Cielo SA

BOVESPA:CIEL3

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Cielo's Second Quarter 2018 Results Conference Call. With us here today, we have señores Clovis Poggetti, Victor Schabbel, Gabriel Mariotto, Marcello Noronha, and Eduardo Gouveia.

This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Cielo website at http://ri.cielo.com.br/n/ where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Cielo management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, dependent on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Eduardo Gouveia. Mr. Gouveia, you may begin your presentation.

[Eduardo Gouveia, executive]

Good afternoon. Thank you all for joining us for another conference call to discuss our results. For me, in particular, this is a special occasion, full of sentiment and mix of gratitude and a sense that job was done. Due to personal and family reasons, explained over the last weeks, the second quarter call is the last one for me. It was a great pleasure sharing our results and spend time with you at meetings and conferences. I have always enjoyed exchanging experiences and ideas with analysts and investors here at Cielo. Thank you very much for all your support during these last months.

Despite all the challenges we faced, together we were able to plant the seeds that will allow Cielo to grow into a leader of this fast-growing industry. As I say goodbye, I want to thank all our employees, who over these last 19 months helped me to deliver a leaner, more agile and modern company, which offers a comparable portfolio and is much closer to its customers. I say goodbye with a sense the job was done, confident that the Cielo that I leave is now a much more efficient company than the one I was proud of [indiscernible] last year. [ Also ], thanks a lot for everything.

I will now leave the call, hand it over to Clovis and Victor, who will discuss our recent initiatives and our second quarter results. Here with us, following the call, we also have our Chairman of the Board, Marcelo Noronha. We will start our presentation with Gabriel Mariotto, our Head of Business Analytics, who will discuss the trends seen over the first half of the year.

Please, Gabriel, go ahead.

[Gabriel Mariotto, executive]

Okay. Thank you, Gouveia, and good morning, everyone. We maintain the vision we shared last quarter that the Brazilian retail sector has been showing signs of a consistent recovery, although still low and gradual.

The numbers shown by Cielo Broad Retail Index, ICVA, for the second quarter confirm this scenario. As you can see on Slide 3, retail sales accelerated, but we lacked strength in real terms. Keep in mind that the second quarter numbers include a nonrecurring event that pushed the sales down, the truckers' strike in May and Brazil's World Cup matches in June. We released, by the way, statistical analysis on these events to the market and the media.

On the other hand, these impacts were mitigated by sales around 2 important dates on the Brazilian retail calendar, Mother's Day in May and Valentine's Day in June, which outperformed expectations. Comparing with the equivalent periods of last year, the growth of both dates came in above the pace of growth of the remainder of those months.

Now looking at inflation with a 2-year historical perspective. In 2016, we saw prices jumping to a level of 10% increase in 12 months and then sharply declining to 1% in 2017, shrinking the nominal revenue growth of retailers. In the second quarter of 2018, inflation returned a bit to around 2%, which helped merchants investing.

Talking about the evolution of sectors in general, the durable goods sector, which includes apparels, department stores, electronics, construction materials, has been following overall retail acceleration, but in a bit slower pace. The nondurable goods, which includes supermarket, gas stations, drug stores, has been driving most of the growth. And finally, the services group has been showing relatively steady growth over the last 2 years.

A positive sign is that all regions in Brazil have shown recovery signs. Even in Brazilian states that were still posting decreased consumption in real terms, such as Rio de Janeiro and the Federal District, the ICVA numbers in real terms were a bit above 0 in this year's second quarter.

Before handing it over to Clovis, I would just like to remind you that the ICVA represents the retail activity as a whole. It is not a proxy of the [ target ] markets, let alone a proxy for Cielo's performance.

Thank you all for the attention. Now I turn to Clovis.

[Clóvis Poggetti, executive]

Thank you, Gabriel. Before we start the presentation, I would like to thank Gouveia for the opportunity of working with him. It was a very rich and challenging period, in which I had the opportunity to contribute with a greater control of costs and expenses, making Cielo a more efficient company. For this and for all the opportunity and learning, I just have to thank you and say it was a pleasure.

Now moving on with our presentation. On Slide 4, I would like to highlight the results of our work and our customer-centric focus.

Over the last few years, we have invested a lot in order to have the ultimate IT platform in a more agile corporate structure so we could react to the changes seen in our industry. Today, all these efforts have been rewarded by a portfolio of exclusive products. No other acquirer offers such a complete range of products and services as Cielo.

Although the acceptance of brands no longer is a differential as it used to be in the past, we still are the acquirer which accepts the largest number of brands, both national and regional. This is a relevant feature in more distant locations of the country where only a few players operate. Also, we extended our offerings of capture solutions with a large number of additional POS terminals to meet the demand of our diversified customer base.

In addition to those -- to these factors, we have a higher penetration of LIO with its own development added to new solutions being created. All this is to help our customers to manage their businesses with better control of sales, inventories and, above all, helping them to sell more.

Concerning the micro and small merchants, our entry-level segment successfully started selling POS terminals through Cielo. As we will see later, we started strong and will continue in this way.

