CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Cielo's First Quarter 2018 Results Conference Call. This event is being recorded. [Operator Instructions] This event is also being broadcast via webcast and may be accessed through Cielo's website at www.cielo.com.br/ir, 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.

Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Cielo's management and on 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 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'll turn the conference over to Mr. Eduardo Gouveia. Mr. Gouveia, you may begin your presentation.

[Eduardo Gouveia, executive]

Good morning, everyone. Thank you all for joining us on this conference call to discuss our first quarter results. Today, I have here with me, Clóvis Poggetti, our CFO; Victor Schabbel, our Head of IR; and Gabriel Mariotto, our Intelligence Officer. I would like to begin this call by talking a little bit about the ongoing recovery of our economy. After many quarters of soft economy performance, we are finally starting to see a gradual improvement of this scenario. We know that is coming on a very gradual way, but at least we are better [indiscernible]. In order to give you more details about to what has been going on in the retail space, I invite here Gabriel Mariotto, our intelligence officer and responsible for Cielo Broad Retail Index, the CBA to join us to discuss a little bit in more detail the most recent trends posted by the industry. Gabriel, please feel free to talk about the latest data that you have.

[Gabriel Mariotto, executive]

Thank you, Gouveia. I'm happy to be here this morning to share some of our thoughts about the most recent performance trends that we are seeing in the retail space. As you all probably know, we released the ICVA numbers for March, back on April 17. They showed as seen on Slide 3 a strong acceleration, both on nominal and real terms, when compared to the figures seen in February, even when adjusted for calendar effects. As witnessed in 2017, the growth path that the industry seems to be back in has its own ups and downs. In May, last year for example, we had figures that were somewhat softer than people were expecting. Likewise, we had this year a February that brought to the scene a deceleration that wasn't supposed to come in a scenario of improving economic activity. This volatility between certain months is a result of the specific dynamics that we are seeing on a sector by sector and region by region basis. Looking at the difference factors, the ones exposed to non-durable goods have been doing better with accelerating growth in the last 3 quarters. In this group, we have supermarkets, drugstores and gas stations among others, that usually sell the so-called fast-moving consumer goods. On the durable good side, a segment that is usually seen as a reference for identifying economic trends, we had less exciting figures. In the last quarters, sales growth has been there in bold real and nominal terms. The pace, however, has been almost stable. Differently from the acceleration seen in the nondurable segment. The different behaviors posted by the margins exposed to the durable and nondurable segments might suggest that the longer way to the economic recovery should be coming at a more gradual pace than potentially expected by the markets. The good news is that the overall better environment is a reality in all regions of the country. While there is a clear stronger recovery in the South region, all regions have been showing signs of accelerating retail sales. [ Warrant ] for more specific aspect effecting some of the states in Brazil like Rio de Janeiro and the federal district, the performance would have been even better. Generally speaking, the volatility between some months naturally raise concerns about the pace of the economic recovery. Looking closer at the sector and region trajectories as I have just done, we can say that as of now, sales are improving and point to a path of gradual recovery. Before handing back to Gouveia, I just like to remind that the ICVA represents the retail activity as a whole. It is not a proxy of the cards market, let alone a proxy for Cielo's performance. Now after sharing our views on the most recent retail trends, I would like to thank you all for the time, and hand back to Gouveia.

[Eduardo Gouveia, executive]

