B3 S.A. - Brasil, Bolsa, Balcão (B3SA3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the B3's Earnings Results Presentation for the Fourth Quarter of 2024, where Andre Milanez, B3's CFO, will discuss the results along with Fernando Campos, Investor Relations Associate Director. [Operator Instructions] As a reminder, this conference is being broadcast live via webcast. The replay will be available after the event is concluded.

Hello. I'm Fernando Campos from B3's Investor Relations team, and welcome to another B3's earnings event, where Andre Milanez, B3's CFO, and I will analyze the results of the 4Q 2024. Andre will start by providing an overview of the quarter.

Thanks, Fernando. We had a quarter with consistent results in line with the resilience of our business model. It was a quarter marked by many political events in Brazil and globally that brought significant volatility to the markets in which we operate, which reflected in consistent volumes in our business. With this, we had revenues growing by 7% compared to the fourth quarter of '23, but slightly below the third quarter of '24, which was impacted by 5 fewer business days in relation to that quarter. Fernando, can you talk a little bit more about the operational aspects that explain the dynamic that we saw on revenues?

Sure. Regarding operational performance, let's start with our listed derivatives, which continue to show solid numbers, although below Q3 2024, mainly due to the lower volatility in the short term of the interest rates in [ real ] contracts. Again, the performance of Bitcoin Futures stood out with an ADV of 206,000 contracts and BRL 43 million in revenue for the quarter. In OTC, we saw double-digit growth in almost all operational metrics compared to the same period last year. Besides the fixed income market, which we have been discussing in other results and has been benefited from the positive scenario for private credit in Brazil and diversification of portfolio risk, it's important to highlight the performance of OTC derivatives, which saw an increase of 17% in issuances and 29% in outstanding balance, reflecting the volatility that Andre mentioned. This volatility also helped the volumes in equities, where we saw an ADTV for cash equities totaling BRL 25.6 billion with a turnover of 145%. It's worth noting here again, the performance of BDRs, ETF and listed funds, which combined for 15% of the ADTV. Regarding other segments, in infrastructure for financing continue to benefit from a positive vehicle financing market. In tech, utilization continued to grow following the fund industry, mainly fixed income. And finally, in data, revenue grew by 5% with advances in Neurotech. Andre, can you talk a little bit more about the financial performance and other advancements?

In terms of expenses for the quarter, it is worth mentioning a few things. First, we have some seasonal impacts, mainly in technology spending, which is more concentrated in the last quarter when we have more projects being delivered. Second, in personnel, we had some extraordinary expenses with severances due to changes that we had in the management of the company during the quarter. And third, on revenue-linked expenses, we had significant growth, which was in line with the high volumes that we saw both on Bitcoin Futures and on TreasuryDirect. It is important to emphasize that our adjusted expenses in 2024 were below the midpoint of our guidance, which reinforces our commitment to discipline and costs. If we exclude the effects of Neurotech since it wasn't -- it was only acquired by May '23, the growth that we delivered in terms of adjusted expenses would have been below the inflation for the period, which it is a very strong message in terms of cost control. Regarding our results, the recurring EBITDA for the quarter was BRL 1.6 billion, a growth of 10% with a recurring EBITDA margin of 67%, above the 65% margin that we saw in Q4 '23. On the tax line, B3 concentrates the use of some tax benefits such as Lei do Bem in Q4. And as a result of that, our effective tax rate for the quarter was slightly below that of prior quarters. Thus, as a result of that, the recurring net profit was BRL 1.2 billion, a growth of 14%. Regarding the distributions, considering the price of our shares during the year, we ended up prioritizing buybacks in our total return to shareholders. We spent BRL 3.7 billion -- we employed BRL 3.7 billion out of the 5.3 billion return to shareholders in buybacks. The 340 million shares that were acquired during the year, which represented around 6% of our share capital, out of. That 220 million shares were canceled during the year, and we already have a new program in place with a limit of 380 million shares, which accounts for approximately 7% of our share capital. Regarding our capital structure, it is worth reminding you that we've completed in January, the ninth issuance of debentures of the company in the amount of BRL 1.7 billion with a term of 6 years and a cost of CDI plus 0.59%. In the agenda of new products and strategic advancements, I would like to call the attention to the fact that during the last quarter, B3's Clearinghouse started to accept debentures as collateral. The launch that we also had of the TreasuryDirect guarantee, an important feature for this product, which will also help to unlock credit in the economy. And finally, the migration of corporate debt trading to our new platform called Trademate, which is aimed to increase our footprint in the growing private credit mark in the country. And finally, last week, our Board of Directors approved the merger of Neurotech into B3, which will now be submitted and approved by a general meeting, which is scheduled to take place in mid-March. The tax benefit resulting from this merger amounts to approximately BRL 800 million and will be collected most of that during the next 5 years. Thank you very much.

