Ci&T Inc (CINT) 2021 Q3 法說會逐字稿

Good morning, everyone. Welcome to CI&T Third Quarter of 2021 Results Conference Call. I am Eduardo Galvao, Head of Investor Relations at CI&T. And today, we have with us Cesar Gon, Founder and CEO; Bruno Guicardi, Co-Founder and President for North America and Europe; and Stanley Rodrigues, CFO.

This event is being recorded. (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through the company's Investor Relations website at investors.ciandt.com, where the presentation is available. The replay will be available shortly after the event is concluded.

Those following the presentation via the webcast may post your questions on our website. Some of the matters we'll discuss on this call, including our expected business outlook, are forward-looking statements, and as such are subject to known and unknown risks and uncertainties, including, but not limited to, those factors described in our earnings release and discussed in the Risk Factors section of our registration statement on Form F-1, in connection with our initial public offering and other reports we may file from time to time with the SEC. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on those forward-looking statements because they are valid only as of the date when made.

During the presentation, we'll comment on certain non-IFRS financial measures to evaluate our business. Please refer to the reconciliation tables of non-IFRS measures in the appendix for more details.

Our agenda for today includes an update of who we are in the CI&T way, a discussion of our quarterly financial results, including our business outlook, followed by a Q&A session.

Now I'm pleased to invite Cesar Gon to begin our presentation. Thank you.

Good day, everyone, and thank you for attending our call today. It is a great pleasure to be here to start this call talking about our IPO, a milestone in our journey at the beginning of a new chapter as a publicly traded company. On November 10, we rang the bell at the New York Stock Exchange. This achievement was only possible due to the trust of well-known investors across the globe, the long-term partnership with our clients and mainly due to their genius and hard work of more than 5,500 CI&Ters.

Our total offering was $225 million, with net primary procedures of $157 million, that we expect to use mainly to pursue strategic acquisitions in order to leverage our organic growth. We are glad to have attractive Tier 1 and sophisticated global investors that share our long-term philosophy, and we are looking forward to strengthening these relationships over time.

Now before diving into our third quarter results, let's see how CI&T is delivering digital transformation to the world's leading brands.

(presentation)

Well, let's now double click on the third quarter of 2021 highlights. We are very excited to present a robust 55% year-over-year net revenue growth in the quarter or 57% in constant currency basis, of which 36% was organic growth and 19% from the Dextra acquisition. The U.S.A. continues to be a fast-growing market with 44% growth in the quarter year-over-year. And we are proud to say that this is our 21st consecutive quarter of top line growth, even during the pandemic and the other periods of market volatility. Our pro forma adjusted EBITDA margin was 22% in the third quarter and 24% in the 9 months of 2021.

Another mark of our business model is the solid cash flow generation. The 9 months of 2021, we generated BRL 90 million in cash from our operating activities. We are also pleased to announce that Dextra integration has been running smoothly, and we expect to conclude it by the end of this year. By now, Dextra is already operating as 4 new growth units under the CIT brand.

Another highlight in the quarter was the expansion of the number of clients with net revenue above BRL 1 million in the last 12 months. We grew from 62 in the second quarter to 75 in the third quarter. We onboarded new clients in all regions we operate through several industry verticals. The onboarding of new clients is a key component in our land and expand growth engine building strong client relationships that expand over time.

Finally, we expanded our team with the addition of 1,400 people in the quarter, including 1,200 from Dextra ending the quarter with 5,400 CI&Ters. Based on remote work, we have been able to hire people from different places and countries. It's worth mentioning that in September this year, we inaugurated a new office in Chengdu, Southwest China.

Now I invite Stanley, our CFO, to delve into our financial results.

Thank you, Cesar, and good morning, everyone. Let me start with our pro forma results for the third quarter of 2021, which considers a combination of both companies as if the acquisition of Dextra had occurred on January 1, 2021.

Pro forma net revenue totaled BRL 411 million, and the adjusted EBITDA was BRL 92 million, a 22% adjusted EBITDA margin. The performance in the quarter reflects our investments on hiring new people and also promoting our employees to foster our growth and our delivery model. We also invested in strengthening our administrative teams such as finance, accounting, legal and compliance to comply with all the requirements of being a publicly traded company from now on.

