Cielo SA

BOVESPA:CIEL3

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, everyone, and thank you for waiting. Welcome to Cielo's Second Quarter of 2020 Results Conference Call. With us here today, we have Mr. Paulo Caffarelli, Gustavo Sousa and Jean Leroy. This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Cielo's website at ri.cielo.com.br/en/, 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. [Operator Instructions]

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Cielo management and the information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that conditions relate 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. Paulo Caffarelli. Mr. Paulo, you may begin your presentation.

[Paulo Caffarelli, executive]

Okay. Thank you. Thank you all of you for taking part in this conference. Good morning, everyone. Good afternoon for all of you in Brazil. The results of Cielo, the leader of the payments industry in Brazil in the second quarter of 2020 reflects the impact of the most devastating health global crisis in 100 years. Cielo accounts for approximately 40% of the Brazilian payment industry and we have had, actually, had a new shortfall after the COVID-19 outbreak.

Some aspects are worth mentioning. The Brazilian government guidelines prohibited more than 0.5 million companies to operate temporarily or permanently, as you see, the biggest situation drop according to IPCA and ICVA from our Cielo's index. The constraints, they're from basic to luxury goods, which projection is around 40% this year. Cateno's operation has faced with the same impact considering the rapid reduction of the consumption with credit and debit cards from Banco do Brasil customers. And finally, the real currency devaluation also affected the consolidation of the results of our foreign participation. In this, we've been talking about the Merchant e in United States.

No doubt that the second quarter of 2020 was a unique moment, not only in terms of challenges, but also opportunities. Cielo has been challenged to go beyond the POS and to reinforce its protagonist as a tech platform company, enabling sales even under the governmental guidelines. It has been possible due to our restructuring to face the transformation to become a tech company. We had redimensioned the company and adjusted bills payments to face the new markets. We adjusted costs, launched new programs, reset the business model, and we reduced the leverage to all-time low levels in the ongoing management.

Cielo has evolved in key solutions such as [indiscernible] payment system operator and also as the white-label platform that guarantees [ selling ] solutions for our customers such as AMBEV. Cielo keeps challenging itself. Having said that, we are optimistic in regards to the second half performance of 2020. However, it's worth highlighting that the losses of the first half, mainly the second quarter that was entirely negative, we want to be offset. We are dedicating our efforts to raise the foundations for the coming years. The market is renovating itself in order to fit customers and uses new digital demand in terms of payment systems.

Considering that Cielo is the leader of the segment, we will keep paving the way in this transformation, reinforcing our regular business strategy based on raising the participation of the retail segment and increasing the penetration of credit products. As a result of this, even in the midst of the crisis, with the tail-end months of the new segment, accounts for 26% of second quarter '20 volume, 31.4% over the first half of 2019. Moreover, Cielo achieved 29.6% all-time high of prepayment SMB and long tail. Another positive score is related to our sales force, which even working remotely, was able to overperform in bringing new clients into Cielo's base, making it bigger than before. This is one of the signs of the new normal in Brazil, even abroad.

Cielo's urgency and agility feat have provided connection between buyers and sellers into one single platform, facilitating the delivery of logistics in compliance with the social distance safety guidelines. In addition, NFC and QR code tech solutions were triggered to [ 80% ] from [ 40% ] last year in Cielo's transactions. Furthermore, Cielo has a good win force as a protagonist in payment solutions, offering broadly Super Link, which is a product developed 2 years ago. During the pandemic period, Super Link became the perfect solution to the new reality, expanding our customer base in 800%. Year-to-date, it holds 700,000 merchants ready to use it.

And in a collaborative ecosystem, Cielo was selected in a Brazilian-acquired contract to provide a pioneer and [indiscernible] payment solutions in P2P and P2M [indiscernible] that. Its production is under evaluation by the Brazilian financial regulator, Banco Central, and we do hope that, soon, we are going to operate in the Brazilian markets.

