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

Good morning, everybody. I am José Leite, Director IR of CSU Cardsystem. It's nice to have you here for our event for the results of fourth quarter 2021 and also the year of 2021. I would like to start with Guilherme Rocha, our Financial Director, to start up this presentation from Slide #2. I'd like to remind you that all the questions will be collected and answered exclusively on chat box. Thank you so much. Guilherme Rocha, the floor is yours.

Thank you, Leoni. It's a great pleasure to be here with you to tell what is our story and present the evolution of the company's results. 2021 was, in fact, a special year. I believe that we can say that it's the best year of our history for many, many reasons, and I will start this presentation with an overview of the main points for this year. 2021 was very special. Indeed, we started up and then we could implement our M&A strategy with the investment at Fitbank, fintech, there is a Brazilian one, flying high. And then we understand that, that is a strategic importance -- that is important because of the synergy of this fintech and our operations are relevant point. It's a kickstart in a strategy that we do consider fundamental for the success and the future of the company. The same way, innovation never stopped there. Last year, we opened up our offer of Banking-as-a-Service launching Blue C Technology. Blue C Technology is the business division of the company, especially for helping all the other companies in the market, to launch themselves into this important world that is banking, setting up their own financial ecosystem. This business division has a fundamental role because it enhances very strongly the cross-selling among different business units, the existing ones. And then again, this initiative was innovative and then we bet very strongly here with growth throughout this year 2022 and the near future as well. Aligned to that, we also had a technological evolution in our business unit, the most important one, payment for credit card system environment, wire platform. This platform is hybrid for processing combining the robustness of the platform and the flexibility of the cloud environment, everything with the structure of microservices. What does it mean? Flexibility and reliability, bringing competitiveness where we are already strong, that is the credit card ecosystem. All these initiatives submit into a commercial process of returning to a meaningful force, achieving new clients, Ágilli, Hash, PSA Bank of the Stellantis Group, expanding the operations in Natura Group with Avon as well and other clients in this new economy. Really relevant that we are not going to communicate, not now, not to break their own commercial strategy. But they are hired and under a process that is advanced, implementing and very soon we can share it with you with more details. And on top of that, the best result of the history of the company with the records of revenue expansion of more than 2% of the headline EBITDA almost -- and the net income almost 30%. Everything -- when we observe the results, it is now a practice, and I really hope it continues for a long time. We talk about the virtual cycle of results that the company delivers records after records. And in fact, we see an expansion here of the net revenue in 2 digit, more than 12.5% and a very relevant point that I would like to highlight that is the expansion in the same level of the recurring revenue. In fact, it is over 98%. What it means, predictability, consistency delivering results. And this, in reality, is one of the factors responsible for this virtual cycles of results. This expansion -- top line expansion has an upside also -- and an expansion of the result lines that is even more meaningful expansion here of EBITDA margin and EBITDA 16% when we compare '21 and '20. And net profit over 29%, almost 30% when we compare '21 and 2020. And this point is really important because connected to the top line growth there is a meaningful increase of profitability. And this, we observed very clearly when we see this indicator, very interesting and used in the venture capital market, the Rule of 40. When we combine 2 digit in our top line, you have high profitability reaching, adding up the growth of net revenue and EBITDA over this 40. Why is it important to see that and why we highlight this point? In reality, this showcases our balanced growth and profitability. And when we observe companies as big as CSU already working in the market longer and consistently, we are moving and celebrating 30 years of market share. Thirty years with growth and profitability balancing it out, especially in this Rule of 40. In our case, it's more important that this is strongly connected from EBITDA and the profitability rate. So we showcase that the company is on the right track, balancing out all these important points for the longevity and the good evolution of the company that is exactly combining growth with profitability. And this expansion is being observed in the 2 business units in order to detail and deep dive the behavior going on CSU CardSystem and payments and CX, I'd like to invite Leoni, and we see the next chart to deep-dive what's going on in these 2 divisions. The floor is yours.

