Earnings Call: Q2 2021

Aug 5, 2021

Good morning, and welcome to Toda's Second Quarter of 2021 Earnings Results Video Conference. With us today are Mr. Dennis Hirschkowitz, CEO Giuliano Tubino, Vice President of Strategy and New Businesses and Gioso Marmaja, CFO. We would like to highlight that the organization and conduction of This video conference is following the essential health and safety measures according to our legislation and health Protocols required by the competent authorities. We would like to inform that all participants will watch the video conference during the company's presentation. Afterwards, we will begin the Q and A session for investors and analysts when further instructions will be provided. Please request assistance by dialing star 0. The audio and video are being presented simultaneously on the Internet atri.totus.com.br. Before proceeding, we would like to clarify that statements made during this conference call concerning the business perspectives, projections and operational and financial goals of Todos are beliefs and assumptions of the company's Management as well as information currently available. Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions since they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, the industry conditions and other operational factors may affect Totus' future performance and may lead to results that differ materially from those expressed in such forward looking statements. Now we would like to hand the floor to Mr. Dennis that will start the presentation starting on Slide 3. Good morning to everyone. I hope you are well, safe and healthy. A drop in critical hospitalizations and deaths as a result of the progress of the vaccination and program is the news we have all been waiting for. This has enabled the first signs of activity and normalization. With everyone's effort, we hope we're coming close to the end of this very difficult period. Internally, this effort has translated into another quarter full of progress regarding the execution of our strategy to build our B2B ecosystem that goes beyond ERP, expanding our addressable market and increasing our take rate. And once again, we've maintained the balance between growth and profitability staying within the rule of 40. For this, I would like to express my gratitude and recognition for the work and dedication of each one of the Tatoo's this quarter with a team united by the same ambition. We continue daily engaged and committed to the digitalization journey, which aims to expand TODAS, always aware of the unique opportunity we have to expand more the value generated to our customers and throughout the entire relationship chains. Finally, after completing the acquisition of RD Station and the consolidation of the results for the month of June. Starting this quarter, we will start presenting the financial and operational results of Todas segregated by the different business dimensions. The first of them is management. It is the foundation in which the dimensions of the Eko system are being built. It includes our ERP HR solutions, the specialized solutions for 12 economic segments and where the data and integration are generated. The second is the business performance dimension. Here, we seek to leverage results, performance and relationship with the different business areas of our customers. Here, we also consolidated the digital marketing platform, RD and Tail and the sales support solutions, e commerce and OMS and we finally have Techfin. The dimension seeks to simplify, spend and financially enable access to B2B Financial Services through the intensive use of digitalization and big data. It is currently composed of solutions of credit and new products. Now Maja and Tubino will elaborate on the results of the quarter starting on Slide 5. Maja, you may proceed. Thank you, Dennis. As Dennis has already mentioned, this quarter, TODES showed once again a balance between growth and profitability with an an increase of 20 with a 20.22 percent and consolidated net revenue and adjusted EBITDA margin of 24.1%, in totaling 46% within the rule of 40%, an increase of 13 percentage points year on year with all 3 dimensions presenting performance that are worthwhile highlighting. In management, recurring year on year organic growth showed further evolution rising from 12% in Q1 of 2021 to 16%, driven by a 26% growth in S and SaaS revenue in business performance. The highlight is also the recurring revenue, and we have a 50% growth year on year. And Tech Fing suppliers' credit production reached a new record ending the quarter at more than BRL 2,400,000,000. This is a growth of 93% in contrast to the same quarter last year. As planned a little over 2 years ago. We currently have a number of drivers that are driving our growth. The business performance in Techfin Dimensions are gaining quick relevance, and we present together more than 15% of the consolidated revenues for the quarter and 36% of the year on year growth of the same revenue. Together, Tech and business performance. In SaaS, management represented more than 40% of the revenue during the quarter and have already accounted for more than 70% of growth in our revenue as shown on the charts to the right. This revenue growth that, together with discipline and management costs and expenses, led to an increase in the solidated contribution margin and consequently a 34% growth in EBITDA as we can see on the chart on Slide 6. It is worth noting, as you can see on the left of the slide, the business performance and Techfin contribution margin combined represented 9.8% of the quarter's contribution margin and were responsible for 32% of the year on year growth. Now analyzing the results of each dimension on Slide 8, we highlight the net revenue of the management dimension reached $679,000,000 during the quarter, showing a year on year growth of 13% in contrast to 10% of growth in Q1. This growth was mainly driven by the acceleration of the recurring revenue, which grew same percent year on year and totaled $560,000,000 during the quarter and 82% of the Management net revenue, the highest ever recorded in a quarter. This mark achieved by our recurring revenue is the result on the focus given to SaaS and claudification, as we can see on the chart at