Good morning, ladies and gentlemen, and welcome to the audio conference call about the earnings results of V3 for the Q1 of 2018. 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 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 would like to welcome you all to B3's Q1 2018 earnings conference call. I'm here with Rogerio Santana, Head of the Investor Relations team as well as the Finance and Investor Relations teams, And I would like to start by thanking them for preparing the documents you have in front of you. And 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 Q1 2017, which includes BMNFovespa and Setit's figures for that quarter.
I'll start the presentation in Slide 3, 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 4 out of 5 of our major revenue groups growing at a double digit pace. Average volumes grew around 40% in both BM and F and Bovespa segments and reached all time highs, while the numbers of vehicles financed increased in the high single digit, 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 had 2 working days less than in the previous year, which offsets part of the volumes growth previously mentioned. Adjusted expenses reached $225,000,000 2.9 percent lower than in the Q1 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 $760,000,000 more than 18% increase versus the previous year. Despite such 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 stability of EBITDA margins and we will go into more details about that later on.
Recurring net income reached BRL448 million, a 15% decrease, mainly explained by a lower financial result as we currently hold a smaller cash balance versus last year Q1 as a result of the transaction with Setip, which was paid for at the end of the quarter in 2017. Now Rogerio 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 4, where you see the revenue performance and breakdown for the Q1 of 2018. In the bar chart on the left side, we see that revenues from all 5 segments grew year over year, leading to an 18% growth in total revenues. The highlights were the BM and F and Bovespa segments as well the Cetit Lienz and Loews segment.
This left one was impacted by change in the business model of Sun Services, and 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 5, 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 2 most significant groups of contracts, the interest rates in BRL and FX rate contracts grew around 30% year over year, while stocking index contracts more than doubled in the period.
On the other hand, the average RPC fell 4.7%, reflect 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 main FX contract and main stock index contracts and 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 the Slide 6, 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 BRL80 1,000,000,000 in the Q1 of 2017 to BRL11.3 billion in the Q1 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 solid growth from 71.1% in the Q1 'seventeen to 77.7% in the Q1 'eighteen.
Both performance are shown in the bottom right chart. Trading post trading margin fell 3.6% year over year due to lower participation of equity derivatives and discounts triggered by higher volumes traded. In the Q1 2018, the ADTV was above BRL9 1,000,000,000 in every month of the quarter. And as you know, this is the first threshold that triggers volume discounts to the market. Next, in the Slide 7, we present the performance of the strategic unit segment.
The value register of fixed income instruments was up 12%, driven mainly by increasing insurance of bank deposit certificates or CDBs. This increase in turn propels the outstanding value of fixed income securities on which maintenance fees apply, which reached BRL4.5 trillion in the Q1 of 2019 and raised 13% year over year. Revenue 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 Q1 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 among amounting BRL7.8 million and applied on different revenues in this segment. In the Slide 8, we show revenue for the Citipoli and the loans segment, which grew 16.1% over the Q1 of 2017, propelled by 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 Q1 of 2018 versus 74.4% in the previous year Q1. This reduction is explained by the fact that B3 has 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 adopting the state of Sao 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 the Slide 9, the contract systems service was impacted by the adoption of a new business model in the state of Sao Paulo, which introduced a new player in the chain used to register a loan in the local DMV of its state.
Under this new model, B3 transmits on behalf of its clients detailed information about loans to an accredited registering company, which in turn registered the contracts with the local DMV. In the previous model, B3 transmitted this information directly to the local DMV, which executed the registration of the loan. Under this new model, we now bundle in the price charge 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 company is booked as an expense by B3 under the expense line 3rd part services.
And 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 act, there was a negative impact for B3. In summary, under this new model, the total fee per contract transmitted will increase from BRL55 per contract to BRL90 per contract, while revenue linked expenses will increase from BRL14.9 per contract to BRL57.6 per contract, growing proportionally more than revenues. This explains why the earn from each contract transmitted will decrease to BRL26 point 34 per load when transmitted after paying the costs of the services provided by the registering company, the sharing of revenues with other partners and the taxes on revenue.