I'm so sorry. Thank you, Guilherme. This is Slide #5. We have net revenue and gross profit of payment unit, CardSystem. And here, we can see the growth, not only top line on the revenue for that unit, and we have been evolving businesses with the clients in this new economy. This was beneficial for payment units, expanding profitability with digital initiatives that we detailed on the result, digitalization initiatives, reducing revenue. At the second point, in large they expand profitability, so we could have growth on revenue over 2 digits quarter after quarter was 12%. And the full year, we also see a 2-digit growth near 11%. Gross profit, we grew, this business is scalable. For every increase of BRL 1, we can increase the gross profit, the growth was on the quarter and also the year level over 20%, also near 30% when we compare the fourth quarter 2021 and the fourth quarter 2020. Growth on revenue and profitability expansion. The next one, #6, we see operational data of our payment unit. On the left-hand side of our slide, the number of processed transactions increased. We had a reduction in the second quarter 2020 when the lockdown hit, the beginning of the pandemic period in Brazil. Very briefly, these numbers get back to the previous levels and they expanded in a very high speed in this growth the 3 quarters, 2020, '21, the expansion over 30% of the number of transactions that were processed. Registered cards indicator underneath on the left-hand side, we also see a 2-digit evolution very meaningful on the number of cards, reaching a new level over 30 million cards registering in our database CSU, but the highlight is on the right-hand side of this slide, financial volume of transactions that CSU processes. We are talking about the growth, expressive growth in this period of time, 2021, consistent growth quarter after quarter, reaching a run rate per year of transactions over BRL 250 billion. This number is really expressive showing -- showcasing the growth of the health of CSU clients and [indiscernible] and also the relevance of the CSU industry. It's not a small volume. It's a very expressive volume, over BRL 250 billion processed annually. Next Slide #7. We see the business on customer experience. We also see the increase of revenue and profitability in this business unit, especially because of multichannel, this expansion of channels and clients in this new economy, but this is light, we see gross profit and gross margin over the level of 16%. This business has an intensive use of robotics, automation of service, use of different channels, as I said, multichannel service ensuring the expansion not only of the top line but also profitability represented here by gross profit and gross margin in the level that was really healthy over 16%. Next, Slide #9 -- I mean #8. Here, we see operational indicators of contact unit, and we see a big evolution on the build or extensions and the reduction of the profitability connected to a movement of our profile shift of the service we provide because of home office, remember we have 2/3 of this area in home office, remote operation. The number of workstations changed because of the occupation rate, so the home office operation has a lower vacancy, so lower services. But on the right-hand side, we can also see profitability in the bars in a healthy level, as I said in the previous slide, with number higher than 16%, a small change in the metrics because of home office, but the operation is really healthy, bringing a profitability that is interesting over 16%. And next Slide #9. We see the highlights of the balance stable gross cash, BRL 80 million on the left-hand side. Underneath we have gross debt reduced. We reduced more than 20% the gross debt of the company and everything because of the cash flow generation CSU, as Guilherme said. There is a recurring revenue over 97%, 98%, and this ensures predictability, cash flow generation are interesting and was superior to BRL 115 million a year. So 4 things happened. The reduction of the debt, you can see it on the left-hand side; cash flow generation; expanding investments represented on the right-hand side; CapEx that was BRL 57 billion with initiatives for business, the company business, expansion of this business, digital innovation and also focusing on cybersecurity. Never forgetting that within this value cash generation, the investment was BRL 10 million and Fitbanking that is not in CapEx, BRL 57 million. And finally, the payout elevation this year something around 50% distributed to the investors, more than BRL 30 million, BRL 14 million already paid and BRL 16 million -- BRL 16.2 million to be submitted to the approval of our assembly for important factors; cash generation, debt reduction, expansion of investment, increase in payout and M&A. So the floor is back to you, Guilherme, please. And he's going to talk about our market -- payment market, the market that we are inserted. Thank you so much.