the center. The SaaS revenue grew 26% year on year compared to 24% of growth during Q1. As a result of the 68% increase in new signings and the 35% increase in cloud revenues, especially in the segments of agribusiness, distribution and retail. And aiming to meet the growing demand for cloud solution, we are expanding our availability zones with the inauguration of the new Zoned in the Northeast of Brazil, which were added to the zones to the Southeast, and this will provide lower latency and optimize performance to customers. Finally, as you can see on the chart to the right, ARR annual recurring revenue presented for net addition of BRL 119,000,000, exceeding by 194% Q2 of 2020 performance and by 32% Q1 this year. We are accelerating SaaS added to the increase in the renewal rate that is at a level close to 99% to for the contractual adjustments in the period. Now on Slide 9, the progress and recurrence associated with reduction of provisions during the first half. This is 300 basis points during the 1st semester. This expansion was possible even with the investment in the modernization of the portfolio and then in the increase in quality, aiming to leverage new avenues of growth and increased the efficiency and the allocation of resources. Now I give the floor to Tubino, who will comment on business performance and Tech Fin starting on Slide 10. As mentioned in the last call. We worked a great deal on the performance dimension with RD with the month of shown already consolidated in the results of the quarter, representing more than 90% of the ARR in this dimension. The recurring revenue from business performance represented 98% of the dimension revenue with an organic growth of 50% year on year as you can see to the graph on the left. As of the next quarter, it will be possible to observe in DKK10.9 million. This performance had as main levers the addition of new customers, the upsell driven by the product led growth PLG strategy. Besides the company's capacity to work with cross sell with other offers such as CRM. We also highlight the strong evolution of digital commerce observed in the graph at the right, which grew 2 51 percent in number of clients year on year and had the number of clients in production that are already generating GMV gross merchandise volume multiplied by 7. The annualized GMV has already reached at $189,000,000 We see in the digital marketing platform a wide avenue for growth in the market that is taking its first steps in Brazil, but with a prospect of great expression in the short term. Until then, we did not have a strong player that could consolidate the market. Besides being the strong player, the integration of this platform and the dimension itself will give Totus a huge competitive edge. We go on to Slide 11, where we notice that despite being a new dimension mentioned focused on growth, the business performance business model is already scalable with a 51% contribution margin. If we consider the pro form a numbers for the quarter, adding the results of April May of RD Station, the contribution margin equals that of management dimension with 53%. It is also worth mentioning that RD station alone ended the quarter with recurring revenue advancing 47% year on year with a positive EBITDA margin, which is something above the acquisition plan for the period. We go on to Slide 12. Techfin that maintained its accelerating trend advancing 126% over the 2nd quarter 2020 and 9.6% over the Q1 2021. As shown in the graph on the left, the supplier operation once again set a new record of DKK 2,400,000,000, as mentioned by Maja, of credit production this quarter, driven by the metallurgical, civil construction and IT equipment sectors as well as the high cycle of CELIQ rate hikes. As a consequence, the loan portfolio also attained the highest level of DKK1.4 billion shown in the chart above center, which is not even higher due to the seasonal event of agribusiness off season, which typically has a longer average term, leading to a reduction in the overall average of 9% when compared to the Q1 2021. The integration between TODAS and suppliers continues to advance with 2 more TODAS MICE Negosios sales affiliates added in the quarter totaling 5 in production, and we anticipate more clients that have generated 1 point DKK 4,000,000 in revenue from credit products in the Q2 2021, a 25% growth versus the period quarter. Moreover, we can see in the graph at the bottom right the number of clients activated with the new TechFin products that increased ninefold when compared to the Q2 'twenty, with an acceleration of this growth and number of clients remaining very strong in the 2nd semester. Finally, as we can see in the graph at the bottom center of the slide, All of this production performance was achieved without neglecting the discipline in credit granting reflected in low levels of delinquency of 2 50 basis points below the in the Brazilian average and still slightly below the levels observed before the pandemic, even with a low level of default because there was no reversal of provisions from previous periods. We had a higher expected loss provision this quarter compared to previous quarter. When we add this to the effect of the time lag in the passing on of the Selic rate Since the revenue recognized reflects a portfolio originated in previous months, which does not happen with the cost of funding always updated with the current interest rate, we had a reduction of DKK3 1,000,000 in the contribution margin presented on Slide 13. When normalizing these two effects, Techfin's contribution margin shows a growth of 6.4% quarter on quarter. Finally, the supplier funding structure concentrated in FIDC has allowed significant increase in its return on equity, which in the last month reached 56%, 39 percentage points above the Q2 'twenty and 30 percentage points above the Q1 'twenty. I would now like to return the presentation to Dennis, who will speak about our moves forward in terms of ESG. Thank you, Thubino. Let us now go on to Slide 15. And as we mentioned in the previous quarter, As the largest technology company in Brazil, we will seek whenever possible to bring our advances and initiatives in ESG. This quarter, we can highlight the release of our data privacy policy, a document aligned