B3 Sa Brasil Unsp/Adr

Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's earnings result for the first quarter of 2024. We would like to inform you that all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer section when further instructions will be given. As a reminder, this conference is being recorded and broadcasted live via webcast. The replay will be available after the event is concluded. We'll now like to turn the conference over to André Milanese, B3 CFO, who will be joined by Fernando Campos, Investor Relations Associate Director. Please, André, you may proceed.

Thank you. Good morning, everyone, and thanks for joining our conversation. first quarter results call. I'll start with a few remarks, general remarks, and then I'll hand over to Fernando to go into a little bit more detail about the dynamics, especially on our revenues. I think we saw a first quarter, which was not, that different from recent trends that we have been observed recently. Even though we had interest rate cuts in Brazil, they are still at high levels and all the uncertainties about the future of interest rates outside Brazil have also contributed to a scenario where a more recovery in the equities market has not been seen. So as a result of that scenario, we saw a negative impact on our cash equities business. But that scenario has also had also positive impacts, particularly on the OTC market and on the listed derivative volumes, which benefit from those uncertainties and that volatility. And once again, that reinforces the resilience of our business model and of our diversification in terms of revenues. As a result of that, we've seen a quarter of stable revenues where all the other business have grown and kind of compensated the reduction that we've seen in the equities segment. Even if we exclude Neurotech, which was not present as part of the first quarter of last year, our revenues would only be 1% below what in relation to last year. So I think that's a very positive result. And as I said, once again, that reinforces the diversification of our business model and the resilience of our results. In relation to the expenses, as we have been discussing during the fourth quarter results, we had a last quarter of 23 that was marked by some non-recurring impacts that we discussed earlier. at length with you at the time. Given that and without those impacts, as we have been saying, it was natural that we would see expenses this quarter returning to levels that were more similar to what we have seen throughout 23. If we take into account that, again, we didn't have neurotech as part of our numbers in comparison to the first quarter of last year, and the, let's say, non-recurring impact of the Dezenhola program, which has revenues associated with it, we would have grown our expenses below inflation which again, I think it is positive and very consistent to what we have been saying to you guys in relation to our cost discipline and our objectives for cost control. I'll pass on now to Fernando to give more details about the operational performance and I'll get back later on to talk about other things.

Thank you, André, and good morning all. Starting with the cash equity segment, where we had an ADTV of R$23.6 billion in cash equities, which represented a decrease of 7% and 3% compared to 4Q23 and 1Q23, reflecting the scenario that André mentioned previously. And this lower volume impacted the turnover, which stood at 128%. Regarding fees, we saw an increase due to the lower day trading volume in the quarter and the low participation of high-frequency traders in market-making programs and liquidity provider problems. And here it's important to highlight the importance of our product development agenda. It's worth noting that we actually saw growth in volumes of ETFs, BDRs, and listed funds, which represented 12% of the ADTV in the first Q24 versus 10% in the first Q23. In listed derivatives, we saw strong growth even despite the decline that we had in revenue, reflecting the lower revenue per contract in the quarter. Here are two main effects. The first one is some adjustments that we made in the fees of DI futures, DI contracts impacting the revenue per contract of this kind of contract and also the appreciation of the Brazilian real against USD, which affect the fees, the revenue per contracts of FX contracts and interest rates in USD contracts as well. In OTC, we saw a solid growth in revenue of 13%, with significant increase in fixed income and treasury direct outstanding balance compared to the first quarter of 2023, reflecting, as mentioned before, the high interest rate scenario. Here it's worth noting that despite the corporate debt market being really hot lately, the decrease that we saw in the outstanding balance of corporate loans in Brazil represents that some of the leasing debentures, we saw there was a high volume of leasing debentures that matured in this quarter. So that's the main effect here. Finally, in technology data and services, it's worth highlighting the growth in the utilization line of OTC, 8% compared to the first quarter of 23, and that this grows with the funding industry in Brazil. And it's, as André mentioned, it's worth uh uh highlighting here that the data revenue includes neuro protect revenue which accounted for which total 30 million reais uh in this uh first quarter uh and we don't we didn't have that in the the first quarter 33 but here i think it's important to to point out that Even though we didn't have that consolidated with us, the growth in Neurotech's revenue compared to the first part of 2023 was 30%. So, showing a good trend in this business. Now, I'm going to return to André. He's talking a little bit about other highlights.

