations with the other states that you currently operate, do you have any probability that they will transit to this new business model or not? Thank you very much.
Hi, Rubens. Thanks for the questions. Part of the answer for the first question has to do with your second question, because some of the initiatives that we are implementing is trying to resume our services or implementing or starting to offer our services in states where today we are not offering that. By doing that, using this new model, we could increase our market share and partially offset the negative impact of this new model. The other initiatives have to do with the fact that we are revisiting some of the services, some of the discount schemes that we have and so on and so forth.
This is something that is under discussion currently with our clients, and we expect that in the coming quarters, we will be able to get more visibility on that, and then have more clarity on what is going to be the final net impact for us.
Thank you.
The next question comes from Eduardo Nishio, Banco Plural.
Hi, thank you for taking my question. Just to follow up on that, regulatory changes have been driving this new model. Would it be inevitable to see the new model rolling out to all states going forward, given this new regulatory frame? If there is any kind of spill-over effect for the gravame, the liens kind of business as well in the future, given that this regulation has changed and probably DETRANs are wanting to have a bit more share of the revenue pie. My second question relates to the dollar exposure. We see the second quarter, the dollar appreciation. If you can remind us about your net exposure to the dollar and if everything is hedged or not, and if you can open that on the revenue and expense side as well. Thank you.
Hello, Nishio. This is Rogério. Thanks for the question. Regarding your first question, we expect that some other states will, in the coming quarters, migrate to this new model. As you know, we do not control this process because it has to do with specific regulations that must be released by the local traffic departments. In our view, or based on our expectations, probably we're going to see more states moving in this direction in the coming months. Regarding the liens business that you mentioned, there is a new regulation that is the Resolution 689 that is going to be implemented in September this year. These new regulations are currently under discussion with the national DETRAN, as well as with ourselves and the banks and other third parties. Probably, we're going to see some change in the regulation, and specifically regarding what could be the impact for our business.
We are optimistic that we're going to preserve materially all the liens business that we have today.
Thank you for the question on the FX exposure. We have about 10%-15% of our revenues exposed to FX, which have to do with the contracts in the futures division, in the BM&F division, that are basically the dollar-linked futures. That's about 10%-15% of our revenue, as well as a little bit of market data and also dollar-denominated swaps in the OTC segment. We do not have any longer any hedges for that in the revenue side, so we are fully exposed to the FX changes on the revenue side. On the expense side, we have about 3% of our total expenses are dollar-denominated, but we do hedge, I would say, probably two-thirds of that for the full year early on every year. For that to make our handling of our budget process, and also the guidance is more, let's say, robust.
We are fully hedged, or not fully, but we are almost fully hedged on the expense side. We also have some liabilities in U.S. dollar. The 2020 bonds are fully hedged, both for principal and coupon payments. We have a direct loan that is also, let's say, structurally hedged through the loan structure that we did through a foreign subsidiary. On the liability side, we also have no exposure.
Great. Thank you so much.
The next question comes from Gabriel da Nóbrega, UBS.
Hi, everyone, thank you for the opportunity. I just wanted to have maybe an update of the competitive environment with some ATS. Do you think maybe ATS could begin operating this year or maybe even in 2019? How could that impact your own business? Thank you.
Thank you for the question, Gabriel. As you know, we have done some preliminary tests with a potential new entrant, as was our commitment with our regulators and with the antitrust regulators. So we're following that. We have no way to give you a precise timetable. I think that the timetable for their entering into operation will depend on their ability to obtain the approvals from the several regulators as well as complete the tests with us. There is, as you know, an ongoing arbitration discussion regarding one of the parts of our infrastructure which might be required, which is the depository services for them to enter into operation.
I think that, again, the schedule will depend on them obtaining the approvals from the regulators as well as dealing with certain legal and reputational issues which you might have become familiar with through the news.
All right, thank you. If you allow me to make a second question, it's regarding your pricing committee. We have seen fees and our margins coming down this year. Could you maybe give us an update of how this committee is going? Until what point do you expect prices to continue on compressing? Thank you.
Yeah, I want to be very emphatic in separating the fact that our fees have come down from any discussions in the pricing committee. The fact that our fees have come down have to do with our pricing structures, which have existed for several years and which have not changed at all due to discussions in the pricing committee. As Rogério went through, they have to do with volume discounts, special categories of investors, day traders, high frequency, as well as sort of the mix between longer-term contracts and shorter-term contracts, or mini contracts versus full contracts. These are the drivers of changes in our average fees, and this has been in our pricing structure for several years. Full stop. Next point is the discussions with the pricing committee have been very fruitful.
I think that we have established a good working dynamics with a very senior group of market participants. This, I think, was the intention from the very outset of this forum, was to be able to transparently discuss with them some potential adjustments in our fees that can go both ways. Sometimes we can propose upwards adjustments when that's justified with respect to international benchmarks and so forth. Sometimes we may propose reductions that could come from our very sensitivity to what clients are telling us, where potential additional volumes could come from if we change prices.