The reason for such a complete portfolio is very simple, we want to maintain our leadership position in the markets where we already are leaders, and we want to gain leadership in the markets where we are not. For this reason, among several products we have, we highlight the prepaid card, which will be available in this month of August, both at Cielo and Stelo. I'm referring to the prepaid card in both companies because our customers will have soon the option to receive the money without needing a bank account, both when the terminal is sold or when rented.

The positioning will be very clear with Cielo's POS bearing the quality and reliability so recognized and valued by the market, while at Stelo, we will pursue these initiatives thoroughly and aggressively, putting more pressure on the base of the pyramid.

As you can see, we are moving forward, supported by our partner banks and our own channel. We are moving on with the strategy defined 18 months ago with greater agility, proximity and commercial effectiveness.

The next slide is a good example of this movement and presents the image of our prepaid cards issued by Alelo to be made available to those clients who wish to receive the funds from their sales in a card like this.

So the message that I want to enforce here is that we are more than leaders in the Brazilian acquiring industry. We are the acquirer with the most complete portfolio, and we don't stop here. The prepaid card will be made available in August, and within a few months, we will launch new products that will make it easier for our clients to capture transactions while assisting them in their day-to-day activities in a much simpler and agile way.

Now I'm going to hand the presentation over to Victor, who will talk about the numbers of the second quarter. Victor, please go ahead.

[Victor Schabbel, executive]

Thank you, Clovis, and hello, everyone. Here on Slide 6 on the left side, we have a chart where we talk a little bit about the volume performance. Here we invite you all to make the following adjustments, to exclude the Agro products and also exclude from the total volumes the Multivan ones, right? The ones that are now migrating to the full acquiring model as the industry gets open. When we do this, we can see that Cielo reported 4% volume growth year-over-year. And out of this volume growth, we highlight that on an adjusted basis, credit would have grown 8% year-over-year compared to 7% without the adjustment, and debit would have grown 2 -- sorry, would have shrank 2% year-over-year compared to a 8% decline without the adjustments.

Here, we can see that when we exclude the Multivan volumes where most of it are related to Elo, a brand that is mostly exposed to debit, we can see that the performance of Cielo was not that different to the one posted by the industry.

If we were to consider the 3 larger acquirers that have already disclosed their numbers, Cielo, Rede and GetNet, the volume growth in the industry would have been up 7%. So the 4% in total volume growth that we posted was then a consequence mostly of a slowdown in the large account segment due to some client losses that we had during the quarter. Given the fact that this is a segment that is less profitable and is a segment where we have already been very successful due to our product differentiation and level of service, we are not competing, at least in that segment, at all costs; reason why, we basically decided to lose some accounts during the quarter [ to some of other ] incumbents, the other large acquirers.

On the right side of the slide, we show the performance of our POS base. For the first time in 10 quarters, we are delivering POS growth again on a sequential basis of 0.5%. This is a consequence, not only of the good performance seen or posted by Cielo LIO that reached 80,000 terminals during the quarter from 49,000 in the previous one and only 8,000 a year ago, but also due to the very positive performance that we have at Stelo, right? Stelo is a company that we acquired at the beginning of the year in order to explore this segment of selling devices.

So in the next slide, I will exactly talk a little bit more in detail about the performance of Stelo so far. Considering the first 6 months of the year, we already have 52,000 active devices on the street, and by active we mean here, devices that process a transactions in the last 30 days, so the conservative and various transparent methodologies that we have. Out of it, we have behind these devices, 40,000 active merchants. And in this period of time, we had 93,000 POS' already sold. The only difference between the number of devices sold to the active ones, refers to the lead time for us to deliver the devices.

Given the fast growth posted by the industry, deliveries have been taking a little bit longer than in -- at the very beginning of this industry. Most of the acquirers have been working to find alternatives, and this is exactly our case. We have been working, in the last months, with new suppliers in order to make sure that our clients are well served and get the device the sooner possible. We already have, among all the acquirers, one of the shortest period of time for the deliveries to take place, right? Order acquirers are taking over 20 working days to have the devices delivered. So that's the only reason why we have this gap between the number of devices sold and the active ones, but soon these devices are going to be delivered and will soon become active.

In the following slide, I will then talk a little bit about the performance of our revenue use. For the sake of time, I will talk more about the sequential performance, the chart on the right side. There we can see that revenues that are not linked to volumes, for example, rental revenues, contributed negatively to a 2 basis point impact to the revenue yield, right? This is still a consequence of the slowdown on the rented POS base. Although the POS base has been the rented one, has been shrinking at a slower pace, right, which is another positive behind the POS performance.

And also not to forget, we would also highlight here on the POS side the positive contribution coming from the growth of LIO and further increase in the penetration of wireless devices. [ The POS has a ] negative factor behind the revenue yield performance, we have the combination of products and client mix.

On the product side, the quarter was positive. As I mentioned, credit growth outpaced by a big margin the debit performance. So the product mix was positive. Unfortunately, we still have the large account segment outpacing the retail one, given that large accounts pay less compared to retail clients. The client mix was still negatively impacting our performance, and together, the product mix are positive, and the client mix are negative. We ended up having a 1 basis points negative impact on our revenue yield.