Thank you, Fernando. Well, as a result of what we discussed in terms of revenues and expenses, we saw our recurring EBITDA amounting to 1.6 billion reais in the quarter with a recurring EBITDA margin of 71% and improvement in relation to what we've seen during the last quarter of last year as a result of those non-recurring items that we discussed. On the depreciation and amortization here, I think it is just worth pointing out that there is a significant amount of amortization that is related to the intangibles that were recognized as a result of the merger between CETIB and BMF Bovespa. These intangibles had an average term of seven years, given that the merger took place in 17. We will... we will start to see from the next quarter onwards a reduction in that line, which is already reflected in our guidances that were disclosed at the end of last year as a result of the end of that amortization. So a good chunk of that will be finish the amortization from the second quarter onwards. So that's just more of a reminder for you guys. On the financial results in Texas, I think there were no surprises. Revenues were higher in comparison to the fourth quarter of last year as a result of higher average balance of third-party funds, even though we saw a decrease in interest rates. On the expense side, again, behavior in line with the decrease in the interest rates. but here that reduction that we saw in the interest rates were offset by the higher level of debt as a result of the debt that we issued at the end of last year in October. This quarter we had One just, let's say, non-recurring item, which was the recognition of impairment of some of our platforms. Here, I think there hasn't been anything special about that. We are constantly evaluating our assets. And as a result of a reduction that we saw in the projected net cash flows, Throughout the remaining useful lights of some of those assets, we had to accelerate the amortization or to recognize a provision for impairment. And that was reflected in the first quarter results. Here, I think it is worth... highlighting that nowadays most of the internally developed platforms are being expensed so typically situations where internally developed platforms will be capitalized are more associated with the replacement of an existing technology, which has already established cash flow. And we haven't identified any further needs for provision on those assets. And as I said, over time, they will become less and less relevant, given that change, in the accounting criteria as a result of some of the changes that we've incorporated, such as agile methodology, the increase in the use of cloud and other things. On the net income and distribution, we had a recurring net income of 1.1 billion reais and a statutory net income of 950 million reais. Throughout the quarter, as a result of the quarter results, there were almost 530 million returned returns. to shareholders with 293 million paid through as interest on capital and 236 million in buybacks. We also announced yesterday the cancellation of 100 million shares that have been bought using our buyback program, which is also very positive. Another thing that was announced yesterday was the issuance of 4.5 billion in a new series of debentures. Here we're talking about a pure liability management exercise where we saw an opportunity to issue new debt at a lower cost, extend maturity, and increase have some positive financial impact as a result of that liability management exercise. So business as usual here, nothing really specific about that, but it shows our disciplining in managing very actively our liability portfolio. Finally, talking about some strategic developments that we announced during the quarter. We finally were able to launch the Bitcoin future, something that we had been discussing with you guys for a while. Still early days, but so far we are very pleased with the results that we are seeing, with the level of traction that the product is getting. uh we also launch the vxbr or the equivalent to the brazilian vix during this quarter again reinforcing our agenda of bringing new products meeting market demands and ensuring that we are uh contributing with the launch of new products to the development of our of our local market here And finally, I think I would like to just make some comments as well about the announcement of changes in pricing for cash equities that we also did during the quarter, which are expected to be implemented next year. For those who are more familiar with the company, this is something that is connected to the same structure that we announced back in 2019. Some of the changes that were announced at that time have been implemented. Others were not as part of some operational challenges that we faced. But most of those have been implemented we have been able to overcome some of those challenges. The main idea here is to simplify our fee structure, to equalize the fees among different types of participants. And we do not, as we said, expect any material impacts in our results as expected. as a consequence of those changes. I think that was it in terms of the main remarks. I would like now to leave the floor open for questions and answers. Thank you.

Thank you. The floor is now open for questions. If you have a question, please press the raise hand button. If you are connected by phone, dial star 9 to raise your hand. If your question has already been answered, you can leave the queue by clicking on the same button. Wait while we pull four questions. Our first question comes from Leandro Leite from UBS. Please, Mr. Leite, your microphone is open.

Good morning, everyone. Andrea, Fernando, NIR team. Thanks for the call. My question is related to the Disney Hala program. We saw it affecting both top line and expenses during this quarter. Just wanted to get some color if the net effect of this was positive for you. And if you could comment if we should see those impacts again in the second quarter. Thank you.

Thanks for your question, Leandro, and for joining the call. Yes, the impact was positive. We haven't been disclosing specifically the numbers, but they were positive. So we have more revenues, net revenues than expenses during this quarter. And you should expect to see some of that increase also impacting a bit of the second quarter because the program has been extended until the end of May. I don't believe it can be further extended, so we should still see some implications. or some impacts of that program in our results for the second quarter, at least up until May. But as I said, it was a positive contribution to our results, as we discussed as well in previous quarters. It was also an opportunity that we had to do develop a new platform, a new product that can be used for other purposes. And of course, even though it has a positive contribution, it is more relevant when you look at the expense base, given the size of our expense base, than it is to our revenue line, but still a positive contribution. And we have now a new product that has been developed and that can be further explored in other opportunities other than just the program itself.