The digital transformation is the reality. E-commerce is the channel. Connecting both Cielo's innovative and safety payment solutions creates a key role in recovering the Brazilian retail economy.

And finally, leading the way, Cielo's participation goes even bigger to support the Brazilian government to deploy the emergency financial assistance, reaching up to 6 million people who might not have bank accounts.

Cielo is extremely committed to the new reality. Although it's a very sad moment concerning to -- concerning the health of the population, we've seen this crisis also as an opportunity to remain strong, be more efficient, strengthening bonds with our customers and above all, maintaining our leading position.

Before to pass to Gustavo, just to reinforce to you that it's important to see this kind of low comparable variables related to the COVID-19 crisis mainly in terms of volume in Brazil in retail. Another thing is related to our company, Cateno, that has suffered the same situation like us in terms of reduction of production. And the third part is related to the exchange devaluation because when we analyze our operation abroad, in the United States, we didn't have the same forecasts that we have had applied for it. In this case, the second quarter was fully committed into the guidance.

We hope that the next second -- third quarter and fourth quarter are going to be much more volume for us in terms of retail and in terms of corporate as well. I hope that we can have a recovery of part of this, but we believe that the most part that we had lost in the second quarter, we want to be -- we want to recover in the next quarters.

Thank you so much. I will pass to Gustavo.

[Gustavo Henrique de Sousa, executive]

Thank you, Caffarelli, and hello, everyone. I'm going -- because we have people following us via phone call and also via the webcast, I'm going to be referring to the number of the slide so that phone call participants can follow and so that webcast operator can also change the slide.

So I'm starting the presentation on Page 3. On Page 3 of this material, and let's start with the boxes on the left, what we have is a comparison of the months of April, May and June, with comparable base of February. We do a comparison of before and after the crisis and the effects in those months. With that, in nominal broad retail sales, the ICVA index prepared by Cielo, which is a reflection of the Brazilian retail activity, we had a decrease of 30.3%. Cielo's TPV on the same comparison decreased by 26.5%. And Cateno's TPV decreased by 24.8%.

In the same period, during this crisis, we saw increased productivity in the commercial and in the administrative teams. You will see a slide talking about that in a few minutes. We also saw a strong increase in the penetration of term products in SMB, and in the long tail, we reached almost 30% of penetration. And we also saw increased usage of digital solutions, and we'll also talk about that in more detail in the upcoming slides.

Now going to Slide 4 of the presentation. On this slide, we see the month-to-month impact of the crisis on the 3 metrics that we saw on the previous slide. On the ICVA, we had a 37% contraction in April. This contraction improved to 20 -- 22.4% contraction in June. And in July, we're showing you the first 22 days of July, we had a 15.7% contraction on ICVA. So not only on ICVA, but in all of the metrics, we are seeing a gradual recovery.

On Cielo's TPV, in April, we had a 35% contraction. This contraction was at 17.6% in June. And in the first 22 days of July, we've seen 8.7% contraction. And on Cateno, in terms of volumes, we had a 32% decrease in April. This decrease was at 18.4% in June. And in the first 22 days of July, we have seen a 14% contraction.

Moving to Slide 5 and where we share another metric for following up the impact of the crisis. We see that, in March, we reached the bottom of this metric. The metric depicts the number of merchants that did at least one transaction with our equipment. And with that, we can see that, in March, in the -- in this information, we had 50% of merchants regularly operating. This metric improved gradually, so that at the end of June, we were at 87%. And on July 22, we were at 91%. We're also seeing a gradual recovery on this metric.

On Page 6, we use another approach to quantify the impact of this crisis in Cielo's and Cateno's volumes. So the methodology we used here was to look at the year-over-year growth of the first 2 months of 2020 and the price base growth metric to the second quarter. So by doing this calculation, we arrive at a projected number of Cielo's TPV of BRL 178 billion. However, because of the impact of this crisis, we saw a number of BRL 127.9 billion. Applying the same rationale at Cateno, we see a projected volume of BRL 75 billion, but an actual volume of BRL 55.5 billion. So by using this methodology, we arrive at an estimated impact of volume decrease at Cielo at BRL 51 billion and at Cateno at BRL 19.5 billion. By applying the revenue yield of these 2 companies to the volume decrease, we arrive at an impact in revenues for Cielo of BRL 404 million and at Cateno, an impact in revenues of BRL 175 million.