As positive factors, we highlight the service tax that we moved back to the previous way of collecting the tax, after the supplementary law that was approved. Changing the way the tax was collected was suspended by the Supreme Court. So we will keep the former way of collecting the taxes until we have a final decision on that matter. This decision to move back to the previous way was because by doing that, we would be in a safer position in order to avoid potential legal disputes and legal questions about the way we collect the taxes. And this generated a positive 2 basis point impact.

The other positive impact was related to other factors. For example, capturing new brands that are mostly exposed to credit, for example, American Express and Hiper. These 2

[Audio Gap]

more aggressively, more assertive to new segments or to more profitable segments in order to maintain our leadership or conquer the leadership in segments where we are not the leaders yet, probably we are going to see a potential bigger pressure on the price factor being however, offset by a better mix factor. Because once we grow the more profitable segment of the smaller merchants, the contribution of mix is expected to be positive. So in these very same charts, we might see a shift between the columns that are shown there. Probably price could get worse in the future, but expectation is for the mix to get better, right?

In the following slide, Slide #9, I will highlight a few financial figures mainly related to Cateno. As I said, the 3 acquirers together, Cielo, Rede and GetNet, posted a volume growth in the quarter of something like 7% year-over-year. This was exactly the very same growth pace posted by Cateno, which has been following a very healthy growth pace in the previous quarters and continues to perform that way with its top line being then positively impacted.

When we move to the chart in the middle of the slide, we can see a decline in our EBITDA. This is a result of the maintenance of the revenue trends seen in previous quarters, although we -- it already has some positive indications on the operational signs that things are getting better. For example, the -- our POS pace resuming -- growing this quarter, for example. We still have the very same trends on a revenue standpoint or very similar ones to those seen in the previous quarters.

But this quarter specifically, we saw an increase of the expenses and costs, the expenses mostly related to the marketing campaigns that we carried out starting on April in order to give publicity to the products and services that we are now adding to our customers, and the costs mostly related to efforts to improve the level of service and also related to the fact that we are now capturing brands that are more expensive on a brand fee standpoint. That's why, the results were impacted.

So in a nutshell, we would say before the revenues can recover after we have just started showing the first signs of improvement on a operational standpoint, we first have to spend money, invest, in order to create room for better figures to come out. So we are now working with the current results to be seen as at least a short-term floor in the coming quarter before we can see our revenue trends improving and, consequently, being translated into a better bottom line trend as well.

And finally, on Cateno's side, we now see Cateno's earnings accounting for 17% of the cash earnings at Cielo, showing the importance of our diversified revenue stream and business model, basically in line with the efforts that we have been carrying out so far.

So now I will hand back the call to Clovis. Please, Clovis.

[Clóvis Poggetti, executive]

Thank you, Victor. Before opening the call to the Q&A session, let's move to Slide 10 to discuss our guidance. Here, we have the figures for volume growth within the range expected for this year according to our expectations. In the quarter, we saw deceleration due to a continued immigration of volumes captured under the Multivan to the full acquiring model. And as Victor mentioned, we also lost some large accounts clients.

We remain confident, and we reiterate our expectations of volume growth since we foresee a gradual improvement of the market scenario. Also, we will have a more favorable basis effect throughout the second half of the year. Likewise, we also reiterate our expectations for total expenses, which should have a similar trend in the second half which increases marketing expenses, among others, due to our commitment to deliver new products and solutions for our customers in the short-term. Thus, we should end the year with total expenses up between 2% and 4%.

And finally, CapEx should follow the same rationale. With linear expansion and new products launched during the second half, we expect CapEx to range between BRL 300 million and BRL 400 million invested for this year.

Now I would like to talk in more detail about the material fact published yesterday evening along with our results. The Board of Directors, following the executive board's recommendation, approved the largest dividend distributions for the fiscal year of '18. On Slide 11, you can see details on the distribution announced yesterday. With our goal of ensuring a profit return to shareholders and, at the same time, reiterating our commitment to creating value over the long run, we decided to announce dividend distributions in a fixed amount for the fiscal year of '18 to be paid over the next quarter. We aim at providing security and the assurance of an attractive carryover to our shareholders which we made the short-term operational decision that we'll guarantee better results in the future.

We wanted to provide full visibility as to the remuneration to be paid as we saw [ dissonant ] expectations in the market with some analysts with a more positive view and others with more pessimistic opinions. For this reason, we choose not to commit to a payout ratio but rather to a fixed number. It's worth mentioning that this is the highest amount paid to Cielo's shareholders in the company's history.

On the bottom of the slide, we made an exercise that shows that in 2016, we allocated nearly 30% of income as dividends and interest on equity. Last year, we increased the payout to 70% and paid BRL 2.7 billion. This year, we will pay BRL 3.5 billion, which, depending on the analyst estimates, implies an expected payout of 80% to 100%.

In order to provide an adequate carryover, we also announced a change in the payment schedule from semiannual to quarterly. That's why we are adjusting this new schedule with a higher payment of BRL 1.75 billion to be made in September, followed by 2 payments of BRL 875 million in the first and second quarters of '19.

The record date of payment of these 2 payments will be announced in the future by a notice to shareholders, following the standards adopted by the company. Shareholders who hold the shares close to the expected date of payment will be eligible for the dividends. As you can see, the idea is to reward those long-term shareholders who hold the shares until the respected payment dates.