That's clear. Thank you, André.

Thank you.

Our next question comes from Mario Pierre from Bank of America. Please, Mr. Pierre, your microphone is open.

Thank you. Good morning, everybody. Two questions from my side. One is on operating expenses, right? If we annualize the first quarter, we'll reach 1.9 billion reais while your guidance is 2.1 to 2.3 billion. So my question is, is there any chance that we stay below the range or do you expect expenses to be higher as the year goes by. Also on expenses, are there any initiatives that you can take to control expenses more? Meaning, my question is more related, sure, the revenues is out of your control, but expenses you can control. So I'm just wondering, given that the outlook is not as positive as we thought it was going to be if there's anything that you can do on the cost side to support earnings. And then my second question is related to competition, right? Like there were news again during the quarter of a potential new entrance into Brazil. Do you have any updates that you can provide us? And then when you look at your systems, your platform, your products, Do you think a new player could come in and offer something that you don't offer today? Or do you think competition is only going to be based on prices? Thank you.

Thank you, Mario. I'll start with the question about expenses. And We, as we said before, we will be working towards delivering an expense growth more in the lower end of our guidance for this year. You have to remember that typically during the second half of the year, we have the impact of annual salary adjustments, which are done based on the inflation index. fourth quarter typically has some seasonal impact. So even though we can try to anticipate any one-offs or things like that differently from what happened last year, there are some seasonal impacts affecting the fourth quarter results. So I think it is too early to... We are seeing a positive trend, We are trying to accommodate within that guidance things such as the extension of the Desenhalla program, for instance. So we haven't revised our guidance as a result of that. So we are working with some buffers that we are creating as a result of initiatives in terms of efficiency to absorb this kind of unanticipated events, but we will be working hard towards delivering expenses at the lower end of our of our guidance. And in relation to your point about us being able to manage better costs than revenues, I think you're absolutely right. But on the other hand, we also have to remember that we have that the operational leverage that we have is very positive when volumes are growing, we see a lot of that revenue grow pretty much translating directly into our EBITDA margins. But when volumes are not that great, there's not that much space in terms of costs that we can cut. And that's one of the, let's say, positive and negative aspects of having that structure with that high degree of operational leverage. Having said all of that, I think what you can expect is that we will keep seeking for initiatives that are bringing more efficiency to the company in order to be able to absorb those unanticipated needs. in order to be able to support additional costs that come as we keep launching new products and new services in order to be able to deliver a cost growth more in line with inflation. I think the other thing that sometimes investors question us is whether as a result of that scenario, we should maybe cut back on some of the new initiatives or perhaps delay some of the new product initiatives. And that's the sort of thing that we believe we shouldn't do, because a lot of that takes time for us before we start to see, to reap the benefits of some of those initiatives. That's what we believe will happen. keep us differentiated from any other alternative that might come to the market. And we do believe that by doing that, we could maybe help a little bit the short-term results, but we could be putting in danger the long-term results and sustainability of our business. And that's That's an era where we believe we should not we should not reduce expenses or expenditure or investments. OK. Talking about competition, I mean, rumors will be there for a while. And this quarter wasn't wasn't that different. And so far, it seems to us, based on everything that we have been hearing from clients, from investors, from analysts, that there hasn't anything new as part of that value proposition that is being discussed with market participants. And on our side, we... do not feel today that there is a big demand for market participants that is not currently being met or in the process of being addressed by the company. So that's where we will keep focusing on ensuring that we have technology that is meeting market demands, that is... competitive when looking at other jurisdictions or best practices outside Brazil as well, and ensuring that we have a very robust pipeline of new products and new initiatives, and that we are meeting market client demands and anticipating market demands with a very strong pipeline of products and innovations to the market.

That's very clear. Thank you very much.

Thank you, Mario.

Our next question comes from Pedro Leduc from Itaú BBA. Please, Mr. Leduc, your microphone's open.

Thank you guys so much. On the technology, data, and service front, this quarter we had a 10% growth in revenues there. Data and analytics up nearly 30%. Technology access also up strong. I was wondering if you could talk a little bit more about what drove this performance, clients, products, you know, just a little more color around this area, which seems to be growing nicely. Thank you.