Thank you, Leoni. We considered very important is, in addition to the company, the position of the company in the market. So I would like to open up a parenthesis. So we assess what's going on in the payment market in Brazil? What is the evolution of transactions, financial volume? What's really going on with different modalities of payments, digital payment, electronic payment in the Brazilian economy. In the upper hand chart, we see the amount of transactions in billions, billions of transactions. The yellow line represents the transactions with credit cards -- credit cards, debit cards or prepaid cards. I would like to heed your attention, especially for 2 lines, the yellow and the blue one. The yellow represents the group of cards and the blue line represents PIX payment. So if we see here quarter after quarter, there is a fantastic evolution. A point to heed your attention is the curve of these 2 modalities. There was a perception and expectation that PIX could cannibalize, remove the importance of cards ecosystem. What we see in the curves formation is that first, the cards are still the most used modality by the economic agents for their transactions, electronic transactions and it's keeping the curve that is similar to PIX. With robust growth, hitting our attention here for credit and prepaid, credit over 41% growth and prepaid over 170% -- 150% -- 170%, strongly impacted because the prepaid works as a cash out in digital accounts very meaningfully. So it's surfing, in fact, a big incentive. Debit is filling new modalities of payments, not so meaningful. And for CSU, the situation does not impact much because our operations are in the card systems, credit and prepaid, especially this -- especially credit and prepaid. When we see the financial volume and it's interesting to see the financial volume in the gray line, the wire transfer is a little bit elevated in the financial volume. I'd like to show you that we pay attention to this table on the right with the average ticket. It's interesting to see that the average ticket of PIX 2021 dropped 42%. What it means in practice? A settlement was near the PIX launch. So we see a settlement throughout time with PIX advancing strongly in the transactions of lower value. And then the drop of these average ticket that we observed when we compare 4Q '20 and 4Q '21. In the wire transfer, that's the opposite, a growth -- very meaningful growth 2.5x and the average ticket of the wire transfer showcasing that it's consolidated as the choice of electronic transfer, wire transfer, electronic transfer with highest value, and there is this perception of risk, a higher perception of risk. These are important points to be highlighted and also a topic that is relevant to when we see the behavior of credit card and debit card, meaning the great majority of cards transaction, no change in the average ticket. And what is the highlight here. Little change in the way people use cards, but an expansion in the use -- expansion in transactions and expansion also in the financial volume. The average ticket does not change. Next, deep-diving in the meaning of this data and the evolution when we compare within the payment ecosystem. So we break into 2 groups. The superior graph upper part concentrate the behavior of the electronic pay means, not credit cards. PIX, banks slips, others, then we have wire transfer, different types, check and TED -- wire transfer TED. And in the other 2 graphs, the participation of cards, specifically cards. On the left-hand side, we assess the amount of transactions. On the right-hand side, the financial volume of these transactions. What kind of conclusions we would like to take? Basically, when we see TED transaction, what I mean is PIX, we see a meaningful growth. It's dominant when we talk about the amount of transactions in payment, not credit cards representing here, leaving 9% participation in '20 to 73% in fourth quarter '20. And the impact of the TED transaction, leaving 30% of the amount of share of this transaction in '22 (sic) [ '21 ] 6%. But when we see the same behavior in financial volume, PIX has grown a lot meaningfully leading 2% to 15%, but it's not a dominant in financial volume. The dominance is in TED and there is this reflection of the increase of the average ticket as we see in the previous slide. So TED keeps a participation of 75% of financial volume, no creditors. And PIX is still growing, but growing in 15%. In fact, the order of importance in this mix, 15% is not so meaningful when we observe this participation of transactions reaching 73%. A very important point when we see the behavior of cards. Then again, as a reflection of the maintenance of the payment use, but also the growth this ecosystem is experienced, the credit has expanded 41%. In the period of time, we see an increase of the importance of credit and prepaid in the snapshot of the transactions on electronic payment and debit loses its relevance. Where is debit losing the relevance? To prepaid, credit, and PIX. So debit here loses the cadence lower than we expected, but losing its importance. And this is reflected in financial volume as well the same way we see financial volume on cards, credit growing 57% to 61% in this rate and prepaid as well growing in relevance and debit starts reducing. Let's see the conclusions. What is the conclusion from this snapshot of the market of Brazilian payment? Let's see next page, please. What are the conclusions we take? TED the number of transactions, but it's dominant in financial volume because of the higher average ticket, higher reliability for higher volume. PIX is dominant in number of transactions when we talk about ex credit cards, 70% of this share, but growing volume to a cadence that is a little bit lower because in practice, there is a drop in average ticket, the usage profile, this modality is getting mature, this modality, as we say in Brazil, is here to stay but is a settlement the way people use it. And in the current universe, except for debit, there is a strong growth, very strong and it does not change any change in the behavior of ticket. In practical terms, what we understand of all this change, cards and PIX show complementarity that is very strong. More than competition, they are complementing themselves keeping strong growth and relevance both. And both are a great opportunity for CSU because what are the answers for CSU for this market behavior, launching Blue C Technology with the initiative as Banking-as-a-Service will let the company capture the value creation via digital payments here using the growth of PIX, SPI and also SPB, the maintenance of the importance of debt in higher volume transaction. At the same time, in the credit card systems where we are already relevant, like Leoni highlighted, transactions over BRL 250 billion with running rate effect, Wide Platform, the hybrid platform, enhancing the competitiveness of CSU with fintechs, digital retailers and players of this new economy. This is focused on credit and prepaid exactly where we see growth. This point is really relevant showcasing that CSU is betting and incur the bets in data that are proved when we assess what's really going on in the Brazilian payment market. And Chart 13, what can we expect of the year of 2022 and the near future? Focusing in clients of this new economy, high growth, with a prioritize on digital innovation and technology. Within the vertical payments, our focus is totally for technological solutions, for digital transformation and this is reflected on the consolidation of Wide Platform bringing competitiveness even higher where we are already important, but also the package of digital solutions and a package of solutions of CSU for the digital transformation for the clients. And the reflection of this throughout the years is in digital onboarding experience that is more fluid and projects like no plastic credit card, there's no need of physical plastic with digital wallets agnostically and the brand, that's the solution of CSU enabling a digital transformation for our clients and the experience that is more and more fluid for what we call, seamless payment. The payment where you do not even realize there is payment, the experience is seemless without the control, without -- and the financial education is also important. CX, we are back for the transformation of the consumer experience through data with a customer journey that is more fluid, frictionless. This is a very important point, and we can only reach through technology, robotics, automation, self-service and multichannel. This is, in fact, where we bet our money and we are going to develop so the clients have more and more. And the clients of our clients have the experience that is more frictionless and solve their problems definitely and fast. And in the business division, Banking-as-a-Service, Blue C Technology, the construction of partnerships with first line, focusing on the clients through the user experience and the user interface developed and the biggest objectives to bring the experience that we have here of user ability in the card ecosystem to the Banking-as-a-Service ecosystem and digital accounts. This is the turning point. We believe that we are going to bet in this differential. So the newcomers for digital accounts and banking can really create and foster their financial ecosystems for payments in a relevant way for their final customer through the user experience that's unique and an interface that is friendly. And this was the takeaway message for you. 2021 was a year, very special year. But when we look ahead, we seek more and more results, challenging results and the maintenance of this revolution that we do believe we are going to bring to the payment systems in Brazil. I'd like to thank you so much, and we open up the floor for Q&A session and clarifications.