With all that said, we are now ready to take your questions. Operator, please.

[Operator]

[Operator Instructions] First question comes from Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

I have a couple of questions. You talk about being a market leader in the markets where you're in and the markets where you want to expand to. There is a risk that you spread yourself a little bit too thin. But my question is more on the strategy you hope to employ. Of course, the large merchant and the medium-sized merchant market you know very well. The micro merchant market is one that's new for you. How do you expect to gain leadership there? Is it going to be via price? Is it going to be via product? Is it going to be via distribution? Is it going to be via the partnership that you always had with the banks? How do you expect to drive volumes and gain your leadership there, given that you're just starting off in that market with 90,000 POS terminals outstanding? Second question. You basically came out with the number of promotions in the second quarter in the Cielo brand, not the Stelo brand, the Cielo brand, that were based around a 3-month offer, that then changed prices. And just -- I asked this in May when you released results, just coming back to the question now. How has the churn been in those promotions because for some of them, the price increases quite significantly and given that it's mostly rental, there's very little costs for the merchants to leave. Can you just comment a little bit how churn has been?

[Clóvis Poggetti, executive]

With regards to your first question, I think it's worth it to mention, our company used to have a kind of one-size-fits-all model in the past. And nothing that we had been doing in the last 2 years is changing to what we can say customizing our offering to what is demanded by, let's say, our customers. And the point is, let's say, to the customers that demand premium services, okay, we will have premium services to offer. And to the customers that demand the very basic ones, we are okay, ready to work in such a segment. Of course, when you go to the bottom of the pyramid, these guys, they are much more sensitive to price. And the point is, if price may be the only variable, let's say, being taken into -- when these merchants take the decision, we'll go fight with these too. Don't forget a very powerful message it is, the company is not here to destroy service. It's exactly the opposite, we are here to generate service. But we will balance this statement with the other one that we just gave to you in terms of -- we will defend our leadership position in the segments where we are leaders, and we will go to take a leadership position where we are still not leaders, okay? This is something that we will have to do in a case-by-case analysis, but that is the message that I want to give to you all.

[Victor Schabbel, executive]

In that sense -- sorry, Marcelo, just to address the other point you raised. In that sense, I think it's worth making clear that there will be, naturally, depending on the segment, a combination of price, product and distribution, right? So pillars of our investment case here at Cielo, so pillars of our company, and we are going to use them in order to explore the segments where we are not the leaders yet, for example, all right? In that sense, just moving to the question you made about the marketing expenses and the marketing -- not expenses, but the marketing campaigns that we've put out. Starting in April, we decided to first convey some of the products or big products that we already have, it was somewhat quite successful, Cielo Controle, that gives predictability to the customers. It was a product already there. It was a product for us to prepare the ground at Cielo for a stronger push in the small-sized merchant segment, right? So before entering that more assertively and more aggressively, we needed to prepare the ground. So following the push in Cielo Controle, we moved to Cielo Livre or Cielo Free, right, in order to give a new opportunity to the customers, a new alternative for them to use or accept cards without buying a device or even renting. And soon we are going to make a bigger push in that segment with other products that we are about to launch, other initiatives, that will make clear how effective we are going there. In terms of the churn that you asked, we can say that there is no big difference, no material difference to the churn that we already had at the company. On the opposite, in some of the products, for example, Cielo Controle, the churn is even lower, right, it's slightly lower. So we are not seeing a change there.

[Carlos Macedo, analyst]

Just one follow-up here. I mean, Clovis, you mentioned price is the main difference. Do you believe that -- is Stelo a well-known brand in Brazil? Do you feel that it's well known enough to fight the other brands that have been -- I know it's a new market, but they've been around for -- like PagSeguro has been around for a little bit longer. In other words, you talked about marketing expenses staying kind of flattish through the end of the year from the second quarter level. I have to believe that it will entail a significant amount of marketing to get the brand to be well-known amongst these clients that don't believe and know Cielo that well.

[Clóvis Poggetti, executive]

Carlos, you're right. Of course, we cannot say Stelo is a well-known company as we speak today, but the idea is, let's say, to improve this and to make it very, let's say, that the customers are aware of this. But don't expect -- let's say, don't forget that not only marketing will make this company to, let's say, improve its volumes but, let's say, we also have the idea to operate with our partner banks in other channels, okay? The combination of these factors, distribution plus marketing, in our view can play a significant role in that specific market.

[Operator]

The next question comes from Craig Maurer with Autonomous Research.

[Craig Maurer, analyst]

So I wanted to follow up on the prior question and just -- the market, clearly in the way stocks are trading, is assuming that Cielo is going to destroy value at the low end of the market. And what I really wanted to understand was the type of resources you're willing to put to work there because if we look at your biggest market expenditure that I know of historically, it was 2016, where you spent about BRL 320 million and if I look at my own forecast, I expect just PagSeguro, forget SumUp, [ Mercalli, Rede ] and others, to spend 40% more than your biggest year just in the micro merchant segment in 2019, yet you have all your segments to support. So I really want to balance the discussion by understanding how much you're really willing to increase marketing over time because to me without a long-term sustained commitment that is in order of magnitude more than you've ever been willing to spend and marketing, I don't see how the brand will be prevalent enough to destroy value in the way that some are suggesting.