[Operator Instructions] Our first question comes from Maria Guedes from Safra.

I would like to ask about your equities margin. I understand that there was a mix effect related to higher volumes of options exercised in December. But I wanted to make sure if there was any price impact in the quarter as well. I mean if you had a comparable ADTV base in fourth quarter related to the third quarter, would the margin bps remain stable? And also if you're planning to make any moves related to the equities pricing strategy for 2025?

Maria, Fernando here. I think here, if you see -- and now we opened the numbers in our operational database for the options exercised volumes. So we did have kind of extraordinary volumes during the month of December, mainly in December, which was a period of high volatility. We had election. We had news here in Brazil that kind of moved the market a lot. So it was a month that we saw almost no recurring volume there in options exercised. And then we do have -- we did have a new program for market makers that also had some impact on that. It's hard to predict how this will perform during this year. We don't have any -- but it's -- so -- regarding pricing adjustments, we do have, for this year, the implementation of the new tariff system, which will equalize tariffs for different kind of investors for -- actually for each investors. We'll make it kind of -- you will have a discount based on the volume that you trade. So that will be implemented during the year, but that shouldn't have any kind of impact on margins when we did ran a back test last year, and we announced that last year. I don't know if Andre wants to complement on that.

No, I think in summary, if I may just add, we don't have any planned changes that should impact margins. These margins should fluctuate in line with volumes and mix of transactions. As Fernando mentioned, we did have some, let's say, extraordinary volumes of options exercised during the last quarter, which has put some pressure on the margins. Whether that's going to be the case for other quarters, it will depend a lot on market conditions on volatility, et cetera. So margins should be much more a function of the mix of clients and products than any changes that will be introduced by the company.

Our next question comes from William Barranjard from Itaú BBA.

I have a quick question here on the merger you commented last in the presentation of Neoway and Neurotech with B3. So if you could elaborate on potential synergies this movement will generate, if so, both in revenues, expenses, if there's anything you could share with us on this front? And also if you have the best guess on which quarter you will start using the tax benefit? Yes, this would be helpful.

Thank you for your question, William. I think the main -- I mean, there are synergies that we will intend to capture as a result of that merger. If you look at from a back-office standpoint and other things, some of them we have already been capturing regardless of the merger itself. I think the main benefit that will be unlocked with the merger is going to be the tax synergy that we have on the goodwill and intangibles amortization. As we did mention during the presentation, we're talking about, roughly speaking, around BRL 800 million of tax benefits, which will be collected or amortized over mainly the next 5 years if the merger is approved by our shareholders during the general meeting scheduled to take place in mid-March, the 12th of -- the 14th of March. The merger will be effected as from 1st of April. So you should see those benefits already impacting our cash flow for the second quarter of this year.

Our question comes from Arnon Shirazi from Citi.

My question is related to equity DTV for 2025. Of course, very difficult and eventually impossible to predict the level. But for budget purpose, you should have a number that you estimate for 2025, which is B3 expectations for this year.

Arnon, thank you for your question. Always easy questions from -- coming from you, right? But anyways, look, it is really difficult to provide an estimate. And of course, we do have our internal estimates, but it is for that reason that -- for instance, we don't give guidances on volumes, on revenues coming from the equities market. What I can tell you is that we feel that it seems that we've reached a kind of a bottom here. The scenario is not that encouraging for equities given the high level of interest rates that we will have throughout the year potentially. But on the other hand, there seems to be some stability in terms of volumes. The diversification of the ADTV itself has also been helping as we highlighted today or last year, last quarter, around 15% of the volume already came from other instruments that they are not cash equities. So we're talking about BDRs, ETFs and real estate investment funds. We do believe that these products have the potential to keep growing. Some of them do not have the same [ cannibalization ] that we do have for equities, for instance, with higher interest rates. So I think we see this environment of some stability with potentially some upside risks that always comes when you have some volatility. So I think that's kind of our view at the moment and expectations for the year.