Good morning, Pedro. Thank you for your question. So here, I think there are two main reasons. The first one is the growth in the utilization line of the OTC platforms, which grew 8% in volume year over year. And so we have the effect of the growth in the number of clients accessing the platforms with the growth in the funding industry in Brazil. And also, we have the impact of the annual adjustment for inflation that happens every beginning of the year here. And on data, I think the consolidation of Neurotech is the main reason. So we added 30 million AIs on our on the revenue line there. We saw a growth of 5% in our results, which shows a boost trend as well in the data business and also other lines as market data, they remain pretty much stable. Reminding that market data, a significant part of market data we charge in USD and we saw the evaluation of USD against the BRL when you compare the first quarter of 24 with the first quarter of 23, which kind of impacted a little bit, not only the derivative revenues as mentioned before, but also the market data revenue. Thank you.

Our next question comes from Eduardo Nishio from Genial Investimentos. Please, Mr. Nishio, your microphone is open.

Hi, good morning. Good morning, Fernando, Milanese. And thank you for taking my question. Two questions, actually, two follow-ups. On the technology side, if you can give us an update on the two acquired companies, Neurotech and Elway. Yes, please. Given the size of the acquisition, I believe expectations are high. If you could share with us an update on your plan to grow products in cross-selling synergies. In fact, we didn't see much of growth in that line specifically. If you can give us an update on that, it would be nice. Also, on competition, if you can give us an update on on ATG product or initiative, since they probably need to have interoperability with you guys, if you can give us, if they are doing that already, the plan, I guess, is to go almost full exchange trading, post-trading, if you can give us some color in that, I appreciate it, thank you.

Thanks, Nishil. So in relation to the acquisitions, As we have been discussing, I think last year was an important year where we had Neurotech joining the portfolio and a lot of time invested in organizing this data business that we are building with those with those pieces of parts of the business that B3 had already developed, Neway that had already was part of the portfolio since 2022, and Neurotech that was arriving, that arrived mid last year. So putting all of that together, integrating the teams, organizing our roadmap of products, our commercial efforts to ensure that we had the right incentives and to maximize cross-selling opportunities, quick wins and these sort of things. We also took the opportunity to to organize also the corporate functions of those companies, to create standardized processes, to seek for some cost efficiency opportunities as well. A lot of the effort of last year was to prepare these companies this new business that we were creating in order to maximize the capture of synergies, especially on the revenue side. I think it is early still to say that, but I think we have started This year with a more positive outlook. As Fernando mentioned, for instance, Neurotech has posted a growth in revenues in comparison to last year of around 30% during this first quarter. That does not appear in our figures because Neurotech was not in our numbers for the first quarter. of last year, Neway is resuming a track of growth, lower growth at this stage, but it's positive because we are reducing churn there and other important measures that have been taken by the management team there. And we also are on track to to make the new initiative as a standalone initiative sustainable in terms of cash generation. And over time, I think we will start to see more and more of that as a a single data initiative for the company which will have contribution from the acquired companies and from the products that were already developed at B3. But we remain, let's say, very optimistic about the potential that that could have in the long term for the company. In your second question about ATG, honestly, it's a little bit about what I did mention during the question from Mario. I mean, What we know is what probably you guys know, what we hear from clients, what we hear from investors, from analysts. They have been going to the market saying that they will be offering the post-trading solution. So far, we haven't received any sort of contact from them in terms of preparing our infrastructure to connect with theirs. So nothing like that. And again, it seems based on everything that we have been hearing, that is going to be a similar offering that they are not coming with any anything different in terms of product or services or technology. And, you know, we will remain monitoring that situation. We will remain putting a lot of attention in ensuring that our client needs are being met, that we keep our roadmap of products very robust, and that we keep bringing these new solutions and new products to the market, meeting their demands and sometimes anticipating some of them as well. So I think we will keep focusing on that agenda. And I think so far there hasn't been any significant developments or news on that front.

Great. Thank you so much.

Our next question comes from Chito Labarta from Goldman Sachs. Please, Mr. Labarta, get my phones open.

Hi, good morning. Thank you for the call and taking my question. Andre, I had a question on, I guess, your capital management. I mean, you continue to generate cash. I mean, you're paying dividends and buybacks. But just given, you know, sort of the slow growth that you're seeing in revenues, do you think there's more room to increase some of this capital distributions, either in the form of higher dividends or buybacks from here?

Hi, Gito. Thanks for your question. Look, I think what, if you look, we are, we are distributing after the investments pretty much all of our cash generation.

Can you hear me?

There's always a, can always be a discussion as to whether we should increase, we could increase potentially leverage and maximize distributions for shareholders. I don't see that happening now. That could be a possibility. potentially an alternative if we have other discussions, for instance, in relation to the interest of capital or other things. And as we have been saying, right, we have been typically distributing our cash return to shareholders between cash payments, interest on capital and dividends and buybacks. roughly speaking, half in cash payments, half in buybacks, tilting that more towards one or another, depending on market conditions, on price, etc. You can expect us to keep doing the same, but today I think you should consider what we have given as guidance as what's going to be our policy in terms of pay out and cash return to shareholders.