Now analyzing our pro forma numbers for the 9 months of 2021. Our pro forma net revenue reached BRL 1.160 billion for the 9 months, almost the same pro forma net revenue for the full year of 2020. In this case, we are comparing our actual pro forma results in the 9 months with the full year of 2020, just as a reference of our current performance. Our pro forma adjusted EBITDA year-to-date was BRL 278 million with an adjusted EBITDA margin of 24%. These numbers are in the top range of the flash numbers we provided in the IPO prospectus.

And now I will talk about CI&T results in the third quarter of 2021, this time considering the consolidation of Dextra from August 10, 2021, the effective date of the acquisition. Meaning that in these figures, we have 50 days of Dextra results within the third quarter of 2021. Net revenue was BRL 376 million, an increase of BRL 133 million or 55% year-over-year. Mainly due to the higher demand for digital transformation from our existing clients and the addition of new clients to our portfolio.

During the second half of 2020 and throughout 2021, we have been accelerating the hiring process as well as promoted employees that have been taking on new rules as we expanded our relationship with our clients. We also invested in our administrative teams in preparing the company for the IPO and to comply with all the necessary requirements of a publicly traded company. These expenses should be diluted as we continue to grow our revenue over time.

In the third quarter, we also incurred in certain expenses such as an increase of BRL 4 million in the provision of profit sharing and bonuses at Dextra aligned with its current performance year-to-date. This effect is normalized when we analyze the results for the 9 months of 2021. Our adjusted net income was BRL 24 million, a reduction of BRL 16 million compared to the same quarter last year, with 7% adjusted net income margin.

Adjusted net income was impacted by higher expenses related to M&A, including BRL 6 million of depreciation and amortization and an addition of BRL 13 million of higher financial expenses. In addition, we had BRL 7 million in financial expenses related to foreign exchange variation with no cash effect. Considering the net proceeds from the IPO as of November, we have a higher cash position than our total debt. Our main markets continue to be the U.S. and Brazil. The highlight for the quarter was the net revenue increase in the U.S. from $115 million in the third quarter 2020 to $165 million in the third quarter 2021, a 44% growth.

Our main industry verticals are financial services with 36%, food and beverage 21% and pharmaceutical and cosmetics with 14%. We increased our exposure to TMT from 10% to 12% and reduced our top 10 client consideration from 72% in the previous quarter to 60% in the third quarter. As we mentioned during our road show, we have a solid pipeline of M&A global opportunities to foster our inorganic growth with new markets, industry verticals and talent locations.

And now I will pass back to Cesar to go through our business outlook for the fourth quarter and to close the presentation. Cesar, please.

Looking forward, we continue to see strong demand for digital transformation services. We expect our revenue growth to continue accelerating during the next quarter. So we expect our net revenue in the fourth quarter of 2021 to be at least BRL 440 million, a 66% growth compared to the same period last year. For the full year of 2021, we expect our pro forma net revenue to be at least BRL 1.6 billion, a 38% growth compared to our pro forma net revenue in 2020. This acceleration is based on higher demand from our current clients, combined with a consistent addition of new clients.

To conclude and open for Q&A, I would like to reinforce our investment highlights. CI&T is playing a massive, very fragmented and expanding market, positioned as a solid end-to-end native player, using a proven global delivery model with access to robust talent and a very attractive culture, plus a solid track record of growth and profitability and a business model that allows the rare combination of high revenue growth and cash generation, all in the hands of a very entrepreneur leadership and an innovative culture created over the last 26 years. Thank you.

(Operator Instructions) Our first question comes from Mr. Arturo Langa with Itaú BBA. Please Mr. Arturo, you may now make your question.

The next question comes from Mr. Diego Aragão with Goldman Sachs.

The first question is on Dextra. Just wondering if you can help us to understand what was the headline growth for Dextra on a stand-alone basis? I mean what was the year-on-year growth rate for Dextra in the third quarter? And how that are you guys expecting this business to grow in the fourth quarter? That's the first question.

