Itaúsa S.A. (ITSA4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Itaúsa's Conference Call to discuss the First Half of 2021 Results. [Operator Instructions] As a reminder, this conference is being recorded. The file will be available at the company's website at www.itausa.com.br/en at the Investor Relations section. This conference call and the live presentation are being transmitted via Internet as well. You can access the webcast by logging on to the company's website, www.itausa.com.br/en. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors. I inform that during the presentation, the questions can be sent by webcast and will be answered at the section of questions and answers. With us today, we have Mr. Alfredo Egyodi Setubal, CEO and Investor Relations Officer at Itaúsa; Mrs. Priscila Grecco Toledo, CFO at Itaúsa; Mr. Renato Lulia Jacob, Head of IR and Market Intelligence at Itaú Unibanco; Mrs. Mariana Espírito Santo, Investor Relations Director at Alpargatas; Mrs. Natasha Utescher, Investor Relations Manager at Utescher. It's now my pleasure to turn the call over to Mrs. Priscila. Mrs. Priscila, you may now begin.

Hello. Good morning. It's a pleasure to receive all of you in our conference call to discuss our results of the first semester of this year. Now beginning on Page 5. Regarding the pandemic scenario, Itaúsa and our invested companies continue to adopt all the security measures regarding our employees and operations, adopting the homeworking scheme since the beginning of the pandemic and all -- and many well-being programs. Also, in order to help the society surpass this difficult moment, Itaúsa and the companies in our portfolio made donations of more than BRL 1.5 billion last year. And this year, the companies of our portfolio had also other relevant initiatives such as the creation of the Instituto Todos pela Saúde with an initial contribution of BRL 200 million and donations of food staples, Havaianas sandals and many other initiatives. On Page 6, we saw some relevant advents that we had in our governance, with the election of 3 investment members and also the creation of 4 advisory committees reporting to the Board of Directors, which are coordinated by investment and external members of the Board. On Page 7, we show some important improvements in the company to increase our transparency and to reinforce the dialogue with our stakeholders. We launched our Integrated Report in the first quarter of this year with a new format, more user-friendly with new content and also a new identity. We also launched, this semester, our new corporate website and our Instagram profile, bringing some top content and more interactivity with our stakeholders. And coming soon, we will have a new newsletter with a modern, simple and objective language, bringing some important topics regarding Itaúsa in our portfolio. On Page 8, some important recognition we had recently. Itaúsa received the Great Place to work certification, recognizing the work we have done in terms of people management. We had an overall 21% satisfaction rate from our employees, which is a big number and made us very happy with this result. Also, we appeared for the second time in the FTSE4Good Index. This is a London Stock sustainability index and recognize our ESG practice. Going to Page 10. We see some important advents in our invested company Copa Energia. The company launched as a new brand with the proposal to be a benchmark in sustainable energy solutions. It is also making advances in the synergy integration and capture process. Copa already concluded the system integration, implemented the new corporate governance, finalized some commitment assumed with CADE, renegotiated agreements targeting cost reduction and SG&A rationalization, and also is starting the logistic flows rationalization process. On Page 11, we comment about some recent advents regarding Itaú Unibanco's stake in XP Inc. On May 31st, Italgas Itau got Fed's approval for the spin-off, resulting in the creation of XPart, which is now a new company in our portfolio and the second biggest investment in terms of market value. As already announced, in terms of next steps, we will have the shareholders meeting in the second semester to approve the merge of XPart into XP Inc. And if approved, Itaúsa [ IUPAR and also the FAGR shareholders ] will receive Class A shares. The ratio of exchange of shares may be around 43 shares of XPart to 1 share of Class A of XP Inc. After the merger, Itaúsa will have a stake of around 15% of XP Inc., and this represents a market value of BRL 18 billion in total as of today. Going to the next page, Page 12, we comment about our new investment in Aegea. This investment resulted in a -- in an investment amount of BRL 2.5 billion in July, and now we have almost 13% of the total capital of the company. And we understand that the infrastructure sector has high-growth potential and attractive return rates, and the company is very well positioned to benefit from the sector growth. And also, we have a very skilled operator and -- as our partner, with a long-term vision that is common with Itaú. Aegea is also the leading private company of the basic sanitation sector in Brazil and serves