That's perfect, Guilherme? Thank you so much. I'd like to remind you that we are going to collect questions on chat. Let's see the first question, Carlos [indiscernible]. There are 2 questions. The first, how your debt is so low? Is it possible to grow inorganically? If yes, what is the level of leveraging that you are available and comfortable? What kind of company are you looking for? At this time, if the increase of inflation and interest rate impact the market of cards. Guilherme, can you say something about it?

Yes, I can say something about it. And feel free to jump in with any information at any point. First, I'd like to thank you so much. This question is very interesting. Our position of low leverage has an objective to have space and balance for eventual transactions in organic growth, essentially using debit. We have space for this growth and the low leverage allows us. What is the level we are comfortable? I'm not going to place a rate or a threshold of negative leverage. But I would say, 2.5x the tickets of transaction, BRL 250 million does not offend this structure, the capital structure of the company or even the leverage. So we still -- we would be comfortable with a leverage like this. More than that, at the same time, we understand that this opens pathway for a virtual cycle that could be combined with the operations in the capital market because we access we are in this market already. So this possible combination of inorganic growth that our capital market brings a space here should be open for this kind of initiative. And at the same time, it's very important to highlight this kind of initiative has to be aligned with the company's strategy, that is the growth strategy in our payment market in Brazil. So in the business unit, payments and Banking-as-a-Service and the feedback is aligned to this kind of initiatives. Initiative like this yes, are being assessed, evaluated, and we are aware of this market and all the opportunities in this sense. The second question, Leoni, can you repeat it, please?

If the increase of inflation and interest rate impact, the card [indiscernible] market in 2022?

Excellent question as well here. The thing is we see a point that is very important. The structure of leveraging now the cash position makes us feeling comfortable and we are still aware of all the challenges present here in short and midterm. 2022 is a year that we have to name the conflict in Europe, the war, Ukraine and Russia, the impact that this brings on the economy indirectly, maybe Brazil, and indirectly in the world of payment. But in fact, we are aware of that and the capital structure and the low leverage of the company. The strong cash position makes us feel comfortable on that. An important point I would like to clarify is that we have cash available to pay more than 2x our debt. That's an important point. In the field of defense, the attack would be choices on inorganic growth and the use of this cash and the leverage position of the company. It's important to clarify that the balance here is always present when we observe the follow-up of the year, this follow-up is very important, the conflict in Europe and also the election year that we have in Brazil. But in fact, what we see here is giving an objective answer. The way out for the pandemic also brings this leverage for the company as we see the [indiscernible] and also the growth predictability of ABECS, the Brazilian Association of Credit card and Related Services, is it still optimistic? And I understand that the growth here of PIX and credit cards show that this horizon -- is an important horizon for these digital modalities of payment even if the general perspective -- the general economy reflected on GDP might suffer in a scenario that is more restrictive with the interest rate that is higher. We see there is room for growth of the digital transactions that is meaningful. This is reflective and also the banking of the population that is a side of the process. There is a meaningful work front far growth and the restrictive scenario brought by the inflation and interest rate increase does not remove our optimism. Of course, it could be better. Yes, it could be better. But this does not mean that this growth has been important. Let's remind that even in a period of time of 2 years, that was really challenging as we saw the growth in the volume of PIX transactions and credit cards more than 40%. So we are still optimistic in this sense.