It means a 30% reduction in our gain. In the previous model, B3 used to earn BRL37.5 per construct. These changes are fully reflecting the Q1 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 Sao Paulo over the next quarters, B3 revenues and expenses will be impacted again.
Now I will hand over the presentation back to Daniel, who will detail our expenses and other financial highlights. Thank you, Rogerio. On Slide 10,
we have updated information on expense guidance for 2018 and the actual expenses for the Q1 of 2018. P3 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 Rogerio 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 Satif are reaffirmed and have not changed.
I will skip the explanation on adjusted expenses because I will cover this in the next slide. So starting at the depreciation and amortization line, the main highlight is the fact that in the Q1 of 2018, the numbers include $187,000,000 in amortization of intangibles recognized in the context of the combination with Setif. The amortization of these assets started in April 2017, so we're not there in the 1st Q 'seventeen. In the case of the expenses related to the combination with Sative, 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 Rogerio explained a minute ago, we note that this group of expenses was impacted by the new business model adopted in the state of Sao Paulo for the contract system.
From now on, these expenses will be more exposed to market activity in the Citi, Pins and Loans segment. Also, if other states adopt the same business model, the guidance of 200 to 220 is likely to be revised, as will be the case if the performance of the segment differs significantly from our forecast. The only two groups of expenses for which there is no guidance provided are stock rent expenses and provisions. In both cases, a significant portion of these expenses is directly linked 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 the non recurring provisions booked in Q1 2017 in the context of the combination with CGP.
Adjusted expenses reached $225,000,000 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 capitalized in projects. The synergy gains from the combination with CITIZ 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 2018. As a consequence, the Q1 of this year is the 1st quarter when we see the full impact of the synergy gains from the combination with Ctrip.
Between the years 2018 2020, the expense synergies will amount to BRL100 million per year. In 2021, after the conclusion of the data center integration process, total synergies will increase to BRL110 1,000,000 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 BRL7.5 billion at the end of the last quarter, composed by B3's own cash and 3rd 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 $5,000,000,000 in Q1 2018.
V3's own cash includes the necessary cash to run the day to day activities of the company that totals between $2,500,000,000 $3,000,000,000 This amount includes approximately $1,100,000,000 in clearinghouses required safeguards. The remaining adds to the liquidity that supports our activity at Central Concert Party and General Corporate Needs. The cash balance at the end of the Q1 of 2018 includes R200 $1,000,000 in interest on capital that were already paid in early May 2018. Mainly composed by market participants' cash collateral of R2 1,000,000,000 dollars mainly composed by market participants' cash collateral of $2,000,000,000 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 2x in Q1 of 2018. Our target is to reduce this ratio to 1x 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 $1,500,000,000 debt amortization scheduled for December 2018. Considering the company's cash position and the cash generation we forecast for the year, we believe it will be we will be able to amortize this debt at the same time that we keep a payout ratio between 70% 80% of the IFRS net income. With that, I'd like to conclude this part of the presentation and open up our question and answer section.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session from investors and analysts. Our first question comes from Raul Benjoli Verra, Banco Plurals.
Plural. I have two questions. They're related to the Fitbit Liens and Loan segment. First, you mentioned are second question, I see on your side here that you have 2 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 it will transit it to this new business model or not?
Thank you very much.
Hi, Ruben. 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 resuming our services or implementing or starting to offer our services in states where today we are not offering that. So 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 has 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.
And this is something that is under discussion currently with our clients. And we expect that the coming quarters, we'll 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.
The next question comes from Edouard Unichio, Banco Plural.
Plural. Just a follow-up on that. Is that regulatory, I guess regulatory changes have been driving this new model. So would be that inevitable to see the new model running out to all states going forward given this new regulatory frame? And if there is any kind of spillover effect for the gravames, the liens kind of business as well in the future, given that this regulation has changed and probably DMVs are wanting have a bit more share of the revenue pie?
And my second question relates to the dollar exposure. You see the 2nd 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, Anshul. This is Rogerio. Thanks for the question. Regarding the your first question, we expect that some other states will, in the coming quarters, migrate into this new model. But 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 department.