around 21 million inhabitants in Brazil. On Page 14, we see some highlights of Itaú Unibanco in the semester. The loan portfolio increased around 12% in the period, mainly in the very small, small and middle market companies and also individuals. We also saw a relevant decrease of more than 25% in the expected loss when compared with last year, related to the credit portfolio. In the semester, Itaú Unibanco showed solid results, increasing the recurring net income from BRL 7.6 billion to BRL 13.8 billion, achieving an ROE of 19% in the period. On Page 15, we see some highlights of XP Inc. that we now have in our portfolio since the beginning of June, registering 1 month of the results of this company at Itaúsa. The company showed a 54% increase in its net revenues in the period, driven by the sale business. The net income achieved around BRL 1.7 billion in the first semester against BRL 0.9 billion last year, reporting ROE of almost 25% -- 29% in the period. On Page 16, we have some highlights of Alpargatas. The company had a net revenue increase in operations, mainly due to the RGM program, higher volumes and also better price/mix for all the divisions, and some very important advents and also in the global expansion and growth of the online channels. The company reported a recurring net income of BRL 246 million, an increase of more than 120% when compared with last year and reported ROE of 16.7% in the first semester. On Page 17, we see some highlights of Dexco. That is the new name of Duratex. And the net revenues of the company increased almost 70% in the first half of this year, driven by the maintenance of high-level of demand and higher average price and mix -- and a better mix of products and readiness. The recurring net income was also almost BRL 900 million of highs, and an increase of more than 560%, achieving an ROE of almost 18% in the semester. This was the best result in the semester and the best ROE of the company in its history. Going to the next page, Page 18, we see some highlights of Copa Energia. The company had an increase of 20% in its revenues in the period when compared to the last year, and reported a loss in the period of BRL 93 million. This was caused by the relevant increase in the cost of raw materials occurred in the semester, with successive price increases made by Petrobras, which was not fully compensated by the company. On Page 19, we have some highlights of NTS, that reported an increase of more than 20% in its revenues as a result of contractual adjustments by inflation. The company reported a net income of BRL 1.5 billion in the semester, an increase of 26% when compared with last year. Going to Page 21. We have the financial highlights of Itau. Itaúsa reported a recurring net income of BRL 5.3 billion, a recurring ROE of almost 18%, which represented a relevant increase in comparison to the last year. We also reported a net debt of BRL 3.9 billion in the net equity of BRL 61 billion. On Page 22, we see our capital structure. After the debentures we issued in the semester and in the last year, at the end of the last year to fund Copagaz and also the Aegea's investment, we now have a 5.6% leverage, showing our high leverage capacity and the prudent financial management of the company. On Page 23, we have the payment schedule of the principal amount of our financial debt. As you see, the average term of our debt is 6 years, and the cost is around CDI plus 1.6%. On Page 24, we see the dividend and interest on capital that we received in the first half of the year from NTS and Itaú Unibanco and the amount we paid or will pay to our shareholders regarding the first semester of the results of the company. In this semester, the amount paid or payable totalized BRL 1.4 billion with a 25% payout, which represents 2.7% dividend yield in the period. We also acquired 4 million preferred shares under our buyback program in this semester. On next page, Page 25. We show the current level of discount of Itaúsa. That is almost 24% discount. And if we include the market value of our stake in XP, which is BRL 18 billion without changing the market value of Itaú and Itaúsa in this exercise, the discount level of Itaúsa goes to almost 24%. And in the next page, to conclude my presentation, I would like to invite all of you to our live event, the Panorama Itaúsa that will take place on September 28 at 10 am Brazilian Time. In this live, you will have the opportunity to discuss the perspectives and strategies of Itaúsa and the investment company. So we now open for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Mr. Tito Labarta with Goldman Sachs.

A couple of questions. I guess first, on the stake in XP. You mentioned here that you'll be limited to 6 block trades over 12 months. Any indication you can give in terms of the timing to exit? I think you said in the past that you don't see it as strategic, but you may not sell immediately. And is there any limitation on the size of those blocks that you could sell? And then my second question more on the pending tax reform. Any color you can provide on -- given the current iteration that's going to Congress, what would be your expectations for the impact that that would have on you?