[Victor Schabbel, executive]

Craig, again the idea is not to destroy value, of course. When we discuss marketing, for example, don't forget in the figures that you mentioned, 2016, we had not only marketing but also sales expenses and the amount that we spend with foreigners. This number in terms of what was expended in '16 can be a good proxy. We strongly believe that the combination of this new level, in terms of market, plus the power of distribution channels, can play a significant role in these new segments. Destroy value, never, but we go for the leadership position. And as I just mentioned in the previous question, when you analyze this bottom of the pyramid, this whole new world that was, let's say, successfully developed, most of these guys, they think only price. So we may have to adjust in some recurring basis. It will always depend -- you can see that the competition in that segment is increasing, but we will not -- we will try to make and to extract the value to benefit most, as much as possible, but we grow also to take the leadership position in the new segment. That is it.

[Clóvis Poggetti, executive]

I would add -- Craig, I would add here one thing that we mentioned in the conference call in Portuguese, right? We, Cielo, we have been the leaders in many profitable and important segments of our industry and we will work hard to keep this leadership position there. In these new segments, given that they are brand-new for us, the profitability that we can get there, even if it's -- the profitability gets lower than what the current leaders are getting, it's a positive. So the marginal contribution or the margin of contribution of these segments for us will be positive. So this is one thing that we keep in mind. On top of it, although we have to invest in marketing, we have to show the customers that we have the products, we have the services that they need, we also rely here, differently from many other competitors out there, on the big and strong support coming from the partnering banks, right? And this is a big differential, not only for the brand awareness but for the distribution, right? Because of that, we were able, in just a quarter, to get to 52,000 active POSs from only 4,000 a quarter before. So this shows a little bit that even without spending much, the clients are already aware because we get the support from other sources from the partnering banks.

[Craig Maurer, analyst]

And if I -- just one follow-up, if I could turn the call to your long-standing existing markets, are you seeing any different activity from newer entrants like Stone and First Data. First Data discussed very strong growth on their earnings call and so -- so we can understand the competitive dynamic within the core market?

[Clóvis Poggetti, executive]

Craig, let's say the need of the pyramid, the new guys, they are more active, they keep as aggressive as they always were, okay? Let's say, there was no change, which means they are still aggressive.

[Operator]

The next question comes from Jorge Kuri with Morgan Stanley.

[Jorge Kuri, analyst]

The 52,000 active merchants that you gain in the quarter, were all those new customers to Cielo or were there -- they were Cielo customers that decided to switch to the Stelo brand? Or -- and also what percentage of those you think didn't accept cards before? Just want to understand a little bit the profile of that customer base that you acquired. Or do you particularly take market share from an existing acquirer? If can you help us understand where they came from. And then, what is the sort of growth that you think -- the net adds that you think you should have say 6 months from today. Is 50,000 a quarter the right number? If some of the long-standing micro-merchant acquires like [ PagS ] and merely are adding around 100,000 a month. And so just wanted to understand where do you think your ramp-up should be within the next 6 months?

[Clóvis Poggetti, executive]

I will start and then Victor will add some comments. Let's say with regard to the 52,000, most, but most of these guys are new to our base, let's say the combined base, okay. The cannibalization is quite small, and the information we have is also most of the guys are new adopters, they were not used to work with cards and they are now using the solution. With regards [ net adds ]?

[Victor Schabbel, executive]

In regards to what you expect to the future, Jorge, thanks for the question. Although, we are not giving a formal guidance, we have naturally the best expectations given the good start that we had, right? So we are very confident that there is a lot of demand for the products. We are only being careful right now because of the constraints the industry is facing in terms of supply of devices. That's why we have been working hard since the beginning to find alternative suppliers so we can fulfill the demand and keep the shortest lead time or delivery time to our customers within the industry. If you look at the time that is required from most of our competitors to deliver the devices to the customers that are buying them, you will find that Stelo is the one that has the shortest. This is a result of the big efforts that we are putting in there and is a result also of the expertise in the logistics that we have. So as a result, because of these constraints, we are confident that we are going to be relevant at some point in the future, so you are going probably to see this growth phase accelerating going forward. But that's it, we are not, let's say -- we are not going to commit right now to any specific number.

[Jorge Kuri, analyst]

All right. If I may add a question along the same lines. This system -- and I know it may be early for this, but if you can provide any sort of guidance, that would be great. The 52,000 new merchants that you got during the quarter, do you have any sense of what the spends will be on cards on an annual basis? Given the type of merchants they are, the type of sales that they have, what sort of like average spend do you think they'll get for you on a full year basis?

[Clóvis Poggetti, executive]

Well, Jorge, so far looking at the client base that we already have, we are talking about clients that are spending something like BRL 2,000 a month, right? So this should be the best reference.

[Operator]

The next question comes from Mario Pierry with Bank of America Merrill Lynch.