Moving to Page 7. With a combination of these effects of Cateno and Cielo, we had lower net operating revenues totaling BRL 2.4 billion, and that's a 12.5% decrease year-over-year; and EBITDA of BRL 236 million, and that's a nearly 70% decrease; and a net loss of BRL 75 million in the second quarter.

Moving to Page 8 and looking at our traditional slide about volumes. We show that on the yearly comparison of the fourth quarter of 2019 to the fourth quarter of 2018, we were showing good growth metrics. Specifically in financial volume in TPV, we had a 12.6% growth. However, TPV was severely impacted by the crisis that we saw on the previous slide, so that we presented a TPV of BRL 128 billion in the second quarter.

When we look at the client base, a similar dynamic. We were presenting a nearly 18% growth in the fourth quarter. This metric was also impacted by the COVID crisis. And when we look at the term products, we are talking here about the SMB and long tail and also about the prepayment of receivables. We have shown a growth north of 18% in the fourth quarter, and now we saw a decline. This decline is driven by 2 factors. First, of course, we have the crisis, which impacts volume. But we also have the impact of our strategy of prioritizing capital allocation to SMB and long tail in terms of term products. And we do see our capital allocation to the large accounts.

Moving to Page 9, we see an evolution of revenue yields. On the yearly comparison, we had a 3 bps decrease. And in the quarterly comparison, we have a relative stability, 1 bp increase. This is a change, and we see that on the graph on the right. This is a change to the trend that we have seen throughout 2019 and reflect not only the fact that Cielo's portfolio was already repriced, but also the fact that with a lower volume, the portion of revenues that is fixed, for example, rent, benefits this metric.

And now moving to Slide 10. We show some of the topics that we will talk about in the remaining slides: production; penetration in SMB and long tail; operational efficiency; innovation; and liquidity and leverage.

So moving on to Slide 11. The metric we present here is the first stage of the commercial efforts. It's the first stage of success that the hunter gets by presenting a proposal to a client. This metric will represent that the proposal was accepted by the client. This doesn't mean that the clients have signed the contract or that the client has already received equipment and is already doing transactions with Cielo. We decided to share this early stage with you just to show you how the metrics in June are picking up.

So what we show you here is a comparison by using January of 2020 as the base 100 parameter. And we show you that we did suffer during the crisis in March and April. But after -- beginning in May, we recovered this metric to levels that are above the beginning of the crisis, the period that is previous to the crisis.

Moving to Page 12. On the chart in our left, we see the gradual gain of participation inside of Cielo's TPV of the SMB and long tail segments. They represented 31% of our TPV in the first quarter of the last year, and they now represent close to 36%. And on the chart in our right, we see the strong increase in penetration of prepaid receivables, in SMBs on the -- I'm sorry, SMBs and long tail segments. We are now at a record high in terms of penetration in these 2 segments, fulfilling a strategy and a challenge that we had shared with you, analysts and investors, in the previous calls.

On Page 13, we show you some of the efforts that we are doing on the cost side. What we show you here on the chart in our left is adjustments on expenses by excluding brand fees completely related to volume, the subsidies on equipment that are sold and also the fees that we pay to the banks that work with us in the origination of clients, in addition to also excluding nonrecurring expenses. With these exclusions, we show you that in comparison to the fourth quarter, the first quarter presented 15% improvement. And we are maintaining the same level of expenses by this comparison. And this is happening because of cost control measures that have to do with changes in the call center operation model, changes in our logistical model, changes in our benefits package and also other restrictive measures that may not impact the bottom line greatly, but they are sent to assess the message and the culture of cost control. I'm referring to the restrictive measures in travel, in cars for the sales force and also in admin services building.