Our next question comes from Lindsey Shema from Goldman Sachs.

So you announced a sizable buyback program again this year. Just wondering how to think about the combination of dividends versus buybacks throughout the year? And then also kind of just what the overall payout ratio that you're targeting for 2025 is?

Thank you for your question, Lindsey. Look, typically, the way we deal with that, we tend to split our cash generation return to shareholders and do half of that through IoC, which are tax-deductible dividends, as you guys know, and dividends and the other half typically through buybacks. At moments where there are some, let's say, distortions in the company's valuation according to some metrics that we follow, we might tilt that equation more towards buyback or in moments where according to those metrics, maybe valuations are above average, we could do the opposite. So tilts that equation more towards dividends and IoC. I mean IoC, we will always be paying that at a maximum amount to enjoy -- or to collect the tax benefit that comes from those tax-deductible dividends. So in summary, that's the way we have been doing, half of it through buybacks, tilting that equation more towards one or another depending on market conditions and the company's valuation. We are at a moment and that has been the case for '24 and in our view, remains at least for now the case for '25, where this equation is more -- there is a higher weight towards buyback around 70% of that distribution being done through buybacks. And that's why we've announced another sizable program. Of course, that could change during the year. And the main reason for that change would be the share price, okay? And in terms of our expectations for the payout ratio this year, we've announced a guidance of BRL 90 million to BRL 110 million. The reason for that, so you will see that this is a slightly lower figure than we had been announcing in previous years. And the main reason is because the difference between our cash generation and our net profit has been reducing as a result of the end of the amortization of intangibles. So we plan to keep returning the most part of our cash generation in nominal terms. But in percentage terms that we tend to see that figure getting closer and closer to the 100% of the net income.

Our next question comes from Eduardo Nishio from Genial Investments.

A few questions on your crypto products. If you can give us a little bit more color on your pipeline of new cryptocurrencies products you are developing. Also, the time line, any regulatory challenges on that profile of clients, if you can, if it's more retail, institutional, any cannibalization you have with other products? And if you can tell us the advantages of trading like futures at B3 compared with international exchanges, I appreciate it.

Thank you for your question, Nishio. So we do have plans of launching other derivatives in the crypto family this year, most likely futures on Ethereum and Solana. We also plan on launching Bitcoin Options by the year-end. So we are expecting to have those products in place during this year. The time line -- the definite time line is subject to the approvals of regulators, et cetera. We do expect the approval process of these new products to be, let's say, facilitated given the discussions we already had during the approval of the Bitcoin future, but we cannot predict that time line. Regarding cannibalization, I think we haven't seen reductions in existing products migrating to the Bitcoin future, whether we could see that happening between the Bitcoin future and a lot of products, I don't know. I think we do believe that there is some demand to be captured, and it is for that reason that we are planning on launching those products. But I think at this stage, it's really difficult to say whether this is going to be moving away volumes from the Bitcoin future, for instance, to some of those new products, we will see. But at the end of the day, what we want is to give the investors alternatives that best suits their needs or their wishes. So we will keep innovating and launching new products and providing new opportunities to the investors.

If I will, can you elaborate a little bit more on the advantages of trading futures at B3 compared with other exchanges?

Do you mean compared to other exchanges...

International, yes.

Okay. I think we have a very similar -- I don't think there are great differences between trading. I think it's just easier for the local investor to trade in Brazil than it is to trade offshore. You don't have to make an FX to send money abroad and these kind of things. You can leverage on collateral that you already have here. So there are a lot of advantage, if that's the question you're making of trading locally than trading offshore. If that's not the point, you can just let us know.

No, no, that's it. And congrats for the product. It's been a great one.

Our next question comes from Kaio Prato from UBS.

