CSU Digital S.A. (CSUD3) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the webcast of results 3Q '21 of CSU Cardsystem, S.A., ticker CARD3. Good morning, everybody. I'd like to pass the microphone to Ricardo, our Executive Director, arrived, and we also have here in this session Guilherme Rocha, our Financial Director. Please Ricardo, the floor is yours, Slide #2. Thank you so much.

Good morning, everybody. Thank you so much for participating with us in this quarter presentation. It's so meaningful to have you here in the third quarter 2021 in a series of continuity of good results. And then, we would like here to highlight 3 topics within this period of time. The first really important considering the associatory capital market and the investors relationship, within this quarter, we are part of 7 indexes of B3 stock market in small cap, financial and IFNC and Brazil Broad-Based. It's really representative for the increase of expressive negotiation in daily volumes of negotiation that we had in 2021 compared to 2020. And according to the participation on these indexes, we will foster and enhance the negotiation power, that's very important. And the second element that I would like to highlight here the work after the launch broadcasted in the end of June of the new business unit, the new operation, Blue C Technology. Our banking as a service operation, focusing very greatly lately. And today, we are in a situation that we are finalizing the MVP process in digital platform. And this process is really advanced in structuring our financial marketplace with different partners already in a process of integration as well as APP White Label already implemented and operational. And finally, a very important condition considering the commercial highlights. We have 7 new businesses in the process of launch of communication to the public. We are respecting the launch of these projects by our clients. Out of the 7 new businesses, 2 clients already implemented already in soft launch period very soon, they are going to have their regular operation. And we can communicate that to other clients with a contract in the final implementation phase already. I said behind of these 2 first clients, also, in the following months, we see the conclusion of the implementation and also the operation of production. And finally, other 3 clients, 2 renewals of traditional clients, extending here limits of operation and a new contract recently signed in new contracts and renewals. So the condition is really positive that we have been accumulating. And the condition here is very promising for the periods ahead of us. Now, let's talk about the details of our financial results. I'd like to invite Guilherme Rocha to detail the results. Thank you so much. Guilherme?

Thank you, Ricardo. It's a pleasure to talk to you all. In reality, we see the company informational highlights that Ricardo has just given us. This cycle is already for a while. We are picking results, and it's going to be kept in a positive way. And this is reflected in this quarter. We have the pleasure to bring an evolution observing to the left-hand of this chart. We can see that net revenue in this quarter, BRL 131 million plus absolute record in our history. And with annual growth of 15.6% compared to the same quarter last year, a very meaningful evolution, reinforced when we also see 9-month year-to-date, 13.6% growth compared to the same period last year. And in the group of the year 385.5%. It's interesting to realize the participation between the 2 main divisions comprised CardSystem, alternating they're taking terms in their percentage above 50, a little bit under, taking turns, and this is here from the evolution of this commercial dynamic and the clients' growth, taking terms. And eventually, it brings a balance between these 2 divisions. A very important point to be highlighted here on the right-hand side of the table. This growth was levered by the recurring revenue with a similar behavior from the strategy of the business plan, the business model that we implement to maximize the continuous revenue generation. And the recurrency is the thing to predictability. And this is a very positive point here that we would like to pinpoint. Next slide, we can see the same behavior for the income is also presenting the profitability lines of this company. EBITDA and EBITDA margin are advancing the growth of 12.6% compared to the third quarter 2020, BRL 38 million EBITDA. Also, a record when you see the history on third quarters, it is still growing, evolving very strongly as the net income in the accrual of 9 months, the growth is even bigger, 18.4%. An important point that is going to be being pointed here, reflected directly in profitability even bigger. This growth on revenue comes from the - and our clients' strategy in provide services with a very strong fit with the client strategy and this is even more important, especially when we observe the world that is more digital, more connected. This is really our DNA, our strategy, and we see the reflection on sustainable gain on profitability here at the company. In the case of net income, we reached meaningful numbers, 31.4% growth compared to the same period last year and the same way BRL 33.8 million in net income. This is not isolated behavior. This is something that is systematic ongoing and evolving reinforcing this vision of a virtual cycle here at the company, bringing up these results. Important here to lead life, I pass the microphone back to Leoni, so we can deep dive each one of the business divisions presenting them in detail, please. Leoni?