Now moving to Page 14 of the presentation, when we talk about digital transformation. And a number of features, they are now being increasingly used by our client base, such as NFC, our Super Link, our partnership with a logistics company helping our clients and also the usage of QR codes. The volume of TPV done by these transactions, by digital solutions, increased by more than 152% when we compare June to February.

On Page 15, we see that a -- a comparison, a view throughout the years of new products that were launched by Cielo. And with that, we state that Cielo has the most complete product suite offered to the clients.

Moving to Page 16. We have launched the WhatsApp payment possibility, which is payment via WhatsApp through the Facebook Pay tool that is processed by Cielo. We work with P2P and P2M. It's as easy as sending a picture to someone, and it is now suspended, being evaluated by the Brazilian regulators.

We move to Page 17, when -- where we show you here that Cielo has recently created an area, a new structure, dedicated to credit products. This will analyze the needs of our clients in launching new products in the future. But we also share with you products that are already available, such as credit backed by receivables, anticipation of receivables by working with some parties and also real estate-backed credit.

And on Page 18 of the presentation, we share with you a recent regulatory approval that Cielo obtained the license to be an electronic currency issuer, which will, in the short term, enable Cielo to work -- to have its own payment accounts, prepaid cards, banking services such as money wire and issuing billing documents and also to work with the PIX, the instant payment solution being prepared by the Brazilian central bank. In the medium term, we will also be able to work with many open banking features, white-label platforms and enhance our data intelligence and reconciliation services.

On Page 19, we show you the growth of digital solutions. On the chart in our left, we see that year-over-year growth of e-commerce, specifically in June, year-over-year, we saw a 129% increase. And on the chart in our right, we see here how these transactions, e-commerce, NFC and QR codes are gaining participation, gaining share inside of Cielo's TPV.

And now on Slide 20, we show you Cielo's liquidity and leverage metrics. Cielo's cash position at the end of the quarter was at -- was above BRL 7 billion. Cielo's resources invested on the prepayment of receivables were at BRL 4.8 billion. Our amortization schedule and other financial obligations is depicted below on our left. We see that most of the short term will be taken care of in the third quarter, and we have BRL 9 billion of debt maturing in the long term. And we also show you a much-improved leverage metric at 1.21x by the end of this quarter.

With that, I finalize the presentation and open for the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Jorge Kuri, Morgan Stanley.

[Jorge Kuri, analyst]

Jorge Kuri from Morgan Stanley. 2 questions, if I may. The first one is on your market share, your TPV was down 20% quarter-on-quarter. We saw GetNet report this morning, down 11% quarter-over-quarter, much better than you did. Can you talk about market share losses? Where are you seeing those losses? Who's taking share? What are you doing to reduce that? And at what point do you think that will normalize? Or maybe the part that I'm not understanding is the difference, it may be driven by less digital transactions. Is that an issue for you? Are you not being able to capitalize on this surge in digital transactions that we've seen? That's my first question.

And my second question is on your JV with WhatsApp. And I'm trying to understand the pricing of debit at 3.99%, which, for P2M, seems very uncompetitive because everyone else charges 1.99%. And so why would anyone pay 3.99% for something that's available at 1.99%? And overall, on the credit side -- on the credit card side, sorry, no ability to do parcelados, which is a huge part of the way Brazilians consume. And so it does seem that the structure on the P2M side looks uncompetitive from that vantage point. And so is that because you're not that interested in the P2M, and this is mostly a P2P platform? Or how do you think that you're going to be able to compensate for that -- those shortcomings?

[Gustavo Henrique de Sousa, executive]

Jorge, Gustavo here. Thank you for your question. I'll start with your first question, and then I'll pass it to Caffarelli to talk about the second. On the first question, on market share, Jorge, and I'm going to talk very subjectively here because we just saw our competitors' numbers and we are still awaiting for second quarter numbers from most of the industry, right? But what we believe is the trend in terms of market share is that Cielo, overall, will have a reduction in this quarter, mainly because of 2 factors.