Perfect. Guilherme. Thank you so much. [Operator Instructions] Next question, [indiscernible]. He congratulates on the result and asks about what's the direction the company will take in 2022, eventually reinforcing the cash or acquisitions and meaningful investments or keep the high payout around 50% as it was 2021? Thank you much for the question. Before giving the floor to Guilherme, I remember the company generated more than BRL 115 million cash. This is 80% of the EBITDA of the company. And because of the cash generation, there's no need to choose either or we can go both, as I said. There was a reduction on debt. We invested and we had an acquisition. We distributed for the investors, and we increased CapEx as we're investing organically in the company. I believe the topic is not choosing either or we are able and we have cash in us for following different fronts, result distribution, investment, reducing debt. And I believe that the cash generation enables us not to choose either or we can navigate them both. Would you like to say something on top of that, Guilherme?

Just to reinforce that's the pathway we seek for balance here. And it's important to heed your attention, not all the companies, technological companies are exactly the same. So we are in a very privileged position, strong cash generation enabling not to follow excluding pathways. So the search for balancing these 2 situations enables us, gives us a position that is privileged and have opportunities in M&A. And at the same time, that does not mean letting payout go out. What might change eventually is the mix for each situation, and I highlighted in the previous answer, there is room, very big room for transactions here on debt. Change here the capital structure and the leverage of the company for more efficient levels than the leverage near 0 to return to the shareholders, not out of the perspective. So these pathways that are not excluding each other because of this topic, cash generation and results. The Rule of 40. Remember, we are a company above the rate of 40, but based on -- although there is a growth of 2-digit in top line, also growth of profitability very meaningful and really strong cash generation. This makes the company into a briefly position not to take exultant pathways, but try to find the best balance, expansion payout and also cash security.

That's perfect. The questions are going to be collected in the chat and answered accordingly. Next question, [indiscernible]. He's individual and a shareholder. Can you talk about the experience in the minority investment in Fitbank? How can this model add to CSU model if we to enlarge the participation in this investment Fitbank? I will answer it. Fitbank fits very well in the strategy of this new business that is Blue C Technology. In addition to the minority investments as we comment since the announcement of this transaction, there is a contract, commercial contract between these 2 companies, CSU and Fitbank to supply technology solutions, and that's going on already. Fitbank is already connected in our Banking-as-a-Service, Blue C Technology as a partner for cash in, cash out solutions in the digital accounts. So it's one of the important partners helping us to execute the transactions, SPB, transfer, wire. It's not only investment, but it's also a supplier of technology and innovation to CSU. And feel free Guilherme to jump in.

Perfect. There is a point here, very important always to bring one of the biggest challenges of being a technological company in a market that is suffering disruption. You have a mindset for innovation all the time, almost a start-up mindset all the time. And this is a byproduct of this relationship that we built with Fitbank because we are so close and breathing the same environment. Somehow we can bring this freshness, this point of view that is different of the payment world and this market, home bringing. So it's an important byproduct. And I believe that your question is fundamental. This is one of the reasons we keep contact, always renewing ourselves continuously in the vision of the company. So we can really have this disruptive attitude and continuous innovation in the market that we work. This is important. This is a byproduct that is here.

Perfect. So you can send your questions on chat. Let's wait we are receiving new questions. [Operator Instructions]. So no further questions. I'd like to thank you so much. Thank you for your participation. This call has the best result in the history of CSU and I may pass the microphone to Guilherme for final considerations. We are here at your service as well. Thank you so much. Guilherme, the floor is yours.

Thank you, Leoni. I'd like to thank here to our stakeholders, partners, clients, customers, shareholders that do believe in the company, renewing this commitment with us to seek more and more challenging objectives. We keep on having this point of view here, all the time renewing all the challenges. The result is delivered. It really means the commitment with the challenge that is even bigger raising the bar. Thank you so much stakeholders. You, that privileged us with your participation in this investment and also your attention on what we do believe and we bring to the market. Thank you so much. And see you next call on results showcasing more and more meaningful evolution. Thank you so much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]