This is Alfredo. In the case of XP, we see XP as a very good investment in our portfolio. We believe in the future of the company. We believe the company will continue to grow. I think the divesting decision of the bank was to pass to the shareholders the value creation that was done during the period that the bank hold this stake. Saying that, we are not in a hurry to sell the participation that we have at XP. We announced that is not a strategic investment, that's why -- that's only why we are in portfolio management activity that is out of the financial sale versus investment that we are doing. So XP is part of a financial service company, is a financial service company. So in the long term, we don't see this investment as strategic for Itaúsa. Itaúsa wants to continue the creation of the new portfolio in the -- in other sectors instead of the financial services. We are not intending to sell XP participation. Perhaps we have many years to do that. We are not in a hurry to do that. When we mentioned that we made with XP Inc., some way out through block trades and other kinds of operations, it is just to have the chance and the opportunity to decide if we want or not to participate or do this kind of block trades or sales, depending on the transaction that they have been doing through XP, through other investors, through Itaúsa. So we have the opportunity to decide if we want to do or not. It doesn't mean that we are going to do. Our intention is to keep this investment for some periods and use the sale -- the money from the sales that will occur over the years to pay debt or to pay dividends or to invest in other companies or to buy back shares. So we -- at the level of the Board member, we will discuss which one of these alternatives will be the best use of this capital, always looking to the return for our shareholders. So it's a long -- it's a medium to long time investment in our portfolio, but we believe that at the end of some many years, we are not being shareholders of XP anymore. In the case of the tax reform that I'm under discussion in the Congress, I think it's too early to say because there are many discussions for what will be approved or not, what will be approved in the lower house, what will be approved in the upper house and the Senate. So I think the -- it is a little bit early to say. But what we can say if the law is approved, as it is today, it's not bad for Itaúsa, specifically because we are not going to have the fiscal expenses of the PIS/COFINS over the interest over capital that we received. So this is -- its range depends on the year of the payout of the companies that we invest. The last year, the range was BRL 300 million to BRL 500 million in expenses. So this was the most important expense of the holding that it maybe can disappear with the end of returns over capital. In general, we see for Itaúsa, probably the results of the companies that we invest will increase due to the level of profitability of them and also because of the reduction of the taxes paid by the companies. But at the end, of course, we will have taxes over the dividends to be paid to the shareholders. But if we look only for the company before distribution of dividends, the results of Itaúsa probably will grow.

Alfredo, that's very helpful. So just one follow-up on the XP. So my sense is you're not selling for now. But was there any limitation on the size of any block trade? Or if you wanted to sell in 1 block trade, I mean, given the size, may be difficult, but just to get a sense, any limitation on that? Or that will be completely up to you and the Board to decide on how quickly you get out once you decide to do that? And I understand it's not in the short term.

As I said, we don't intend to reinvent, let's put the other way. We intend to keep shareholders of XP for a long time, but we are going to reduce over the years, the coming years, according to the price, to the perspectives of the company, to the liquidity of the market. Many factors will influence our decision to sell or not to sell any stake in XP in the coming years. So it's difficult to give you a precise answer. But anyway, we -- as I said, we are happy and confident with the future of the XP, and we will reduce the participation because it's not strategic for Itaúsa, that wants to create a portfolio of nonfinancial companies. The only financial that we see in our portfolio in the future is the shares of Itaú Unibanco Holding. So XP will be reduced our stake over the years according to the liquidity and perspectives of the company.

[Operator Instructions] This concludes today's question-and-answer session. Mrs. Priscila, at this time, you may proceed with your closing statements.

Okay. We'd like to thank you all for the participation in this call. As you saw, Itaúsa reported solid results, showing an important increase against the last year. And I would like to invite you once more for our live Panorama Itaúsa that will take place on September 28, where we will share with all our investors, the strategy and perspectives of Itaúsa and the companies of our portfolio. Thank you, and have a good day.

That does conclude Itaúsa's 2021 results conference for today. Thank you very much for your participation.