First, we are doing a work to recover profitability with large accounts. And in some clients, we are able to reprice them in rather better terms. And with others, they lead to the competition. I suspect that the competitor that you mentioned is gaining traction in those accounts, but they have their own pricing policy.

Another segment where we are likely losing share is on the long tail. We had expressed to the market that we are way more restricted in 2020 in terms of subsidies for equipment that are sold. We presented an information, Jorge, in our release showing that in this second quarter, as a result of that, of lower subsidies, we sold 42,000 equipment. And this contrasts to the number of equipment sold in the fourth quarter of last year of 260,000. So we will likely, because of the lower increase, lower inflow of new clients that joined Cielo with equipment sold, we are likely going to have market share losses on the long tail as well.

In the middle of the pyramid, that's where we want to retain our footing and to expand. Because the competition hasn't fully disclosed numbers yet, I don't know where the trend will be. What I can tell you is that we don't see market share losses at Cielo as a result of not participating in digital payments and so on. Quite the contrary. We launched and enhanced a number of alternatives to our clients in terms of digital innovation, and this increased usage on that.

To talk about -- Caffarelli, I'll now pass the word to Paulo Caffarelli. Caffarelli, please?

[Paulo Caffarelli, executive]

Okay. Jorge, thank you for your question. First of all, we need to take into consideration that these current movement is the first step from WhatsApp in Brazil. In this case, let me talk about MDR for P2M. We are talking about [ non ] entrepreneurs in Brazil -- when we talk about [ these non ] entrepreneurs in Brazil, I need to be very [indiscernible] 3.99% is a very competitive price. If you analyze all the acquired in Brazil, they are processes sometimes pricing like 5%, 6%, [ 8% ]. In this case, there is some kind of need in terms of financial education for the companies because sometimes, the people are not interested in terms of interest rates, but they are interested in how quickly they can receive their money, okay?

In this case, I think that 3.99% is a very competitive price. We can be very competitive among all the acquirers in Brazil that are competing in this segment, in the long tail segment. And we believe that for the other phases, what we're going to do is reduce prices, when you talk about non retail or even maybe [indiscernible] company because we need to take into consideration, in this situation, the scalability that we can have in Brazil related to the MDR. At the end of the day, we need to consider as well that P2P, there is no charge in terms of transactions.

[Jorge Kuri, analyst]

All right. Thanks, both, for the explanations. Just one clarification. I'm looking at the website of [ PACS and Tone ] and Mercado Pago and SOMO. And their debit is 1.99%. So that was my question. So the going rate for debit for micro merchants, it's 1.99%, and you're charging 3.99%. So that was my question. How do you see that as competitive?

[Paulo Caffarelli, executive]

Okay. Yes, in this segment, these companies that you have mentioned, there is no participation because we are talking about is [indiscernible] segment. There are other companies working on this. And I can send to you by, perhaps, Jean, the prices among these segments, and I can show you that we have much -- not too high prices than we are charging nowadays, 3.99%. We'll send to you, okay?

[Operator]

Our next question comes from Neha Agarwala, HSBC.

[Neha Agarwala, analyst]

I have 3 questions. First, on the expense side, if you could elaborate a little bit, even considering the normalized expenses, the total costs this quarter was flat quarter-on-quarter because the revenues declined with lower TPV. So we thought that some of the costs would be variable, so with the lower TPV, those costs would be going down. So why didn't we see the decline in costs? And how should we think about costs in the coming quarter? Should they grow now that the TPV would come to more normalized levels in the coming months? Should costs continue to grow hereon in the coming quarters?

And then my second question is on the net adds. We understand that you lost a lot of clients because you reduced subsidies, especially in the long tail market. So is that impact largely done by now? Or should the active merchants continue to decline in the coming months? So any color on the active merchants for this year would be helpful.