Thank you, Diego, I can get this one. I think Dextra has a very similar profile of growth and profitability at CI&T. So basically, we have the same pace. So we -- as you saw, we grew BRL 0.36 organically. And then we added 19% from Dextra. And for the next quarter, it's almost the same. We are expecting 66% of top line growth, and basically, you can consider that Dextra is growing at the same pace as CI&T.

Okay. Perfect. And the second question is regarding the margins. You mentioned a couple of, let's say, additional costs, there seems to be no recurring items in nature. So can you just help us to understand the year-on-year trends and maybe size the amount of, let's say, those extra costs that will no longer impact your margins in the fourth quarter?

I can take that. Diego, thank you for the question. If you get our flash numbers, we already anticipated those effects in a broader view coming from net income, BRL 56 million is the amount that affected net income, so 15 percentage points. And if you take from the EBITDA perspective, we are talking about BRL 33 million. So going forward, we basically have 2 items: amortization coming from the acquisition of the Dextra, you can consider a monthly number of BRL 2.5 million going forward. And interest with regard the debt that we contracted for -- to finance the acquisition. And that as well, you can consider like BRL 4 million per month in the beginning. Of course, towards the future, this will dilute and of course, interest will reduce as long as we go with the amortization schedule.

And additionally, Diego -- sorry, additionally, Diego, if you want more color, we already described, for example, we have the write-off of software, et cetera. Those are also pre-described in the flash numbers. So we didn't have any change in those aspects.

The next question comes from Mr. Jason with Bank of America.

Congratulations on the IPO. Just a couple of questions. I guess, first off, I would love to hear a little bit more about the pipeline for new clients and how that is shaping up at this point? Where is it strongest in terms of verticals and geographies?

Sure. Thanks, Jason, for your question. I can start here. Basically, as we mentioned, this was a great quarter. We added net 3 new clients with last 12 months revenues above BRL 1 million. And I think as this growth in our growth strategy is very important that not only we expand within our current clients, but we ensure the entry of new loans every single quarter. And the idea is that those new clients will mature in 2 or 3 years and guarantee, we continue in a solid growth pace. And we are seeing a lot of demand from digital transformation services. So we expect that we will continue onboarding new clients in the following quarters.

I think in terms of verticals, financial services is still very solid. We even increased the participation in our revenue from 34% to 36%. And we see really -- 2 new verticals being more relevant. I think Stanley mentioned, TMT now is getting to action from 10% to 12% sharing -- as shared. And we see retail as a big trend too, a lot of demand is coming from this vertical. So basically, we see those as the main drivers for continuing to grow in this space.

Understood. Any preliminary thoughts on hiring targets for 2022? And what the potential mix of freshers versus non-freshers could look like?

I'll take this one. So as you know, our headcount will go up according to revenue growth, for instance, pretty linear. So we're expecting the number of headcount to increase according to revenue growth, which is -- which we predict to be the levels were today. So then the number of people that we've been added in the Q3, we added around 1,300 people, including the Dextra acquisition where we have 1,100 people. So we're kind of ramping up the efforts like our own hiring structure there and a lot of marketing and other efforts to keep the hiring in our attractiveness to the top in the industry, right? So as you know, we have a very high attractive rate. We continue to have most of -- over 3 quarters of the proposals that we extend to candidates accepted. So we wanted that to keep that way going to 2022.

Let me add one. I think it's worth mentioning that last Q1, the first quarter of this year, we're onboarding in our trainee program around 200 new trainees. And for the next first quarter of 2022, we are forecasting 400. We are double the size of our trainee programs. So we intend to onboard 400 new trainees in Q1 next year. So I think this is a relevant part of our strategy of developing our own talent since the early stage of their careers.

And just last 1 real quick for me. What was voluntary attrition in the quarter? And how much of the 66% revenue growth in Q4 do you expect will be organic?

Attrition on the quarter, historically, attrition for us, as you know, that's been an industry benchmark around 12%. Now that we had added Dextra, Dextra had a little higher attrition rate. Combined attrition rate in the quarter was 14%. And so that was the number for the quarter.

And then the Q4 organic?

Yes. As you saw, we are forecasting 66% of growth. This is basically, I would say, CI&T and Dextra now combined -- already combined, and it's pure organic in the sense that it's already integrated. And you have -- if you think about the sizes, 80% is original CI&T clients and around 20% is Dextra growth. So we just know growth units growing the same pace now.