[Mario Pierry, analyst]

Let me ask you 2 questions as well. You talk a lot about, right, gaining market share and we have seen the effects of the changes in regulation, increased competition in Brazil, the effects it has had on your profitability. Looking at your ROE, it has declined from 125% in 2012 to 21% only this quarter. At the same time, your EBITDA margin has contracted from 57% to 39%. So I'm just trying to get a sense here, how much more are you willing to sacrifice, right? Or if maybe what -- if you can give us how is the compensation of management determined? Is it purely bottom line, is it market share, or are there's some type of probability metric involved? Second question is related to potential regulatory changes in Brazil. We saw this Senate committee coming up with some recommendations in shortening the payment cycle, maybe changing debit cards to a fixed fee, also possibly putting a cap on interchange on credit card transactions. I would like then to hear from you if you can give us an update where we are, how do you see regulation evolving from now?

[Clóvis Poggetti, executive]

I will take advantage of your questions just for some comments. I think they are really worthy to be taken into consideration anyhow. First one is that when we analyze such a long period of time going -- looking back, it's not fair to compare EBITDA margins in this effort because we had the consolidation of new businesses and new business that didn't have the same margins as the acquiring business that we have. That's comment number one. Comment number two in a very objective way, we have been investing through a perfect storm in the last 2, almost 3 years, okay? Perfect storm in terms of the market situation, no need to mention what happened. The competition got increased, the Multivan that hit our figures in terms of top line, the mortality of the merchants that hit our rental business that was always very resilient and also the Selic going down affecting the receivables. All of these together happening at that same time in the same direction that -- hitting the company. We already discussed it is a lot. So top line under pressure in terms of volumes and also revenues. And then in the last 2 years, working hard, the company, in terms to be -- trying to be more efficient in order to offset part of these effects. Now we believe -- we strongly believe we are in a kind of inflection point. These second quarter results, maybe the third quarter results, may be the bottom. And why? Because even the situation from a market perspective is better -- is slightly better, but this is still not good. And so it seems that the work is behind, but if it is still not good and even not being as good as we expected, we took the steps. But the right decision in terms of investing in the past that we believe are relevant. And in this -- there is no magic, increased our expenses. So we are still facing the tough situation in terms of top line volumes and revenues, and we have such an increase in expenses because we had to create, let's say, the ways to, in the short to medium-term, start benefiting from everything that we have invested. Of course, we are confident that -- with -- of what is ahead of us and that's why I said to you, this may be the bottom, okay? It is a matter of time for us. From our perspective it's a matter of time for us to start benefiting from all the initiatives and investments that we made in the last few months, couple of quarters.

[Victor Schabbel, executive]

And still on that side, Mario, answering your question about the compensation. We have a very aggressive model here at Cielo with most of the compensation of management being variable, linked naturally to the budget, that should be delivered during the year. And also linked to the share performance given the vesting period that we also have. In that sense, what I have to say here is that we have the full support of our controlling shareholders in order to make what was needed to be done in the short term, even if at the expense of short-term earnings, in order to make sure that we would continue to generate long-term value in an industry that -- where the profitability is still quite promising, right? You mentioned that the profitability, the margins came down, yes they came, the industry went through a big transformational process, right? But the outlook is still quite compelling, mainly for those with scale, right? You need to be big and you need to have the firepower for you to roll out technologies for you to get the most in terms of profitability. That's exactly the mindset and we are going to move -- keep moving in the right direction, even if it comes at the cost or the expense of short-term earnings and we have the full support of the board in that regard. Now I will give back to Clovis for him to address the regulation -- the regulatory question.

[Clóvis Poggetti, executive]

[ What I said is ] the following with -- in terms of the regulation. We always said, we believe that the ultimate objective from, let's say, the regulator is to allow any merchant that decides to work with cards, for example, such a merchant to pay the fair price. And it may sound romantic, but how to reach this fairness is what really matters. And according to our view, it's through competition. Central Bank creating the greenfield, for example, for companies to start doing the business and through such as higher competition, prices going down. We know there are discussions taking place in terms of the settlement period mainly. We strongly believe that the Crediário product may help a lot on this front in terms of -- and this is also adding volumes to the whole industry because of some characteristic -- unique characteristics of the product. But the [ D+30, D+15, D+2 ] is something that is more frequent on the discussions. In our view, Cielo, of course, helping in such a process. Cielo, we want anything that may help the merchant to sell more, that is our objective as well. And what can be different than what we have been saying the last couple of quarters is that we may see a shortening of the settlement period in a shorter period of time. For example, we never know, for example, the [ D+2 ] in 2 years, maybe 3 years, that's hard to say.

[Operator]

The next question comes from Alex Spada with Itaú BBA.

[Alexandre Spada, analyst]

Based on your figures shown in the presentation regarding the [ yield ] behavior or breakdown, it sounds like Cielo has not been responding to price pressure from competitors over the last quarters. In other words, it seems that rather than matching prices originally offered by competitors, Cielo has been more often not -- just simply letting clients go instead of matching the prices. Does it make sense to think about Cielo's positioning this way? Also if this is the case, does the company intend that you change this strategy and start to respond differently when clients receive a better price from competitors or is this not the case?

