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

Good morning, ladies and gentlemen. Welcome to CSU Digital First Quarter 2023 Earnings Call. This call is being recorded. Replay can be watched at the company's website, ri.csu.com.br. This presentation can also be downloaded. All participants can watch the participants, but also follow the slides during the presentation. We'll have a Q&A session and further instructions will be given then. I would like to remind you that this content will be presented in Portuguese. There is simultaneous interpretation into English. Please press the interpretation icon at the bottom-right of your screen. It is possible by pressing the interpretation bottom present on the bottom right corner of the platform and choosing the language properly. Before we proceed, we would like to state that forward-looking statements are based on the company's beliefs and on current available information. These segments may involve risks and uncertainties because they involve future events that may, therefore, depend on circumstances that may or may not occur. Investors, analysts, and journalists may have to take into account that the economic outlook, the industry conditions may make these forward-looking statements differ materially from future results. Guilherme Rocha, CFO; and Mr. Pedro Alvarenga, our IR Director, and the entire IR team are available today with us, I would like to turn over to Mr. Pedro Alvarenga. Mr. Alvarenga, you have the floor.

Good morning, everyone. It's a pleasure to talk to you, investors and everyone interested in keeping track of what the company has been doing. We'll be focusing on our Q1 results more specifically. But before I dive into the results, the company has gone through a very intense transformational period in the past 3 years, investing heavily to be more productive and to come up with solutions to the markets where we operate. I think it's important to have that recap; what we do, how we do it, and why. I think that everyone can be on the same page, therefore, this is what the company has become after this journey. I'd just like to say that CSU is an infra tech. We develop and offer technology for the services or the financial services world, we operate in the B2B2C arena. All the technology allows all the companies to provide their end users the state-of-the-art technology offering a comprehensive offer of services. Customers always have the choice to use the full suite of products for the entire platform, but they can pick and choose specific modules throughout the architecture, and we offer that possibility through APIs, and they pick and choose depending on their specific needs. The second item here, which is very interesting too, is they always maintain the use of their own brands. We provide services using the white-label logic. So their brands will always be on the forefront. And by doing so we have always been willing to help our customers to operate the platform and provide high-value services to their end users so they can count on our entire technical support and on top of security and a robust infrastructure. They can, therefore, have or explore new revenue sources. These are companies that are not directly related to the financial services world. But by providing that offer, they can get even closer to their consumers to generate more revenue streams, generate more interest, cross-selling, upselling opportunities, but most of all, increasing that customer loyalty, given that better perception that customers have. CSU has been in the market for over 30 years. We have over 40 -- there are 44 B2B customers. It's an interesting volume of units, accounts and cards registered in our platforms, above 34 million users. So that is very relevant because it can bring more and more volumes in terms of transactions. We have over 900 million transactions processed in the past 12 months. The TPV of BRL 280 billion. That's a very relevant figure. So let me break down what we do in terms of products. I always like to start with this slide because it shows how we operate and what we offer at the end of the day. On your left you see, CSU Pays. We have an entire suite of technological products for financial services; payment methods, banking as a service, loyalty and incentive. On your right, that's what we call DX, the digital experience, just like a was saying before. On top of our offering the entire technology infrastructure, we help customers execute their own strategies. That's where customer experience comes in; service, engagement and relationship with end users. And very soon, we'll have several solutions for the entire process automation. That's what we call middle office. Let me now describe each segment. Payment methods. That's where we started. We can ensure and offer an entire package of full service for those customers that want to offer payment means or payment methods to their own customers. We have a complete suite of credit card portfolio including plastic cards, virtual, digital, digital wallet, always connected to other payment platforms, including Apple Pay. We have the entire portfolio for quite some time. Everything is inserted in our ecosystems. We've now given the option of paying by Pix and