Just to add to that, on the third quarter, we have 55% growth. And we had 50 days of Dextra we see in the quarter. So the 19% inorganic tends to expand on the fourth quarter as we're going to have full Dextra we see in the fourth quarter. So we expect to maintain a similar organic growth level and a higher contribution from inorganic growth.

(Operator Instructions) The next question comes from Puneet Jain with JPMorgan.

Congrats for the recent IPO. Cesar or Stanley, if you can talk about like the business momentum you are seeing as it relates to next year's growth, what visibility you have right now at this time on next year's growth without getting into numbers, do you have better visibility than same time last year or maybe the year before that?

Thanks for your question. I can get this one. Well, as you know, we -- our growth strategy is based on -- is extremely recurring business model is based on our land and expand strategy. I think what we can see is, for now, it's for this second half of the year and for next year there's an increase in our net revenue retention. Historically, we -- our net revenue retention was around 118%, 120%, but we are this year seeing this number increasing. We are going to have around [100% to 80%] of net revenue retention. That means a lot of demand coming from our portfolio -- of course, it's been a combination of more demand from the portfolio and CI&T gain more wallet share due to our performance and our end-to-end value proposition.

So I think we have even more visibility. That's why we expect a very strong, not only Q4 as we give the guidance, but also for next year. So it's -- again, it's -- we will have the discipline of opening room for onboarding new clients to make this engine continue to work the land and expand engine guarantee, not only short-term growth, but long-term growth. So we have a very high visibility at the end of the day. I think it is a result of companies. We see large -- special large corporation investing even more on digital, and we will take advantage of this scenario and continue our very solid growth.

Understood. And can you also talk about wage inflation trends you see in Brazil? Has there been any change in wage inflation trends like over last 1 or 2 quarters there?

Inflation trends. We see that inflation is a consequence of post-pandemic effects, especially coming from exchange rates. So naturally, those costs are adjusting in most recently. And we see a stabilization towards the future. So that's pretty much the overall scenario we are foreseeing. Galvao, if you have something.

Yes, just to add to that, Puneet, we do have pass-through clauses on our contracts locally in Brazil. So pretty much this is pretty standard in Brazil to pass it through our clients based on contracts. So we certainly expect to manage that based on our existing agreements. If you think about our operations in the U.S., then you have the FX component that also helps to offset inflation impact on our results.

Okay. We've got a few questions here on the webcast. So our Arturo Langa from Itaú BBA. He says, I don't think you were able to hear me for the technical issues. Can you please help us understand how we should think about growth and margins? In other words, we saw a big pickup in new hires. Should we expect the same pace going forward? And my second question is, if you can share headcount attrition rate and what are the main drivers for talent acquisition and retention you're seeing in your footprint?

We already answered the attrition rates. That's 12% stand-alone CI&T, 14% combined. We expect that we're going to bring that down as we integrate Dextra and kind of impose our own HR processes.

In terms of the revenue growth, also I think we answered that we're expecting that to grow, right? So -- and how we actually are kind of planning to attract and retain people, I think it's back to our value proposition for employees, right? So we have a very simple and clear and powerful value proposition for attracting and retaining people, which is we grow faster than the industry, and people grow with us. So we are working on a lot of opportunities to people to step up, to grow into their -- into other roles and to take on new responsibilities. And we'll give those opportunities for people that are with us, and so we promote them within and we support that development.

And so then people have here faster careers that they would have elsewhere. So that's a very compelling value proposition in this market, and that's what actually drives our very low attrition rate and a very high attractiveness kind of KPIs as well.

Okay. Arturo is back on the line queue here, so we can open him to listen him live here. Operator, please.

Mr. Arturo, you may proceed.

Maybe just a follow-on on the headcount. Is there any particular geography that you're seeing a higher share or a higher mix of new hires? Is there any color in terms of geography that you can provide in terms of talent acquisition?

Yes. We're kind of -- as you know, most of our headcount is still concentrated in Brazil as we serve the biggest markets are the U.S. and Brazil. So it's mostly in Brazil, but we're seeing this quarter, we saw 20% of new hires coming from other locations, right, mostly the new development centers in Canada, Portugal and other locations and Latin America as we open to hire more people from work-from-anywhere setup. So that's -- we see that as a trend. We expect this -- that ratio to even increase going forward, and that talent pool to get more diversified over time.