As these take place, we will incorporate them in our discussions with the market and with investors. At this point, I can say that we haven't felt any concern or pressure from market players, including those that are represented in the pricing committee, for us to have any sort of deeper or across-the-board reduction or changes in our pricing structure.
All right. That's very clear. Thank you.
The next question comes from Luis Fernando Azevedo, Banco Safra.
Hi. Good morning. I have two questions in the lien and loans segment regarding this new registry model. The first is, regarding the new guidance of revenues linked expenses, are you assuming that this model is implemented only in São Paulo, or it moves to what proportion of your base? That's the first question. The second is, what prevents the client of the service to bypass B3 and contracts directly your partner in the service? Is it a matter of credibility compliance, or B3 is still offering any essential service in the process?
Hi, Luis. This is Rogério. Thanks for the questions. The budget that we disclosed yesterday regarding revenue linked expenses considers a scenario where not only São Paulo, but also a second state migrates to this new model. As a consequence, if over the year, other states decide to shift to this new business model there is a chance that we will be obliged to revisit this guidance in the coming quarters. Of course, if to have additional revenue linked expenses, we will also have, at the same time, additional revenues that today are not considered in our forecasts. This is going to be the dynamic here. This 2018 is a kind of a transition year that we need to track month by month how it's evolving. Okay. Can you repeat your second question?
The second question is regarding the risk of a client that hires B3 for this service of bypassing B3 and hiring directly the B3 partner to reduce fees, right?
Thanks, Luis. To be very frank it can happen. There is no restriction that prevents the banks or any other financial institutions to connect directly to the register. Why they have not done that is because we have a very strong relationship, not only with the banks, but also with the bank federation and other groups of players. We are sure that the value added by our services is the main reason why the banks choose to keep using B3 as a hub that will concentrate all the information on the loans. This hub managed by B3 will connect to registering companies in different states. Making a long story short, why the banks will keep using B3 services because of the value added it provides.
Also credibility maybe, right?
Oh, yeah. It has to do with our long-term relationship with the banks, of course. When you have this kind of relationship, you build credibility with them. They trust on our services, on the quality of it, our SLA, and so on and so forth.
A follow-up, if I may. Do you think that with this new model, you could access back Minas Gerais state?
It is a possibility. It is a possibility for Minas Gerais, as it is a possibility for other states that we have not offered our services in the past. In the slide nine of the presentation you see these states in the gray color.
Yeah. Okay. Thank you.
You're welcome.
Our next question comes from Frederic de Mariz, UBS.
Good morning, everyone. Thank you for the opportunity. Just a follow-up on the ATS question. Can you just give us a bit of color? How is it working on the testing side, on the pure data side? Are you connecting the CSD with ATS? How are the tests? How much in OPEX or in spend should we expect on your side? On this topic as well, obviously, you won't be able to comment on the arbitration on details, but is it correct to say that they have six months to get to a final decision and that the decision will be binding? In other words, does it take us to the third, fourth quarter? If you could just provide a bit of color on the timing. Thank you.
Sure, Frederic. Thank you. On the testing side, we did some, again, preliminary tests earlier this year in the first quarter. They did not take a lot of our time and effort. Obviously, operations teams were engaged in doing that. It was connectivity tests only, not fully operational tests end to end.
We will continue to do so as we are asked to do, and we're keeping obviously our regulators aware of the fact that we're doing this and of the effort that we are engaged. It's not something that we're doing every week for several hours, at least not at this point. With regards to your second point on the arbitration, there is no specific, let's say, timetable that we can share with you. The timing, let's say, to kick start the arbitration was something that we were committed to. If we hadn't, let's say, reached an agreement up to a certain point, the arbitration procedures could have been started, and they have, but there's no timetable for them to end necessarily. This will be up to the arbitration court to decide at what pace they want to move forward with that discussion.
Yes, the results will be binding with respect to the price for the depository services, which is what's under discussion. Yet the regulators, sorry, the CVM, will have to, let's say, confirm that they are also comfortable with such prices, because the final word on this is always on the CVM side, and they chose the arbitration procedure as a, let's say, a way for the parties to try to come to an agreement, and then for them to give the final validation and sign-off on whatever price comes out of the arbitration procedure.
That's very clear. Thank you.
Excuse me. We have a question of Pedro Gonzaga with Pacífico Gestão de Recursos through the webcast. Was there any retroactive payment related to the change of the contract system model in São Paulo?
Thanks for the question. This new business model was fully implemented since the beginning of January. It applies from January the 2nd until the end of March. This is the impact that we see for the entire quarter. There is no other retroactive payments or expenses related to that.
The next question comes from Rogério Moraes with Kiron Capital. Are the revenues-linked expenses 100% linked to the Sistema de Contratos, or is there other revenues considered in the guidance?
It is roughly 95% of the revenue-linked expense is related to the contract system. There are other very small expense lines that putting all together does not sum up to 5%.
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 participating. Once again, please feel free to reach out to our investor relations team if you have additional questions that we may be helpful with. Thanks to all the team here next to me for putting all this together. Have a good day.
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.