with the LGPD, which demonstrates a priority given by Totus to the topic, the release of the annual reports, graded report and the diversity and inclusion e book based on transparency and global best practices. One of the highlights of the integrated report was the materiality update, which counted on the engagement of several stakeholders and whose results will be used by management in prioritizing the ESG agenda topics for the next biennium, The election of Totus as the best company in TMT Technology, Media and Telecommunications Sector in the Institutional Investor ranking. On Slide 16, I convey as a final message that like in a tennis game, we are and will always be in motion either with a strong M and A agenda, with a large and diversified pipeline, looking for creative ways to unlock value as, for example, the movement with Diamensa, which will now have dedicated resources, is greater focus and autonomy. There were 2 quarters with hard work and significant strides in all the three dimensions that make up our strategy of building the ecosystem of B2B Technologies in management. Recurrent revenue already reaches almost 3 years of growth in a 2 digit range, even with viewed leadership in the Brazilian ERP market, which reinforces that the market is far from maturity and business performance with the completion of RD Station acquisition, we took a decisive step in structuring this dimension, which has a high potential for value generation. We will bet heavily on this dimension with a broad strategy of GMV generation and take rate increase. Finally, in Techfin, we are just beginning our journey. There is much more to come. Our goal is to revolutionize the financial services offering by expanding our portfolio with personal and more competitive products to help companies to overcome the challenges of their business using the power of technology. We will continue on this growth path. We see a brilliant future with enormous opportunities. Totus is a beneficiary of the digitalization of economy, including the management sphere. We are now at your entire disposal for questions and answers. Thank you. Ladies and gentlemen, we will now go on to the question and answer Our first question comes from Marcelo Santos from JPMorgan. A good day to all of you. Thank you for taking my questions. The first refers to ERP, which are the transactions that would make sense to do over RD? How can you complement this and which is the focus? The second question refers to management, which would be your focus in coming years, thinking of technology. You have shown an increase in margin. Is this what we should expect in coming years? I can begin with RD Station when it comes to best performance. Our strategy is to truly help clients and everything that refers of their penetration into the market with subcategories, categories of software and Technology. RG has given us greater strength, very strong marketing automation, and it begins to have success in the CREM sphere. As you asked, This extends to customer experience, solutions analytics experiences, solution marketing, everything that in a certain way will help the client to relate to better understand their clients and to carry out more digital sales. When we refer to the second question that you asked about the management margin. Now this dimension perhaps is the most mature dimension that we have, it is developed. It doesn't mean that the market is mature. We have grown in the last few years and have shown this With the levels of recurrent revenues, this dimension has increased significantly. And it is natural to imagine that the scale gain that we have in this dimension will continue to take place. If we look at the management dimension, this gain of scale will still be possible. What I foresee is the dimension and the company will take a margin leap greater than the one in in the last year. This is not something that perhaps we will expect. Perhaps because of the nature of the company's revenue, it is primarily recurrent in 80% in management, and it is natural to see in evolution, more in line with the what we saw in last year's in recurrent revenue. Once again, this will not allow us to take a huge leap. Perhaps quarter on quarter, we may have more volatile behaviors, but on an annual basis, at least, is what I foresee. Thank you. Our next question from Mr. Enrico Trotta, BBA Itau. Good morning, Maya. Thank you for the presentation. I have two questions I would like to ask about supplier. We've seen the increase. And because of the Selikh, I would like to know if you are thinking about other funding alternatives for supplier and what options these would be. And when we see a mismatch between cost and revenue because of the Selikh, when will you see suppliers' margin going back to normal? When this increase of Selig, will reflect on the revenue and when Supplier's margin will be closer to what we saw during Q1. I would like to understand these points within Supplier and RD stations. You had already mentioned that RD was exceeding your initial expectations in your budget, and I would like to know how what RDs performance will be especially during the Q3? And how do you see the cross selling with your current at Todos, bearing in mind the results of RD. Okay, I will start. And to be in May, if they want to add something, that would be excellent. Now when we think about suppliers specifically, I would say that yes, yes, we have been assessing for some time different funding possibilities. We see a present and a brilliant future for suppliers. In terms of growth. We see strong and sound growth as you could see with a level of default way below the market average and even below the historic average for suppliers. So this strong growth brings funding challenges, and for that, we have to be creative. So yes, rest assured that throughout The future, we will use alternatives and options that will allow supplier to grow as it has been growing. Now regarding the mismatch, it is difficult to say exactly when the mismatch match will end because we really don't know when the strong actions in the Seliki will end. Today, well, the market shows us that at the end of the year and during the beginning of the year, these movements of 0.70 fund 1 point in each meeting, well, they will stop