Pix on credit. Banking as a Service, one of the projects that received our focus in the past 3 years, it's now becoming operational, still in the soft launch model. We have been introducing solutions gradually with some customers. We offer that complete technology solution for digital accounts. Again, customers can offer an entire package through an app or if they have some sort of internal solution, they may add some of our solution using our API. The loyalty and incentive world, we provide the entire infrastructure to manage loyalty programs so that they can extract more engagement, especially through financial services using points and cashback systems. We set up marketplace. The points accrual system is established, and we give them an end-to-end solution. As far as customer experience goes, digitalization is key, especially in recent years. We have introduced self-service mechanisms using robots so that we can provide that quality perception right there in the front line to end users, providing economies of scale for both us and our customers. Middle office, it's our priority for the year. We can ensure automation of each step of the way in hiring and contracting financial services using payment methods or banking as a service. We have exchange fraud prevention onboarding curation. All these mechanisms are available to our customers. On to the next slide, this is our customer base and how it evolved throughout the years. Year after year, the company has been bringing more and more customers to its base from several industries. It's a very diversified industry; banking, financial services, retail, consumption among other industries that are part of our portfolio. That gives us more and more opportunities to expand so that gives us predictability as far as our results go depending on the financial cycle of one industry since we are very diversified, in terms of customers and industries that gives us more sustainability in our results. In Q1, I would like to point out that we have included 2 additional customers, [ A Listo Technology ] and Villela Brasil are now part of our portfolio, both for PACE and DX verticals. Let me now address results more specifically. Here's what I would like to point out. CSU Pays remains the #1 vertical of our company. That's one of the growths, the most important growth catalysts, and it becomes more and more strategic; therefore, we have north of 34 million cards, almost 19 million can be billed. Our processing volume keeps growing substantially year-on-year. Growth is both in terms of number of transactions, an important metric to measure revenue trends and also the number of cards, but not only in the number of transactions, but also when we talk about TPV, we are reaching the 20% a year. That means that we have been able to establish very robust relationships with our customers. They have been expanding their own operations, both in terms of number of users and number of transactions. We have been having that lasting growth in this vertical. As a reference in Q1, we had a 14% expansion when compared to the first quarter of last year. Our performance remains very strong in this vertical. When you look at the chart on your right, that growth is sustainable. That 3 important effects I would like to highlight when we talk about gross profit for that operation. We become more efficient in operating this product, given the digitalization of products per se, plastic or virtual cards. These are products that are more profitable. Likewise, when we talk about processes, the company has digitalized most of its back-office processes, processes that are part and parts of this entire model that we operate in this ecosystem. So that provides expressive profitability gains. So this is a growing line. We start having gains of scale. In Q1, gross profit reached BRL 42 million, 16% above than year-on-year. That explains that margin expansion. Let me now address our digital experience operation. This is the vertical that suffered the most transformation in recent months. We have been investing heavily in this area, trying to expand more and more the use of new tools for the service ecosystem. Self-service is one of them; RPA, chatbots, social media to establish that relationship with end users. And in the end, the more digital interactions there are, the higher the quality is. And at the same time, you can reduce costs. So most of those changes we've seen in revenue is directly related to the digitalization process itself. And we are investing more and more in new solutions. We'll see that in more detail shortly, especially when we talk about middle office, where we have been investing more and more. The most important aspect is that, that transformation is happening in a very healthy fashion. We have been focusing on more added value processes to speed up our profitability and expand the brand. As you can see, despite those periods of more pressure in terms of top line, that does not translate into gross profit. So for every transaction, every interaction we manage in our platforms, we can generate more Reals per unit. As a consequence, gross margin goes up by 1.8 percentage points. I'll turn over to Guilherme. He'll be giving you more detail on the results.