[Clóvis Poggetti, executive]

We have been very active in the industry and depending on the segment, depending on the offer that is made, we do match, we do even lower the price that is offered, but this depends on the segment, on the region. So there are many factors also on the niche of where the merchant operates, for example, if it's a strategic one for us, if it's not, right? So depending on a few factors, we will -- going to match or even defend as much as we can in order to -- the client to stay. The only difference is that we might see this number becoming increasingly effective as soon as we go further down in the pyramid, more aggressively, into segments where you have been seeing more growth, right? So this is only one thing that we just highlighted in order for people to be on the same page. But addressing your concern or your question, yes, we have been matching, we have been effective reacting to the competitive pressure in order again to sustain the leadership that we want to sustain in the markets, in the segments where we are already the leaders. So this hasn't changed.

[Alexandre Spada, analyst]

So it hasn't changed. So you're not becoming, how can I say, more aggressive in matching than you were in the past and you don't plan to do that going forward?

[Clóvis Poggetti, executive]

It only depends on the way the competition is evolving. So far, given the way the competition has been, let's say, evolving, we have just -- just following the same practices that we were following in the previous quarter. So the competition is challenging, so we do see pressure on many fronts, so I highlighted a few clients that we lost in the large account segment. Here, we lost to some of the other incumbents, other large players. In midsized merchants, we see both the other incumbents and also new players being very active and we are responding to them. In the micro, very small entrepreneurs, we are being the newcomers, right, being aggressive there. So it depends on the niche, but it hasn't changed materially compared to what we have been doing in the previous quarters.

[Operator]

The next question comes from Carlos Gomez with HSBC.

[Carlos Gomez-Lopez, analyst]

I had 2 questions. The first one is with respect to the decline in debit cards, obviously having to do with the movement in Elo. How much longer do you expect to see this decline and where do you think your ultimate market share is going to be in debit card after the market normalizes? And the second one is if you can update us on any possible plan to have a listing in the [ ADR ]?

[Clóvis Poggetti, executive]

Carlos, in regard to debit, we are almost over in the transition process from the Multivan to the full acquiring one. There is less than BRL 1 billion left in our systems being captured under the Multivan model, so probably in the next quarters we are going to see this number declining further, becoming probably irrelevant, right? With that said, the market share that we are going to end up having, although there is no target for market share, we do want to be the leaders. This is a fact, but there is no real target for each of the segments. The market share in both debit and credit, which might be a good reference for you, will be pretty similar. So in the past, we had a big difference between market share in debit versus credit, now with these new market environments, there might be no relevant difference between the 2.

[Carlos Gomez-Lopez, analyst]

Thank you. And about the listing?

[Clóvis Poggetti, executive]

I didn't get the other question, Carlos?

[Carlos Gomez-Lopez, analyst]

A possible ADR listing.

[Clóvis Poggetti, executive]

We already have the OTC ADR in place. We are obviously studying and considering higher ADR levels in order to satisfy the demand for the shares that we have. So what can -- what we might say is that we are studying this as we speak.

[Operator]

Next question comes from Brad Erickson with KeyBanc Capital Markets.

[Bradley Erickson, analyst]

Just 2 follow-ups. First on the marketing front for Stelo. Can you kind of talk about what the strategy is between brand marketing versus performance marketing in terms -- and sort of the buckets and how you think you'll acquire customers? Second piece of that is just how you're seeing and expect customer acquisition costs to trend over time? And then lastly, just maybe layout the 1 or 2 or 3 factors where you see opportunities to differentiate on the product front as you increasingly address this micro-merchant segment?

[Clóvis Poggetti, executive]

So first on the marketing side, we are still studying the best approaches to be adopted, given the strategies that we are going to soon implement at both Stelo and Cielo because both companies are going to be active in that segment. So not only Stelo will be exploring the micro-entrepreneurs, I think Cielo will be positioned there as well with different products, different services that soon we are going to announce, and this is part of the marketing strategy for the second half. So the idea is to have investments in both. So this you will soon get a sense on. And in terms of differentiation in that segment, we have to basically keep adding services to these customers, that we see most of them as banks, but usually not using that much financial services. So there is potential for you to, for example, add the prepaid card that we just announced. And also, we are adding new solutions soon exactly to provide these customers with greater convenience, right? This is one idea, we cannot, let's say, anticipate much in that sense, but there will be other products in order to satisfy further the needs in that segment.

[Operator]

The next question comes from Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

Just very quick, going back to, I thin,k, the question that Jorge had asked earlier on the 50,000 clients with Stelo. Could you just give us a breakdown of what percentage of these clients had bank accounts? And what percentage of these clients were captured via the bank network -- distribution network, Bradesco, Banco do Brasil?

[Clóvis Poggetti, executive]

Well, we will not give disclosure on the breakdown between the 2 banks, both have been very supportive. But what we can say is that so far, given the fact that we are launching the prepaid cards now to be in place, available now in August, most of these clients do have a banking account, right? So out of these 52,000 active POS devices, we have most of it linked to a banking account.

[Carlos Macedo, analyst]

I didn't mean to separate between the 2 banks, just wondering what distribution channel was used to get these accounts. Whether it was an Internet or via the branches.

[Victor Schabbel, executive]

Most of it were the branch networks from both Bradesco and Banco do Brasil.

[Operator]

The next question comes from Jorge Kuri with Morgan Stanley.