Okay, great. Thank you, Andre.

Our next question comes from Guilherme Grispa from JP Morgan. Please, Mr. Grispa, your microphone's open.

Thank you, André Fernando. Two questions on my side. The first one is just a follow up on the previous one. On the buybacks, just to be clear, what is the appetite you have, André, of increasing the share of buybacks in this distribution? And if we have the debate, if we're going to do buybacks or maximize IOC? What is our view? I imagine the view is still to maximize the taxation, but I just want to see whether you can increase this buyback share on the total return to shareholders. And the second one is related to the tax reform. We had the first draft of the special regime. I just want to hear your initial views on what are demand debates to be three, if you can have already an initial assessment. whatever you can share regarding this tax bill. Thank you.

Thank you, Crispon. On your first question, I mean, we will always maximize the tax benefit on the IOC, but we can reduce dividends and increase buybacks or do the opposite by depending on market conditions as I discussed. So doing more buyback does not mean that we will not enjoy the full benefit of the IOC. I think the the thing that will vary in that equation is going to be the amount of dividends. So I could distribute less dividends, still maximize IOC distribution and tax benefit, and maybe do more buybacks. The way we have been doing, as I said, is tilting that more towards one or another, depending on market conditions. We have a buyback program open. We have executed... a good chunk of that during the first quarter, and we will keep doing that. And if we feel that we need to increase, that we could always do that. But today I think we have the tools to follow that strategy that we already announced. But I think it is important for you to understand that there is no trade-off between doing more buybacks and maximizing tax benefits on the IOC side. The second question regarding the tax reform, I think it is still very early to assess any potential implications. One of the key things in order to be able to do that is going to be the rate, the tax rate, which hasn't yet been defined. But what I can share with you is that I think one of the things that we had been working towards last year as part of the discussions around the constitutional amendment, which was to ensure that our activity would have similar treatment to the financial services industry. I think we were able to achieve that with the the draft of the new law specifically creating that differentiated regime for the financial services industry, which I think it is in line with our discussions and our expectations. But again, in terms of potential implications, it's still too early to tell, but so far it has been progressing as we were expecting.

Okay, thank you. Our next question comes from Carlos Gomez Lopez from HSBC. Please, Mr. Lopez, the microphone is open.

Hello, good morning, and thank you for taking my question. I wanted to ask you first on the technology and data side. You made these two acquisitions. You seem to be satisfied with the way the companies are going. First, do you need to at some point have any impairment, given that one of them is You know, it's only now we're starting to restart growth. Second, is this market one in which you might consider further acquisitions in this area or you are satisfied already with what you have? Thank you.

Hi, Carlos, and thanks for your question. In relation to your first point about potential impairment of the business, this is something that we are constantly monitoring. we, as of yet, have not identified any need for impairment losses. This is mandatorily tested annually, but given that some of the growth that was being expected in the short term has been postponed a little bit, that reduced our in terms of the value in use of some of those companies in relation to the acquisition cost. But so far, we haven't identified any problems any need to recognize any impairment losses as part of those acquisitions. But we will keep monitoring that very closely. But we are on a more positive trend now, I guess, than we were before. And your second question was about...

No, and a need for further acquisition. In fact, it's a more general question. Do you need to buy more or do you need to sell more? Are there businesses where you want to get out of?

No, I think those were the two assets that we had identified that we believed were important to deliver our strategy on data. The main focus now is on the execution. As I said, we've invested a lot of time last year organizing that data initiative that we have created by connecting initiatives that were already being developed at B3, the new A business, the more recently acquired Neurotech business. There might be some small add-ons here and there, but definitely nothing of the size of what those two companies were, Carlos. So big focus now is on execution, on delivering our strategy, on data and the roadmap of products and the business plan for that initiative.

Very good. Thank you so much.

Thank you.

This concludes today's Q&A session. I would now like to invite André Milanes to proceed with his closing statements. Please, Mr. André, you may proceed.

Well, thank you very much for joining our call. And for your support, I would like to also thank everyone here at B3 that had been involved in this first quarter release for all your help and hard work. We will be here at your disposal. Feel free to reach out to us should you have any further questions or comments. Again, thank you very much for your support. Have a nice day and a nice weekend ahead of us. Thank you.

That thus concludes B3's audio conference for today. Thank you very much for your participation and we wish you a wonderful day.