Thank you, Pedro. It's a pleasure to be talking to you once again. Given these dynamics that Pedro has just explained... On your right, in your top right, you can see company revenues in Q1, almost BRL 133 million, slightly above numbers of last year in the same period. It's important every beginning of the year, there is some seasonality involved in our industry and in the industries of our customers. And that explains that variation, a slightly downward trend. We see customers somewhat conservative, especially in retail. So this happens across the board, especially when it comes to hiring new services so that's why that seasonality effect was greater this quarter. But the most important thing, just like Pedro said, is the digitalization of our services. This has been happening very heavily. At Pays, it's very mature. It's been going on for years. But in the case of DX, it's concentrated in recent orders and especially the last 6 months. That reflects on the indicator that Pedro has just mentioned which is the number of digitalized interactions, reaching north of 60%. You have self-service above 10% to that is very positive results. And of course, that generates just like in Pays in the past, we've been saying that quarter after quarter. That reduces top line but provides a very positive effect in terms of profitability and sustainability more importantly, after all, especially during economic slumps I think it's important to point out hyper automation solutions being developed in the business area of DX. So the focus here is purely efficiency gains, especially in middle-office. This is something that we've noticed with adherence above expectations and there's a strong demand from the market to hire these solutions. There's a lot of technology, embarked involving machine learning, AI, processes that require less and less human interaction, and for that same reason, they can provide better contribution in terms of results. These growth avenues have been opening up and that's very interesting for the company, specifically for the DX units. At the same time, at the bottom, we could see a trend that's been going on in recent quarters. And I'm referring to the increase of Pays participation in the relevant mix. It's up by 7 percentage points when compared to '22, from 56% to 63%, and the impact in results is very positive. Moving on, the economy now requires efficiency more and more now, and this is something we've been delivering for quite some time, and that can be seen in the variation and the evolution of our results lines. In all of them, gross profit, EBITDA or even net income no matter what index you look at, we've seen variations ever since 2018, a 2-digit CAGR is almost 19% for gross profit in the same period when we compare year-on-year, over 11% Q1 '23 to Q1 '22. The same thing applies to the company's EBITDA. And I would like to point out the effects of our net income, our bottom line, over 30% variation. CAGR, almost 22.4% when we compare numbers from 2018 to 2022. This entire digital transformation, and we have been harping on it quarter after quarter. But I think it's important to mention it once again that this provides very significant benefits in the company's results. As a consequence of this improvement in our results, we have been showing evolution in operational generation. I would like to draw your attention to the top left corner, almost BRL 37 million of cash generation in the quarter, 7% above year-on-year. And that, of course, impacts the cash equivalents about BRL 80 million. I think it's important to say that this cash generation -- on top of the impact and the availability level -- these resources can be applied not only in the maintenance of a high level of investments, but also dividend distribution. As you can see, on the bottom left chart showing the variation in the quarter and also on the right, in the last 12 months. We have been able to invest above BRL 56 million, dividends north of BRL 37 million, and debt settlements and reducing the company's leverage with no significant impact on cash availability. Once again, cash generation, let's break that down and see its effects, especially when it comes to debt, BRL 94 million, our gross debt. On the top left, you can see the amortization schedule. 2-thirds of the debt will mature long term above a year. Along the same lines, its behavior throughout time is something that is also worth mentioning. Our leverage is 0 now. Net debt EBITDA ratio is almost 0x; 0.08x, actually, times our EBITDA. And this is for gross debt. I think it's important to be reminded that the gross debt with FX 16, that will include leasing contracts. When you take into account gross debt, and look at when comparing to onerous debt, this has been going down. Q1 of 2023, we are at BRL 13.4 million, 75% below Q1 of 2019. In practical terms, net cash when we compare cash availabilities when compared to onerous debt, almost BRL 70 million in cash for that period. And now looking into further detail investments. Q1 of 2013, the company invested almost BRL 13 million, heavily concentrated in the Pays division. But I think it's important to say an increase in investments in DX, once again, reflecting our search for more technological solutions and hyper automation solutions as well. Anyway, 95% of the company's investments, we're focused to technology developing solutions and the infrastructure technology or the technology infrastructure rather. Likewise, just like cash generation allows us to maintain high investment levels. The company can also maintain that high level of dividend distribution, allowing high returns for investors or shareholders. In the first quarter, we've already distributed BRL 6 million through JCP and there was a change in payments. So these dividends will be paid out in the same quarter once the decision was made. In the past, the company would pay dividends just once a year. Once the decision was made, the payments would be made out in the following fiscal year. As of this year now, we have distributed JCP that has already been decided in the first quarter. We did that in April. So the compensation strategies for shareholders has become even more attractive. I'll turn back the floor to Pedro.