Just one on my side, please, and it's more related to competition. So during the B3 Day by the end of last year, you mentioned that -- management mentioned about the company can be even more active and creative in launching new products as probably one of the competitors in the Street is looking to add new products in derivatives, for instance, and B3 can be even faster in asking regulatory approval at some point. So my question is more in this sense. So in addition to the crypto that you just mentioned in the last question, if the company is already working in some of these potential new products or improvements of existing ones such as dollar contracts or some of these things and also regulatory approvals and what we can expect going forward from that? That's it.

Thanks for the question, Kaio. And you are absolutely right. That's what we are currently working on. You can expect a much more active pipeline of new products that we will be trying to launch this year. The crypto family examples I gave you are just examples of that. We have already submitted some requests of other products, which we will not comment on for the moment. But we will provide you guys with more visibility as we move along in that agenda of new products during the year, but you can expect a lot of activity on our side in relation to that this year.

Just to complement on Andre's answer, just yesterday, we announced a reduction of the contract for Ibovespa option. So I think those kind of initiatives you can expect to be announced during the year, small ones like this one, aimed to the retail investor, but others like Andre mentioned that we cannot disclose at this time.

And the weekly options on the index as well.

Exactly, yes.

Our next question comes from Antonio Ruette from Bank of America.

So if I could follow up on a point that you guys mentioned in the presentation, so that's Trademate. If you could provide any detail related to that. So in terms of market share, what's the current size of it? What percentage of traded fixed income does it represent? And also, how can we see Trademate in your P&L?

Thanks for the question, Antonio. As you know, Trademate today is a platform that is used to trade government bonds and now private, let's say, private securities. The market share of electronic trading, especially on both, I would say, is not that big still. Our ambition is for that to become a larger portion of the overall trading activity. We do believe that these platforms will help to increase liquidity in the market to make the, let's say, the process of settling those trades between counterparties on the fixed income market easier, more efficient. So that's part of our ambition with that project. Regarding revenues, we already have some revenues coming from the platform. So as kind of a software licensing of the platform, which is included in our technology revenues. But we do believe that over time, as we see this market increasing, we could start to see other revenues coming from this activity or from the secondary market. But so far, it is more -- at the moment, more a software revenue generated by the platform, but we do believe that this will change over time.

Our next question comes from Yuri Fernandes from JPMorgan.

Andre, Fernando, just a follow-up here on the fixed income. When we look to your volumes for most products like the debentures, CDs, we see -- many products are growing like 20%, 25% year-over-year. Your revenues are growing 9%, and you have some of those new initiatives to improve your fixed income. So can you help us understand a little bit why like we are seeing a lower growth of revenues on the fixed income side versus the balance of some products? And if you can provide an outlook, how do you are seeing the product, how you are seeing the industry on fixed income? And then a second question just on -- also a follow-up on the crypto on your incentive plan. If you plan to end this at some point, like what would need to take for you to remove the rebates for the crypto?

I'll start with the one on fixed income and Fernando will help me here with the one the incentive. On the fixed income, I think, as you know, the fixed income market for us has a different dynamic. A significant part of the revenue comes from the inventory of assets. So it is a revenue that is less dependent on the floor, which is the, let's say, very different, for instance, from the revenues that we have on the cash equities market, where it is pretty much all about the flow here. The size of the inventory of the pool of assets matters more than just the inflow. But of course, as you see inflows growing, that typically represents higher inventories and therefore, higher revenues. You have to remind, for instance, to remember that even though we saw record volumes on corporate bonds last year, we are still seeing the effect of -- on the reduction of the inventories with the termination of the leasing debentures, for instance. So even though we're seeing volumes growing more than 20%, the inventory of corporate bonds, for instance, was not growing that much. So it has a different dynamic. You will see a more resilient growth and performance over time. So if you see some deceleration, you will still see revenues growing at a lower pace. On the other hand, when there is some acceleration on the inflows, you have revenues accelerating, but not necessarily at the same speed. I think it is important to say that these changes that we are seeing in the market in terms of finally seeing the local DCM market becoming the primary source of funding for companies is something that first adds more resilience to our results because we are seeing these bonds being issued for longer tenors, which means that they will remain in our custody, in our depository for longer and therefore, generating more revenues over time. The sophistication that we are seeing in that market opens new opportunities to be explored. We discussed a little bit about the secondary market, but we are also seeing a lot of opportunities for products evolving data, for instance. Recently, we've announced the launch of a new fixed income index. Next step will be to develop products that will be based on that index, such as ETFs or even other kind of contracts. We are discussing potential changes in regulation to allow short selling of bonds, which will also be important to develop more liquidity in the market. Over time, we do believe that as this market evolves, there will be room for a credit derivative market. So I think we are very -- in summary, very excited with the opportunities coming from the fixed income market. I think we've seen the market really reaching a different level, and that opens several opportunities for B3 to explore and help with products that will make this market to continue to develop and evolve. So very excited with the opportunity, with the outlook for the fixed income market.