And then lastly is on the credit products. I understand that you're working with partners to provide different types of credit options to your customers. But could you give us some color on what is the size of your loan book, what is the profitability of this product that you add, and what is the growth outlook that you have? You previously mentioned that you would need to diversify your revenues and go beyond just acquiring. So how much do activities beyond acquiring contribute to your total revenues at this point? And how do you see that growing with additions of credit products and other forms of businesses? Those are my questions.

[Gustavo Henrique de Sousa, executive]

Thank you, Neha. I'll do my best to answer them. I'll get them 3 ways, right? So starting with the cost side, so one number that we presented to you in this material and also in our release is our attempt to try to make the number clearer to the market. And I'll gladly go through that. What we are calling in that presentation and in our release as normalized expenses is the combination of costs and expenses, with the exclusion of brand fees. That's the cost item we have that is related the most to volume. So the reason we exclude that it should have this variable cost out of the [indiscernible] to show you that the core of costs is actually reducing. So because of that, about this exclusion, this is the cost that we would like to see increasing, but which related to volume, right?

But for this normalized expense calculation that we do, we exclude the brand fees. We also exclude the subsidies of equipment that is sold, specifically because, as I mentioned to Jorge on the previous question, we significantly reduced the level of subsidies that we are now bringing to clients on sold equipment in 2020. So that now throughout the year, we are living with the amortization of subsidies that were granted last year. But in 2021, that will not be the case, specifically because we are subsidizing way less.

We also exclude the fees that we paid to banks that work with us in the origination and maintenance of clients because last year, those costs were a reduction of revenue. And on this year, they are on the cost side. And we also excluded one-offs and extraordinary items, nonrecurring items that we presented.

With that, the normalized expenses show a year-over-year decrease of 5.4% and a relative stability quarter-over-quarter. That's a growth of 0.4%. So what we are likely to see, Neha, is the continuation of this improvement on the cost side when we do those adjustments, and the cost that will likely grow with the recovery of the Brazilian economy is the brand fees. So it's sort of a mixed answer. The core of the cost side will keep going down as we keep implementing efficiency measures, but brand fees will go up.

Your second question was related to net adds. And specifically, in this metric, on the client base metric, Neha, we have 2 effects. One is related to, again, lower subsidy levels that we are granting to clients. As I expressed, in the second quarter, we saw 42,000 POSs versus 260,000 in the fourth quarter of last year. So this lower entrance of new clients inside Cielo is part of the reason we saw a decrease in client base.

The second reason for a decrease in client base has to do with the crisis. We actually had -- the metrics that we present for client base is the number of clients that performed at least one transaction with Cielo over the last 90 days. And we saw an increase in this metric. We call this involuntary churn. Clients that haven't canceled the contract with Cielo, however, have not performed transactions with Cielo, so we saw an increase in that completely related to the crisis.

What we are likely to see, Neha, is a recovery on this metric of clients that did not operate with Cielo. And we are already starting to see that in the early July numbers. We are seeing an uptick in client base inside of Cielo. But on equipment that is sold, we are likely to keep seeing a decrease of the entrance of clients that buy equipment inside of Cielo.

And on your last question, talking about credit, the initiatives that we are presenting here are more related to the future, Neha.

[Audio Gap]

So it's very marginal. It's not very significant in terms of Cielo's numbers. We do have the alternative, working with partnerships that we presented here in our call. But the reason we created the specific area, the new structure inside of Cielo is to enhance this number. Because this is still being worked on, I do not have revenue projections or a specific goal to share with you, but we do have high hopes for this new structure that was recently created.

With that, I hope I have answered your few questions.

[Neha Agarwala, analyst]

Yes. That's very helpful. On the revenue side, could you please elaborate and tell us how do you see the revenue growth evolving in the coming years, where the pressure on MDRs continue and same as with the POS revenues? Prepayment too had sharply declined this quarter, but I believe the 2-day payment optionality is working well for you. So what do you think will be the revenue drivers in the medium term for the business?