Before we conclude, let me just comment on this slide. This shows the relevant results the company has been able to deliver. The combination of this growth in both volumes and profitability, as we said before, this has been given us a very prominent position when we talk about indicators of return on invested capital, return on equity, even when we compare the company to top players in related industry and also those abroad, taking the American market as a benchmark, our return rate is substantially bigger than any of other companies. Just like Guilherme said, we have been maintaining that practice to distribute dividends, a very interesting and very attractive practice. We have been returning part of that profit to shareholders and those levels are also well above market averages. When we look at the pricing of our shares comparing to the same players. There is some differences -- there are some discrepancies there in terms of return and value. Let me point that out. If you take that enterprise value of our revenue, EV/Revenue, and the same thing, enterprise value over EBITDA we're 4x below average. We'll talk about EBITDA, it's 5x. If you take the top layer, that distance is even bigger. I think it's important to identify how much we have evolved in terms of results. We have been talking to investors more directly to clarify any questions they may have about our results and about our operation overall. On to our closing remarks, 6 highlights for the quarter. Scale, digitalization, and portfolio synergy are becoming more and more relevant for our results. We have become a very integrated operation for each one of those products in each one of those verticals. We want to promote the logic of full service more and more. This has allowed us to grow very quickly when you take into account profitability indicators. Robustness of our infrastructure provides us with that competitive advantage in the marketplace. It has helped us have a more favorable position amidst commercial turmoil. Companies are going through difficulties. And I'm referring not only the robustness in infrastructure, but also its financial structure is very robust. We have been able to keep on investing heavily, allowing us to introduce new solutions. The bank as a service as a soft launch in the quarter was a highlight, pay methods in several other resources, providing us with more revenue streams. We've been working with DX closely to incorporate new solutions and expand sales even further. Despite these investments, the company has been able to be very attractive for investors. We've distributed 30% of our profits in the first quarter as JCP. We paid that out back in April. And once again, I would like to point out high profitability rates for the company. With that asymmetry when we talk about value and compared to related competitors. I think we can now move on to the Q&A session and we are available to clarify any questions you may have.

[Operator Instructions] Bernardo Guttmann XP Investments asks the first question.

You talked about the soft launch of bank as a service. What is this project all about? What's the potential of this customer and what are your expectations for the business in the year?

60-plus bank was a contract signed back in April. We are going to provide the entire banking service to a player that will start operations in northeastern Brazil. It's a niche digital bank for individuals that are over 60 years of age. This is an audience that requires a lot of attention. You have a challenge to combine the best of the physical and the digital worlds. So it's a very interesting project that enables us to operate in the bank as a service. Still in the soft launch approach. They have gradual growth expectations for the first year. We don't expect a major impact for the year, therefore. But there is high expectations to expand in Northeastern Brazil taking; Recife, Fortaleza, among other cities in Northeastern Brazil. So there are some positive expectations for growth. But it's more of a symbolic customer, and it's a landmark, especially at the start of this operation. So we're opening up for new interesting possibilities as of now.

I think your answer is very complete. But if I may I'd like to add that there is the possibility to expand to other areas, and it's actually the realization of this new route that can be very positive for the company in the short term.

[ Alexandre ] asks the next question.

Congratulations on your results. Can you elaborate on the hyper automation and processes? What's that product like? What are the revenue and results expectations? And the last table you showed just like you said, Pedro, your comparison with your peers. -- what's the buy side point of view? What do they say about this major discount, I think it's interesting to understand the point of view of the buy side as well.