[Jorge Kuri, analyst]

I just want to go back to something Clovis said. Did I understand correctly Clovis that you said that it is possible that when -- within the next 1, 2, 3 years, that the settlement period of cards may be moved downwards from 30 to 2 days or something shorter. Is that what you said and I'm asking because if that's what you really believe, it's kind of like surprising that you're venturing into the micro-merchants space where the vast majority of profitability in that business comes from the anticipation of receivables. And you can see that by looking at the statements of the companies that operate in that space, the transaction business requires a level of scale that is just not there yet, and most of the profits come from the prepayments. So thinking about that business -- going into that business in size, without the prepayment, seems a bit odd. And maybe I didn't understand, so would you mind clarifying?

[Clóvis Poggetti, executive]

Okay, the point exactly is this. The recommendations that were sent to Central Bank from their own analysis made by the Senate, just as an example in these regards, say [ D+15 ] days now and then [ D+2 ] in 1.5 years later. The important thing that I think is worthy for all of you take into consideration is all the discussions, they have been quite balanced, okay? Central Bank knows the pros and cons of every single idea and measure. And on this regard specifically, for sure Central Bank, the regulator, is taking into consideration all the players. So, for example, not only the merchants, but also acquirers, but also issuers and also the cardholders, okay? The fact that some segments could be more affected by a measure like this is exactly what is being analyzed, okay? It is hard to say when it's going to happen. I'm just saying to you that this is being analyzed. The recommendations, of course, take into consideration a shorter period than compared to what we had before. But it's hard to say exactly when something like this may happen.

[Operator]

The next question comes from Mohammed Ahmad with FGP.

[Mohammed Ahmad, analyst]

I got 2 questions, one pretty quick and the other may be a bit longer. The first question is on the product mix in your slide on a quarter-over-quarter basis. One of the things you said was that your volume in the quarter was a bit light relative to the market because you let go of some larger accounts and didn't drop your price. But at the same time, the mix impact was negative and this on top of the fact that your credit volume was higher than debit. So given that credit was better than debit and large accounts you had some losses there, why did this not become positive? Can you give us a little color on that? And then I have one follow-up.

[Clóvis Poggetti, executive]

Mohammed, a very good point. Yes, we saw deceleration and slowdown in the big merchants segment due to these client losses that I mentioned. This however, was not enough for us to see the retail space, for example, outpacing the large account segment, on the opposite, we continued to see the large account segment doing better. It decelerated, this is the main reason why we posted this deceleration during the quarter, exactly because of the slowdown seen in the big merchant segment because there in the retail, we continue to see the environment as still quite challenging, with volumes not recovering yet, mostly due to 2 factors, the economic recovery has been very gradual and the growth has been pushed by bigger merchants and by the very small ones. And second, because there we have been facing the competition, a greater one, seemed to mid-2016 when we had the opening of the market through the Multivan profits, right? So there we have, as I mentioned before, large players, the other incumbents, operating actively in that segment, the midsize ones, and also the new guys on the block also trying to grow there. That's the reason.

[Mohammed Ahmad, analyst]

Okay. My second question is about the inflection that you guys talked about a little bit earlier in the call. For that to happen, clearly Cielo Brasil's results need to turn around or at least stabilize and then grow. Even adjusting for the tax accounting, I think Cielo Brasil revenues were down 2%. And I realize that there is actually a positive impact there, so organic would actually be worse. So can you give me a sense of that given that we have good visibility on cost, because you control it, but on the revenue side, when can we expect a turnaround because you need your terminals, at least on the rental side, to stabilize, which they still haven't. And you need to be able to grow volumes at a faster rate than you have in the past while keeping pricing, which is proving to be difficult.

[Clóvis Poggetti, executive]

Another good point, Mohammed. Here our idea is to start seeing the trends improving there at Cielo Brasil. We mentioned quite precisely the impact of the new tax collection approach, or to be more precise, we are resuming the approach we had beforehand. So these generated an impact at Cielo Brasil of something like BRL 31 million, positive impact. And obviously, on top of this positive impact, what we are waiting to have is better trends coming as a result of the -- better trends we are starting to see on the operational side, right? At Cielo Brasil, we still had some contraction on the POS space, but the contraction was smaller compared to the one seen during the first quarter. So the trend is for it to keep improving. The quality also improved, so we have more LIOs out there, we have more wireless terminals out there. So all of this should start helping us out to deliver better trends at Cielo Brasil as well, right, not only at subsidiaries like Cateno. So that's what makes us more constructive for the upcoming quarters. Obviously this might take some time, that's why we are saying that the third quarter figures might be similar to those seen now in the second quarter, because you have to see the better operational trends maturing before they can translate into better top line ones. But we do expect them to materialize still in the coming quarters given the first signs of improvement that we already had.

[Operator]

Okay, excuse me, this concludes today's question-and-answer session. I would like to invite Mr. Clovis to proceed with his closing remarks. Please go ahead, sir.

[Clóvis Poggetti, executive]

Okay, I would like to thank you all for being with us today in our earnings call. We will remain working hard and expecting a second half this year in which we can start capturing the rewards of the initiative implemented over the last month. And I reinforce what I said earlier, we will work to defend our leadership in the markets where we are already leading and we will go after the leadership in those segments that we are still not leading, okay? Thank you and have a good day.

[Operator]

This concludes Cielo's conference call for today. Thank you very much for your participation. And have a nice day.