[Gustavo Henrique de Sousa, executive]

Just following the items you mentioned, Neha, we believe MDR is on a continued declining trend. This decline is softer this year, but in the long run, we think that the trend will persist. The POS rental is also following the same trend.

On prepayments, I believe we're likely to see growth in overall clients that use the solution. So specifically, one metric that we were very happy to share with you was the increase of penetration of prepayment products in SMB and in the long tail. So we're likely to see that growing.

So out of the 3 traditional components of acquiring revenues, 2 of them will persist under pressure, in our view, and one of them will likely see an increase in product. With that, acquirers, and this is the reason that we are -- we created these new teams in a few areas dedicated to new products. We have to diversify their sources of revenue via credit, digital wallets, other sources of payments and so on. So that, in our view, is the trend.

[Neha Agarwala, analyst]

Okay. Last thing, if I can ask, you're focusing on the middle market. Do you have the NPS numbers that you could maybe share with us?

[Gustavo Henrique de Sousa, executive]

We do not have updated numbers, Neha. The last number that we talked about was from late last year. We talked about it on the last call. Just to give color to everyone on that, we presented a strong growth in NPS when we compare the end of '20 to the beginning of 2019. And with that, we are at par with what the market calls the incumbent, right, with our top direct competitors that are controlled by banks. However, we still have a gap to surpass, a gap to work on to reach the levels of the new entrants.

[Operator]

Our next question comes from Tito Labarta, Goldman Sachs.

[Daer Labarta, analyst]

My question is on the prepayments. Just to look at that a little bit further, if we look at prepayment volumes, they were 7.7% of total volumes. I know that's offset by the Receba Rápido, which increased a lot. But even if we combine the 2, both the prepayment and the Receba Rápido, it was around 15% of total volumes. If we look last quarter and last year, it was closer to 20%, 21% of total volume.

So if you can maybe -- why did it fall so much? I mean I think if you grow more in SMBs, I would expect they would demand more prepayments than Receba Rápido. So just to understand, is it just something particular to the quarter, given the impact of COVID-19? Or is this sort of a new trend that we should expect, where the total volume should be around this mid-teens?

And then in terms of the mix between the 2, should we continue to see prepayment fall even further and continue to be offset by Receba Rápido? Or how -- what percentage of total volume should come from each? If you can give some more color on that, that would be helpful.

[Gustavo Henrique de Sousa, executive]

Tito, thank you for your questions. What we have there is actually a mixed trend. So overall, in terms of the prepayment volumes for Cielo as a whole, we are likely to keep seeing a decrease there because the big volume driver for prepayments is large accounts. That's the big volume driver, but that's not the big profitability driver.

The -- what we have been talking about in the last quarter is that our capital allocation will move capital from prepayments in large accounts to the allocation of capital of prepayments in SMB and long tails. So when we look at Cielo overall, you keep seeing a reduction in that metric.

In addition to the capital allocation strategy, we also had restrictions that were imposed with some clients, mainly the big ones, that were more severely affected by the COVID crisis and that are riskier in terms of the impact of the crisis, such as sub-acquirers and clients of the tourism and entertainment segments. We restricted the prepayment of receivables in those segments.

But that being said, we are shifting capital allocation towards SMB than in the long tail. And in that segment, and we do share the information we see in this material, we see an increase in penetration. So we are likely to keep seeing this increase persist in the coming quarters. However, because we're talking about increased penetration, but with lower volume than large accounts, overall, we are likely to see a reduction on the metric for Cielo as a whole.

[Daer Labarta, analyst]

Okay. That's helpful. So I guess maybe it will pick up a little bit from this quarter, given some of those restrictions. But then after that, it should decline over time. And then what do you see the impact could be from the receivables market and when that gets launched? Did you expect significant pressure on pricing from that? Or how do you think that could impact you?

[Gustavo Henrique de Sousa, executive]

We do expect more competitive pricing definitely, but we still have to see what the market would look like after the implementation, Tito. But yes, we believe that the receivables, central with -- after [indiscernible] will bring additional pricing pressure on receivables.