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 Lian business that you mentioned, that is the Resolution 689 that is going to be implemented in September this year. These new regulations currently under discussion with the National DMV as well as with ourselves and the banks and other third parties. Probably, it's going to 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 Lian business that we have today.
Yes. Now thank you for the question on the FX exposure. We have about 10% to 15% of our revenues exposed to FX, which have to do with the contracts in the futures division, in the BM and S division that are basically the solar linked futures. And that's about 10% to 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 2 thirds of that for the full year early on every year. So for that's to make our handling of our budget process and also the guidance is more, let's say, robust. So we are fully hedged on the 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. And we have a loan a direct loan that is also, let's say, structurally hedged through the loan structure that we did through a foreign subsidiary. So on the liability side, we also have no exposure.
The next question comes from Gabriel da Nobrega, UBS.
I just wanted to have maybe an update of the competitive environment with ATS. Do you think maybe ATS could begin operating this year or maybe even in 2019? And how could that impact your own business? Thank you.
Thank you
for the question, Gabriel.
We are following that situation. 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. And so we're following that. But 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 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. But 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. And if you allow me to make a second question, it's regarding your own pricing committee. We have seen fees and the margins coming down this year. Could you maybe give us an update of how this committee is ongoing?
And until what point do you expect the prices to continue on compressing? Thank you.
Yes. 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. And as FOGERIO 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 pricing the discussions with the pricing committee have been very, 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. So as these take place, we will incorporate them in our discussions with the market and with investors. But 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.
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. So the first is regarding the new guidance of revenues linked expenses, Are you assuming that this model is implemented only in Sao Paulo or it moves to what proportion of your base? That's the first question. And the second is what prevents the client of the service to bypass B3 and contract directly your partner in the service?
Is it a matter of credibility compliance or B2B is still offering any essential service in the process?
Luis, this is Rodrigo. Thanks for the questions. So the budget that we disclosed yesterday regarding revenue linked expenses considers a scenario where not only Sao Paulo, but also a second state migrates to this new model. So 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, we have to have additional revenue linked expenses.
We will also have at the same time additional revenues that today are not considered in our forecast. So 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 going, how it's evolving, okay? Regarding can you repeat your second question?
The second question is regarding the risk of clients that hires B3 for this service of bypassing the B3 and hiring directly the B3 partner to reduce fees, right?
To be very frank, this it can happen. And there is no restriction that prevents the banks or any other financial institutions to connect directly to the register. But why they have not done that is because we have a very strong relationship, not only with the banks, but also with the bank's federation and other groups of players. And 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 low ones. And this hub managed by B3 will connect to registering companies in different states.
So making a long story short, why the banks will keep using B3 services because of the value added it provides.
And also credibility maybe, right? So
Yes. 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 SLAs and so on and so forth.
And 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. It's a possibility for Minas Gerais, it is a possibility for other states and that we have not offered our services in the past. In the Slide 9 of the presentation, you see this stays in the gray color.
Our next question comes from Frederic de Maris, UBS.
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 should we expect on your side? And then on this topic as well, obviously, you won't be able to comment on the arbitration details, but is it correct to say that they have 6 months to get to a final decision and that the decision will be binding? In other words, does it take us to the 3rd, 4th 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 Q1. They did not take a lot of our time and effort. But obviously, operations teams were engaged in doing that.
It was connectivity tests only, not fully operational tests end to end. And 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. But 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. And yes, the results will be binding with respect to the price for the depository services, which is what's under discussion. And yet, the regulators sorry, the CGM 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.
Excuse me. We have a question of Pedro Gonzaga with Pacificus de Andrei Curcio through the webcast. Was there any retrutive payment related to the change of the contract system model in Sao Paulo?
Thanks for the question. This new business model was fully implemented since the beginning of January. So it is it applies from January 2 until the end of March. So 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 Rogerio Moraes with Quirao Capital. Are the revenues linked expenses 100% linked to the Systema 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. That is there are others 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. And once again, please feel free to reach out to our Investor Relations team if you have additional questions that we may be helpful with. And 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.