as the average term of the portfolio is more or less 50 days. Once this stops in a month, things will go back to normal. But Until these ups and downs go on with our Seliki, we won't be able to see exactly what the funding costs will be and the revenue. Now funding costs, yes, we saw we felt the effect of the mismatch, but we also felt the effect of the different fundings. And this is a specific characterization of the FIDIC model, which presents advantages. Nonetheless, there are points that can cause problems. And when the operation grows rapidly, like right now, will, first, you fund and then due the funding works with origination and creating portfolio and as a consequence with new revenues. Today, we this Now we had the effect of 2 things. We had a greater cash positions because of the fundings reflected on growth and also the mismatch of these rates on the revenue and also on expenses. Now in terms of RD, Enrico, I am going to repeat what was mentioned as soon as we acquired RD. RD is growing at a good pace. It had been growing at a good pace. It's a highly differentiated company. It is difficult to find a B2B tech company that has the maturity and presents the growth that RD has offered. So our intention is not to generate any type of disruption in its pathway. So yes, we will do the integration and the extraction of synergies. Calmly, of course, we have been in talks Since the approval by the antitrust agency, Tubbino will mention this, there is also a strong proximity with the RD team. So we are finding different pathways, and we see possibilities with all of these synergies. And we will do things calmly because we want RD to continue its path. And I want to add, and we don't want to bring problems that currently don't exist in RD. Now what about the growth of RD that is noted. And in parallel, we see the growth of our digital commerce operations, we practically tripled the amount of customers in our digital commerce platforms, and this shows a positive effect and R and D benefits itself, and it will benefit itself in the upcoming years because of the digital maturity of our countries. The pandemic boomed this. Now all the customers relate to their customers in an automated way, in a digitalized way. When we analyze in-depth, they were able to increased the trip up the operation, the amount they increased the amount of customers, they increased the cross selling, the increased retention, but and this shows the maturity of the market requesting solutions. Our RD helps us a lot in this type of positioning. Thank you, Tobias, Dennis. Our next question comes from Leonardo from UBS. My question is about management, the revenues, the part of SaaS doing very well and is quite high. I would like to hear more about the segments that have done so well and that you remarked on the release retail, for example. What is it that happened specifically? And how do you foresee the growth in cloud management in the second half of this year? The segments that we mentioned here are segments that, in fact, have had a very good dynamic. And we mentioned metallurgy, for example, agribusiness, these are sectors that have been undergoing a very good dynamic year on year. And consequently, this has given them a thrust and they have become ever more effective in terms of management. We see other sectors that are recovering. But as you mentioned, cloud, we're working a great effort towards digitization. Some sectors are doing better, and they also have a higher capacity to invest. And they're going to use the digitization as one of their competitive edges. The fact is that this digital world sometimes makes us think of e commerce, omnichannel that, of course, are doing very well, but that's not it. It also requires that you have management, a very correct management, and this ends up demanding that you revisit processes, tools because of the new digitization tools. And obviously, it is more connected to sectors such as the Retail 1 distribution, but very generally, the digitization is impacting all the segments. Thank you, Maja. And based on what you said at the very beginning, demand for These sectors has been stronger. The sectors are growing this year. And of course, you have a good share of credit among these clients. On the part of TOTUS, which are the other product launches or service launches that could have had an impact on the management dimension? Or has it only been the growth of clients? I mentioned the issue of digitization, which as a consequence being demand for segmented solutions. We have to enter more into each client, and we also have to revisit some back office routines. And in several cases, we have clients that are migrating to the cloud. And of course, this creates an opportunity to revisit them to implement e commerce and omnichannel and see if there could be other solutions going forward along the lines of digitization, electronic signatures, for example, CRM as well as other similar tools. Maja, if you allow me, the HR itself has had a very strong growth for us where we have been on a journey these last few months, possibly since last year of significantly expanding our portfolio. Totus has always been strong and continues to be very strong in the payroll and the HR segment. But we have made great strides and launched several novelties in terms of human capital. Our client base is ever more sophisticated and demands that from us, and we have responded to them. HR is a typical example of how we are becoming more sophisticated and the growth potential that this can bring about in the management market? Very well. Thank you. Thank you, Maja. Thank you, Dennis. Thank you for the answers. Thank you. At this point, we would like to end the question and answer session. And we now return the floor to Dennis for his closing remarks. I would like to thank you once again, thank the TAU Tours once again. A very difficult quarter with very positive results indeed. And I call that the new quarter has already begun. We have another battle before us. But, doubtlessly, we will have a performance and excellent efforts. I would like to take advantage to congratulate Tubino. We didn't bring him here in vain. It is his birthday today. So On my behalf and on behalf of Totus as a whole, happy birthday. Have a good day.