[Operator]

Our next question comes from Jeff Cantwell, Guggenheim.

[Jeffrey Cantwell, analyst]

And I appreciate all the detail you've given us in your slide presentation and on this call. I wanted to ask you a question about your profitability. We can understand it's a very difficult time period, and then you have to manage through this period, which means maintaining a lot of the costs you've talked about over the past couple of years with the hunters, et cetera. And that's clearly impacting your profitability right now.

But going forward, can you talk to us about your commitment to getting Cielo back to profitability over the next 6 to 9 months? Maybe tell us, do you think investors will see Cielo return to profitability in the back half of this year? Or is that more likely to happen in 2021? Can you just give us a little bit of color on your base case from a profitability standpoint as we try to think out over the next couple of quarters?

[Gustavo Henrique de Sousa, executive]

Hi, Jeff. Gustavo here. I'll do my best to answer your questions and not give you specific projections because I cannot do that for regulatory reasons. But I'll do my best to answer your questions.

So the first comment I have for that, Jeff, is the fact that a loss at Cielo is something that is not structural. Cielo's earnings profile is structurally positive. So with that, what we are seeing is completely related to the crisis. So the recovery of that also has to do with the recovery of volume. So what we have been seeing, and we showed that on ICVA, we showed that on Cielo and on Cateno, is a gradual recovery. If the recovery persists, we are likely to see improvements on Cielo's numbers.

Let me talk about some fronts where we expect improvement inside of Cielo. So first, as I talked about throughout this presentation, we have a different pricing policy for large accounts. We're trying to extract more profitability there. In some cases, the clients are accepting different prices, and others are migrating to the competition. But that's part of the business. We are seeking greater profitability. In terms of the long tail, we changed our subsidy policy. And just to share with you how impactful that is, because we're still carrying the subsidy amortization from last year, but we will not carry that in the next year because the amortization of subsidies is done in 13 months, so in the first quarter, we had BRL 76 million of subsidies. In the second quarter, we had BRL 60 million. So that's very heavy in our earnings.

We will keep pushing on an efficiency agenda. We are presenting better metrics in comparison to the last year, and we are likely to keep seeing that in the upcoming quarters. And we do have another important item to address, which is the performance of our U.S. subsidiary, Merchant e, which is run by another wholly owned subsidiary called Cielo USA. Cielo USA, because Merchant e is doing a turnaround process, still has some costs related to this restructuring process. That loss in BRL is now being magnified by the depreciation of the BRL. The loss that Cielo USA presented in the first quarter was at BRL 54 million. The loss that it presented on the second quarter was at BRL 87 million. So just think, Jeff, of the impact in 1 quarter, the second quarter, of adding BRL 60 million in subsidies amortization and also BRL 87 million in a loss in a foreign investment.

So by combining improvements on these fronts that we have talked about, large accounts, the long tail with the gradual cycle too of the amortization of subsidies, improved efficiency, and we believe that the turnaround process of Merchant e will be concluded by the end of this year, and we will be able to have a strategic evaluation of this asset in the beginning of the next year. That's how I look at the important improvements that can arrive at Cielo's profitability in the short to medium term.

[Operator]

This concludes today's question-and-answer session. I would like to invite Mr. Paulo Caffarelli to proceed with his closing remarks. Please go ahead, sir.

[Paulo Caffarelli, executive]

Yes. Thank you. As you could see, this quarter was unusual because of the correlation between Cielo and [indiscernible] Brazil. But I hope that the next quarter, we're going to have very good results considering all the things that we are doing in the company related to our strategy. Thank you all for taking part of this meeting. I hope that we could answer and clarify all the questions, and if you have some doubts or even other questions, do not hesitate to contact us, please. Thank you so much. Have a good day.

[Operator]

That does conclude Cielo's conference call for today. Thank you very much for your participation, and have a nice day.