That's great Guilherme, thank you so much. Next slide here, we can zoom in and see the performance of CSU Cardsystem unit, payment means a loyalty and in the future, Blue C, so net revenue, we have a good performance, a growth of 22%, reaching in the third quarter, BRL 67 million and a performance with profitability. This business is scalable, growing constantly, because of digital initiatives that CSU has with the clients, represented gross profit expression bigger than the net revenue 27% 3Q '21 compared to 3Q '20, a record from 9 months, BRL 32 million. So the performance is really positive. Connected to digital initiatives digital transformation that CSU has been part with the clients as well in addition to that. Next slide, we are going to deep dive operational numbers of Cardsystem, payment means division we presented an expansion observing year-to-year 13% in registered cards associated to commercial initiatives of our clients, showcasing future conversion potential of registered cards, low relationship with revenue and profitability of the unit and the build cards, when we see the central graph in the Slide #2, billed cards, we have an expansion year-to-year 4.4%, a small drop last quarter. We explained in the release associated with spurge of cards because of debit, but the evolution is really meaningful and with profitability. And the right-hand site graphic, we have processed transactions that was a contractions second quarter last year because of COVID that very fast. We returned to the level and now we reached in the third quarter '21, a record of BRL 183 million of process transactions. By the company, representing annually financial volume of BRL 230 billion. This is really meaningful. The number of transactions processed also the volumes represented. Next, business units, CSU contract. This is Slide #7. The expansion was in the client base, the businesses of customer experience evolved, 10% evolution, reaching BRL 64 million third quarter '21 and gross profit, an increase of turnover causing this small drop. This growth, a little bit smaller than net revenue, but keeping profitability healthy in the unit above 16%. So next slide, I will deep dive on operational numbers. Customer experience, the evolution was 16% of the number of positions of service. And this is connected to different clients in this unit, keeping the profitability. You see on the right-hand side, gross profit BWs. The level is healthy, as I said, without losing profitability, keeping the gross profit of this unit above 15% because of the competitiveness that we have in order to gain contracts and expand the operations in the client space. Now, I pass the microphone back to Guilherme, our Financial Director to deep dive into balance data. Thank you.

Thank you, Leoni. This virtual cycle, it is really materialize in a cash generation, that is paramount. We have a very strong cash generation. The company is notable, and this is reflected in the strength of reducing the indebtedness, the cash, the availability of cash is growing in a trend, 11% compared to the same period last year, reaching BRL 96.6 million. And this fact is really important to highlight because when we observe the leverage of the company, the net debt in the last 11 months in levels that are low. But when we observe specifically the indebtedness, this gross cash represents almost 3x the debt of the company. So it would be equivalent to say that with this cash, we can pay all the debt of the company, 3x very -- almost 3x, 2.7x to be precise. And this structure of leverage brings 2 points that are important to be highlighted. The first 1, the company has a space and balance to accelerate the investment activity investment activities also in M&A that we keep on mapping the market and following up close for opportunities that are advantages for the company. And this could be done also using the leverage of the company. The balance gives us room, comfortable room, so we can do it with interesting movements. But obviously, we cannot leave behind the scenario of 2022, bringing uncertainties, uncertainties eventually with the growth of the interest rate for contracted levels, more than expected, inflation trend that is ongoing persisting and could bring some concern. But in general, all the company is in a position that is really comfortable to deal with these challenges mid and long term. We understand that although the inflation rate brings adverse scenario in the macroeconomic point of view, the company is doing so well with the structure of costs and also the capacity of having the contracts, because they have a defense clause for the clients these scenarios. Our optimists are to eventually less optimist scenarios. For this period ahead of us in the future, but the company has a situation in the balance that is comfortable to manage the scenario of higher uncertainty. This was the takeaway message and the highlights. We are here at your total service, our investors and also any comments or questions, and we open up the floor now for the Q&A session comments. Thank you so much.

[Operator Instructions] The first question is Rafael. Thank you Rafael. He is investor individual. The question is not connected exactly with the results, but I think the company period in July this year, communicate and a part of a report of our research case. What was the objective of the company of issuing this communication? And if we intend to keep on announcing. Ricardo, can you talk about this report.

Thank you, Rafael, for the question. The objective of that report was simply to communicate a player in the market, assessing business in different companies, including ours, and simply bring transparency to an assessment performed, nothing more than that. And I think that we are not going to keep on doing this position because maybe it is better. You check in your own sources as we always communicate all the assessments, all the recommendations on purchase, maintenance, sale of any research case, it is opening on site. And any investor that is interested in seeking more information, we are going to make them available for assessment for each and every investor.