So Yuri, regarding the incentives, if I got your question right, it's the incentives for the Bitcoin Futures. They will last until April next year. It was a 2-year incentive program that was when we launched the product. So it was in April this year. So 2 years, April next year. So it's a [ one help ] contract for each contract traded by a retail investor. So you give that back to the broker. Regarding other cryptos, if you're going to do incentive programs there, it's -- usually, we do when we launch a product, we always have incentives. I don't know if we have anything -- we don't have anything prepared yet since we don't have the approvals, but you're almost certain that we will have some kind of incentive programs for oher cryptocurrencies futures.

No. It's pretty clear, Fernando and Milanez. Just a final follow-up here on the crypto on Bitcoin. Why the RPC is growing for this? Like this used to be, I don't know, [ BRL 250, ] and now it's running at BRL 350. Can you provide some explanation? Like should we -- I'm just trying to understand the economics because if we are able to reduce the rebates and keep this RPC, this can be a tailwind for you.

Yes, sure. So in the first month, there was kind of a step forward kind of price schedule. So it was -- when we launched, there was a huge discount that we will -- that we removed during the subsequent months after the launch. So it was something that was already planned with the brokers and given the success of the program. And then now fluctuates for 2 different reasons: first, the price of the Bitcoin. So it's linked to the Bitcoin price. So if the Bitcoin price goes up, so we're going to see the price goes up a little bit. And also, since it's -- we charge in Brazilian reals, it's also -- and the Bitcoin Futures is in USD, it's a contract that is indirectly linked to the USD as well. So we saw the USD growing, so we did see an impact on the RPC for Bitcoin Futures. We don't have any kind of changes in tariffs planned. So you can see moves regarding, like I said, the Bitcoin price and the FX fluctuation as well as in the same modes that we have nowadays with the FX contracts and interest rates in USD contracts.

Our next question comes from Carlos Gomez from HSBC.

I wanted to return to the competition. it's not your business, but you surely have an idea about how the time line is for any competitor to set up. And when it comes to linking with you, perhaps using your Clearinghouse, have the potential competitors taking any steps? Or do you have an idea about when you will be involved in negotiations as to putting together your systems?

Thank you for your question, Carlos. I mean, we don't have a time line. I mean this is something that potentially we need to discuss with this new initiative, this project. What we have been hearing is that some of them are saying that would be ready and operational by the beginning of next year. It seems to us a little bit optimistic, but I mean that's a question that you potentially should direct to those initiatives. Regarding your point about connecting to our clearinghouse, one of the initiatives aims to use our depository. We have been having some initial discussions in that regard, but it's not something that it's already set up or working, but we had already initial contacts regarding that connection.

In the previous attempt for somebody to set up exchange, there was a very long period discussion and eventually actually legal action and arbitration to decide on pricing. Has that stage already been reached? I mean you already know what the financial terms would be of any connection or that's something that still remains to be discussed?

I think we do have some benchmark, let's put it this way, given the prior discussions in the past, but we haven't yet sat down to discuss an agreement or anything like that.

[Operator Instructions] This does conclude today's Q&A session. I would like to invite Andre Milanez to proceed with his closing statements. Presenter, you may proceed.

I would just like to thank you all for joining our fourth quarter results. It has been a very interesting year where we were able to show the resilience of our business model. We finally saw the company -- the numbers demonstrating the power of our diversification strategy with the top line and the bottom line growing back again this year. We are now very excited with all the opportunities that we are seeing in front of us for 2025. I would like to thank you all for your support and wish you a very nice day. Thank you very much.

That does conclude B3's presentation for today. Thank you very much for your participation, and have a nice day.