Congratulations for the results and the IPO.

Thank you.

Okay. I have some follow-up questions here on the webcast. So Otávio Tanganelli from Bradesco. Congratulations on the results. Can you provide us more color on the slight margin compression that we saw in the quarter? Is this solely a matter of consolidation of tax? How do we expect this to evolve going forward?

So I think this Stanley mentioned briefly during the first question. I think it's important, we do have some one-offs in the quarter, and we mentioned that also the provision for bonus at Dextra that normalized when you look at the 9 months and it was provision specific in the third quarter. So certainly, we're going to look at the fourth quarter as a cleaner result, that will be a better reference in terms of margins of what we expect going forward in terms -- we mentioned the 66% revenue growth that we expect for the fourth quarter. And on top of that, we're confident that we'll be able to deliver a solid EBITDA margin in the fourth quarter as well.

So also some follow-up questions here on the web. (inaudible). Could you please comment on the outlook for top line growth and profitability for 2022?

Sure. By now, we are not giving you specific guidance, but we can say that we have a very amazing visibility, and we expect continue to grow organically in a very good pace. But -- and we expect to also combine this organic growth with M&A, right? We have, I think, a good pipeline of opportunities to expand our talent pool capabilities, further expertise and geographic reach. So we expect that 2022 will be a year with a very solid organic growth, combined with M&A or inorganic growth.

Another thing is in terms of margins, we really expect to consider continue best-in-class profitability above the industry. And of course, M&A, as we probably are going to acquire some companies with lower EBITDA margin than us. We expect some fluctuation, but it's also we see as an opportunity to really add our streamline operations to just new targets and bring them to the level of profitability of CI&T.

Okay. And 2 follow-ups here. One from Bruce Qian from Kennedy Capital, have you seen any significant wage inflation of Brazil labor market, which could press your gross margin? I think we commented on that. And then he adds, can you still grow at high 30%, 40% going forward -- high 30s, low 40s going forward?

In terms of -- I think in terms of inflation in Brazil, our business model is very resilient to Brazil habitat turbulence. I think over the last 26 years, we continue to grow into profit in any and every single year. So -- and I think it's important to note that we have half of our revenues in [hard currency], mainly U.S. dollars. And most of our -- of course, our costs are in Brazilian real. So FX, normally more than offset inflation and other turbulences affecting Brazil.

And also, I think Galvao mentioned, for our local contracts, 100% of them had annual price adjustment clause based on inflation indicators. By the way, this is a very standard business perhaps in Brazil. So of course, we can have some seasonality because normally sale adjustments are more concentrated in Q1 and contract price adjustment are distributed along the year. But at the end of the day, it means we can guarantee continue in a very good level of profitability.

And the second part was regarding the -- yes, I mentioned we are not -- at this moment, we are not giving a specific target, but very confident we will continue a very good pace of growth and also having an additional growth coming from M&A. That's what we expect right now.

The final question we have on the webcast is another follow-up here, [Rodrigo Augustine] from (inaudible) Capital. Could you please share a little bit more about the net revenue retention dynamic during the quarter?

It's a topic that as Cesar mentioned we're currently [looking] for the year.

Yes. I mentioned it's increasing, right? We are now in the level of [120, 80%] of net revenue retention. And I think this is really the result of seeing our current clients increasing their investment in digital and of course, CI&T gain more wallet share with them. And so -- and we expect that for the future or net revenue retention, we will continue to be around or above 120%. And this is an important part of our land and expand strategy.

All right. We have no further questions, so Cesar would like to proceed with your closing remarks, please.

Sure. Thank you, Galvao, Stanley, Bruno. And of course, thank you, everyone, for participating. We are very excited about the future of CI&T, about our purpose to unlock business, technology mainly with people potential. And so again, thank you very much. Looking forward to see you in the next quarter. And of course, let's make their tomorrow. Bye.

Thank you all.

Thank you.

That does conclude the conference call for today. Thank you very much for your participation, and have a good day.