Thank you, [ Alex ]. That's a very interesting question. The hyper automation solution -- it's closely related to a BPO offer. Let me try to explain that. Almost any company that operates in this industry with a lot of regulation, with a lot of complexity. They suffer an enormous pain. They have to deal with several platforms, legacy platforms that don't often talk to each other, and they generate highly manual processes that are complex and expensive. I'm talking about back-office in the financial industry. We have exchange activities, documents, handling in constant onboarding inconsistencies, documentation in the medical industry, several documents and processes in the insurance businesses. So there are so many pains for these highly regulated industries, and we've been very present in these industries. These solutions can actually remove many process-related inefficiencies, especially in the middle office. This mid-layer that is so important to these industries. There are actually 2 very important aspects. Digitalization will be operating right there. It not only generates a huge cost reduction opportunity because these processes are excessive. They're highly complex manual interactions that are very intense. And you can also improve the quality dramatically because when you talk about manual interaction, of course, errors are involved. And when you digitalize that process to a certain extent, you can bring in automation in those processes and therefore, reduce the number of errors. That is crazy. You reduce process times that improves the perception of consumers and that lag that there is, when you have to deal with back-office, that will impact their own end users and of course, it improves the level of correctness. So we add on a technology platform that can combine all these legacy systems and automatically solve whatever can be solved through AI or by simply digitalizing the process -- you addressed the last mile problem. But even the manual labor, there still exists in the last mile. It's way more optimized because the information has been organized before and then AI can organize information and then it will be manually dealt with in the last mile. Efficiency gains are huge. We've seen that happen internally. CSU has operated in these industries that are very regulated. They are critical, they're very complex. We've been doing this for quite some time. We've used that type of solution before. We did that in our own middle office when we operate as business as usual. What we see now is that this entire know-how that we have developed internally has a huge value in the marketplace, and adherence levels are crazy. And even the rollout of this type of solution to new industries is exactly what excites us the most in terms of growth avenues and adherence because we didn't even imagine that this demand would be so high. So we're very excited about it.

Let me piggyback on your second question. Anyway -- but first of all. Thank you for attending our call. Let me address the asymmetry issue when we talk about share values or share prices and what we have delivered as far as results go. So here's my take, and I'm speaking on behalf of the entire leadership team. Just like I said, we've gone through major changes in our business in recent years. We basically transformed the business, bringing in a lot of tools, a lot of the digitalization, aiming at more productivity, more results, more profit, more cash generation, and at the same time we have been investing a lot over BRL 150 million in technology alone. So we have been investing heavily in adding new skills, products, and services. Here's what we see -- when you take the past 1.5 years or 2 years, the market has been very skeptical about technology companies because there was that major concern. Companies that were burning cash with no breakeven predictability whatsoever that has hurt almost all companies in this segment. At the end of the day, CSU was involved in that group was deemed a small cap company, a technology company. And of course, that concern spread to us as far as our results generation capabilities, especially because our business plan had a lot of new elements. We oftentimes hear from buy side on this and also sell-side one this. They say, "when you announced that new plan, I was skeptical. These guys are going to burn a lot of cash to execute," and it was quite the opposite that happened. The company is at its best time ever. We showed that we can execute. It shows that we have a lot of financial discipline of our executives. And the message is clear. Yes, we are going to make the necessary investments and at the same time, respecting the results generation capabilities that the company has. When you have something and you transform that into something way more profitable is key to us. That's what enables that strategic change by adding new products. And of course, it shows how surgical we are when it comes to executing our activities. There was that time in which the market was concerned, but we showed them the opposite. We can execute the transformation plan and at the same time, generate more and more results. A transformation plan with sustainability, right?

Sustainability and consistency. Quarter after quarter, we have been investing. Yes, transforming. Yes, but at the same time, delivering results. CSU is a case of efficiency for quite some time now and very sustainably. And we see the company keeping that pace. Everything is done with a lot of responsibility. Efficiency gains is something that we are always striving for both internally and also for our own customers, which in the end will help us in return. Our #1 asset maybe that generation of benefits and competitiveness to our customers and grow with them. These are very important pillars. We have adhered to for quite some time.

We're not a company for the future. We are a company of the present. We deliver results, and it's been growing. Not every company can grow at 30% time and time again -- very few companies can triple their cash generation in so little time. That market concern is dwindling quarter after quarter. We have proven that we can execute our strategies. We have been working hard internally. We've been getting support from people like you that help us get closer to the market, to remove that asymmetry. It's a matter of education. That's why I like to talk about our thesis at the start of the call. The company is delivering results. And I still have a series of new initiatives that can even leverage that potential even further. So I think it's clear our return rates are extraordinary when compared to the market. And that share price should be closer to what the market is paying to companies in other related industries. So it's a matter of building step-by-step brick by brick. We have to keep on delivering results, something we've been doing consistently and at the same time, show that to the market. That's our number one were challenge.