That's perfect. This information that Ricardo is saying, this is public information. It's common to have a section to talk about the analysts. The analysts and their recommendation, their point of view, their opinion. Our website is not different than that. [Operator Instructions] Next question is [ Alessandri ] [indiscernible]. And he's asking if it's estimate any future acquisition? Thank you for the question, [ Alessandri ]. I’ll pass the microphone to Ricardo.

Thank you, [ Alessandri ] for the question of our program that is really important and relevant for the company. We have mentioned before, we are highlighting the condition of the company, working and planning and executing, assessing possible investments in areas that add value to the balance of the company or the condition of business associations, partnerships, technology that add value to our operations. So effectively here, the perspective is continuity. The operation that was celebrated in March this year with the participation in participation of Fitch Bank. It was not isolated at all. CSU has here our work, a road map to seek other opportunities, continuous work, performing with dedicated people, dedicated professional in the company and also higher professionals for consulting and services and it's ongoing. And probably, gradually we'll announce new similar situations.

That’s perfect. Next question, Andre [ Paraschis ], our shareholder. Can you give me a follow-up about Blue C Technology operation? Of course, Andre. Guilherme, can you answer that, please?

Thank you so much for your question. Blue C, our road map was a strong evolution in MVP in the solution throughout the second semester. And I'm telling you that this planning is being well fulfilled. We are evolving very strongly in that direction already with a net operation implemented evolving very fast in the integrations of casing, CASA, SPB and PICs and also not less important, the most relevant point. The partnerships that are part of the marketplace, financial services of this business unit of this solution. This be platform of banking as a service that is being implemented. Commercially speaking, and that is an evolution. We have different prospects here in the final phase of discussions. Some already and a discussion for a contract minute. So here, our intention is to bring something new very soon. Commercial level, operational level for this business unit. And the numbers are positive that we communicate do not bring the contribution of these initiatives yet. But certainly, we are going to see these in the near future.

Next question [indiscernible], Research. Please, can you comment about the reduction of EBITDA margin in CardSystem? Is it connected with Blue C costs?

Please, can we see, again, the final slide attachment. We have a division of third business. When I talk about the profitability of the business unit CardSystem and contact. We have in the main slide, the gross profit because they exclude the costs of assorting these 2 units. They fed not exactly Blue C if the assortment of expenses and CardSystem in this quarter specifically had a growth higher of the income than Contact. But on the expenses was heavier for CardSystem, that's why it was 45% of EBITDA margin, 47% EBITDA margin in the third quarter '20 to 44% in the third quarter '21. But if you observe this table here in blue, the gross profit grew 2 percentage points for 45% to 47%. And we do believe these are a reflection of the profitability of the company. So that's why we have in this attachment, the income and the metric of profitability, gross profit and EBITDA to exclude this effect of assortment between units. Guilherme, would you like to say something on top of that?

Yes. In fact, when we observed, the best way to understand the operational result of the business unit, as Leoni explained this gross profit. Essentially, some events may impact the EBITDA bringing a distortion for this analysis. And it's interesting to see that we hit your attention. When you bring a longer period of time, when we see the evolution of 9 months, 2021 year-to-date and the year-to-date 2020, we see the opposite effect, the growth of EBITDA margin profitability in this vision, showcasing the continuity of this profitability. I believe that's the best way, the most interesting way you see the correct perception, you see the gross profit.

That’s perfect. I'd like to tell you that we are answering questions that’s come from chat. Next question is Murilo Breda, [indiscernible]. Thank you for the question, Murilo. Cash generation reduced the leverage, but the macro environment is more challenging ahead. The company will be more conservative in acquisitions. Ricardo, if you could comment the relationship of M&A and the macroeconomic environment?

Perfect. The question that you raised is part of the assessment, not only CSU, but other companies as well in the market. We can say we are in a condition as Guilherme well presented all the structure of capital in the company, also the available cash and indebtedness that is really reduced compared to any process, cash generation or available cash. And I think that we can count on a space and the existing balance, the liquidity and the capacity of leverage financially, if necessary. If there is a good opportunity, we do not see, although we are observing very carefully. Of course, Guilherme is the financial responsible for the company. This is a continuous practice. But we are in a situation that is really favorable to take ahead, continue an investment plan that brings value to the company. It doesn't matter this macroeconomic scenario of carefulness and observing the market. But as I said, our debt is really low. So we have room for continuity and growth.

That’s perfect. And next question, Rafael, individual investor. How can the company see trends and opportunities in the innovation from the Central Bank? Guilherme, please. Maybe the main innovation is Pix and open bank. Pix implemented an open banking final phase of operation.

Perfect. Thank you, Rafael, for your question. Very relevant. We see with a good perspective and the reasons are simple. First, great part of the incentives that we have of getting into this competitive arena, banking as a service, capturing the value of fix to the market. It constitutes per say - to our business in addition that is really -- here, I would say, no, it is not big presence, of course, directly transactions with money, USBB and it's materialized that transactions and eventually, not so strong prepaid, not so strong, the credit transactions, the arrangement that they have. That is totally weighing in when we see UX. So in practical terms, when we observed the numbers of the company, what is the income or business lines that are threatened by PIX growing the company? I would say that it is immaterial this risk because our income in processing, they are really strong from a universe of credit transactions, especially credits and the brand, brand credit. In general, we have more upside when we capture your peaks than downside, that threatens per se. And considering open-banking, open finance, one of the reasons for seeing it so emphatic of marketplace, financial services within this universe of Blue C solution is coming from this. We understand that our objective here is to create an ecosystem and a platform of relationship that anticipates the effect of open bank. And finally, what is the wish. The wish of basing behind this initiative, and you know that this are following this industry, you know that this is nothing new, is to increase the competitiveness and especially improve the quality of the services, financial service to the end user, sharing data. In practical terms, this big marketplace or financial service is addressing when we have different partners connect, and then we bring the possibility of the user, final user, the end user, the client of our clients benefit from an ecosystem where these partners can also compete in quality of services, also in costs of services. To provide and conquer the preference of the end user, the current account client and the client -- our client, we are service providers, B2B, B2C. In critical terms, we see this in a good perspective of these changes, regulatory changes, because they come and create upsides that are concrete to the company. And we hope that throughout next year, the following year, in the following years, we can bring and materialize here exactly this expectation that we nurture on these changes.

That’s perfect, Guilherme. And next question, [ Alessandri Ibama ]. Although the good results in the final 6 months, the price of the stock suffered. Do you believe that there is some reasons for that, if you can comment? Ricardo.

Thank you,[ Alessandri ]. And this is a question that we give full attention of the area of RI is engaged permanently in communicating all the information, all the results continuously growing and the business evolution, and you have using business evolution that promise continuity. Although it is true as to registered in 6 months, we have had a reduction of prices in the papers of the company, but this is a fruit of an aspect connected to the market in general. The company's tech company suffered for some vision, some possibilities of reduction. And then, we were together with a big group of companies. And although, we are moving ahead on continuity, we have used this expression in this call several times, a virtual cycle that's present since 2019 and is ongoing this growth of income and even higher growth for profitability. And this is up to us to deliver to the market results. So we can also have a continuity of payout considering profitability that the company delivers distributing meaningful results, growing results throughout the years. And the market will soon realize this condition of a strategy that is well defined, fostering continuous result and this connection of new solutions and new avenues for growth, the condition of this is translated to prices inevitable. We really hope to see this condition ongoing.

That’s perfect. [Operator Instructions] We do not have further questions. I'd like to thank you all for attending this webcast. I pass the microphone to Guilherme for his final observations and then Ricardo. Thank you so much.

Thank you, Leoni. It's a great pleasure. We are still here at your service, part of what Ricardo has brought. The company has put in a great effort of delivering results, communicating their business plan, they appear way as possible to mitigate doubts, questions, bring the best understanding on what we are going to do, the intention and how we are going to reach all these results, keeping our attention for a higher payout and activity of investment that is continues ongoing and growing. In this point of time of cash generation that enable these 2 movements that are really important for the shareholder in our base, but also taking exactly the structure of financial leverage that is comfortable, making us ready to fly higher to deal with market uncertainties without letting go. The investment capacity and the capacity of sharing these results with our shareholders. This is a relevant point of view that I would like to bring using this final question, this opportunity. And we are still relying on the near future and also mid and long-term as well. Thank you so much.

That's perfect Guilherme. This is a very well placed, a very well placed briefing of what we are doing as the Board of the company, considering the continuity, the growth, achieving new clients. We have reached -- we are having the satisfaction very soon to name these new businesses, these new situations on results generation, even more positive to the company. And this is the agenda of the company. We invest on growing continuously in customizing our platforms and our solutions. And as we said, the financial condition is adequate at this difficult moment, different difficulties in the market, we say that we still have a differentiation to keep on delivering these results.

That's perfect. Have you all a great afternoon. And here we conclude this webcast. See you soon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]