Thank you, Gabriel. Now I'll move on the presentation to Slide 4. I'm happy to share with you our new marketing campaign. After some time away off the big media, we are back with our strong campaign. Talking about our real successful Cielo Controle product. With over 150,000 clients, Cielo Controle target the merchants that who want greater predictability. We have a fixed monthly fee based on the amount of sales that is expected to be generated. The client knows more properly how much he is going to spend with us. And how much he will receive after each sales he makes. It's easy and simple. It is clearly a product for the bottom of our pyramid, entry-level merchants that want simplicity and a good level of sales. The idea of pushing more strongly this product was to protect more properly the base of our pyramid, which is today more exposed to other alternatives than in the past. As we move more aggressively to segments that were not properly explored, like micro merchants, it's important to have a broad and complete product portfolio for all the different needs that the merchants have. In that sense, we will soon intensify our approach in the small merchant segment. By being more aggressive in the sale of device for those clients that don't want to pay the rental and are not demanding a high-level sales. For those that still want a close relationship and sound support, we're walking on other products that will target the entry-level merchants. All of this is being done together with our partnering banks as a way to assure Cielo's leading position in Brazil [indiscernible]. We are the leader in the market as a whole. We want, however, to be the strongest player with the best valid proposition for our clients in all segments of our market. This wasn't possible in the past when we were still dealing with the rollout of our new IT platform. Now that we are moving forward, getting close to the end of the rollout, products can be more easily developed and put in a production. That's the reason we were able to intensify the launching of products starting mid-last year and that's why we are going to bring great solutions to the market in the coming months. Following our more aggressive strategy and more complete product portfolio, we will have from now on, a stronger and recurrent presence in the bigger media. This is key for us to be in front of entry-level clients, who has proven to offer a great growth opportunity, not only for acquirers, but also for banks. Before that said, about our short- to medium-term strategy, I'm going to hand the presentation to Clóvis, who will talk about the numbers that we posted during the quarter. Clóvis, please go ahead.

[Clóvis Poggetti, executive]

Thank you, Gouveia, and good morning, everyone. On Slide 5, I would like to start talking about our volume growth. As discussed in previous calls, with the migration from the Multivan model to the full acquiring one, Cielo was expected to benefit from a greater exposure to credit volumes. As we started to capture Hiper and American Express brands that operate in the credit segment. On the other hand, as our competitors initiated the process of capturing Elo, a brand that operates with both credit and debit, but is primarily exposed to debit, we were expected to lose some share there in debit transactions. This was exactly what happened in the fourth quarter and was once again seen in the first quarter of this year. Our debit volumes excluding the Agro product decelerated growing by 1.5% year-over-year compared to the 8.3% in the previous quarter. On the credit side, however, we saw our volume growth accelerating, reaching 10.1% year-over-year in this quarter compared to 9% in the previous one. Here, it's worth noting that we've had both the impact of the migration from the Multivan to full acquiring model.

[Technical Difficulty]

[Operator]

Mr. Clóvis, you may proceed, please.

[Clóvis Poggetti, executive]

Okay, thank you, and really apologies for this guys. I will start from Slide 5, okay. So I would like to start talking about our volume growth. As discussed in previous calls, with the migration from the Multivan model to the full acquiring one. Cielo was expected to benefit from a greater exposure to credit volumes as we started to capture Hiper and American Express, brands that operate in the credit segment. On the other hand, as our competitors initiated the process of capturing Elo, a brand that operates with both credit and debit, but is primarily exposed to debit, we were expected to lose some share there in debit transactions. This was exactly what happened in the fourth quarter and was once again seen in the first quarter of this year. Our debit volumes excluding the Agro product decelerated growing by 1.5% year-over-year compared to 8.3% in the previous quarter. On the credit side, however, we saw our volume growth accelerating, reaching 10.1% year-over-year in this quarter compared to 9% in the previous one. Here, it's worth noting that we had both the impact of the migration from Multivan to full acquiring model and also the overall improvement of the macro scenario. The better the economic situation, the more likely is the recovery in credit to be seen. While volumes are doing well with growth rates being sustained at good levels and credit outpacing debit, which is positive for our yields as a negative note, we continue to have pressure on our POS base. Seasonality factors, coupled with a challenging competitive environment, mainly on the bottom of our pyramid and in midsized merchants, led us to post another drop in the number of our POS terminals. It is important, however, to call attention to a few important aspects behind this contraction. The ramp-up of our value-added LIO terminal continues and is helping the mix to improve further. This has been pushing up the penetration of wireless terminals, reducing the pressure on the rental revenues. Moreover, although the pace of contraction is similar to the one seen in the previous quarter, the revenue trend that we are now posting is more benign, benefiting from better price dynamics and increasing value generation on a client per client basis. This doesn't mean that we are happy with the numbers that we are showing. On the opposite, I'm just highlighting here some of the positive factors that are arising from the efforts that we are putting place in order to have our POS base back to the growth path. There is more to be done and we are confident that it is a matter of time for the company start presenting better figures. On the next slide, we can see in more details that more positive factors that I have just mentioned. On the chart on the left, we can see that our revenue yield declined by 11 basis points on a year-over-year basis. In the annual comparison, the main driver behind the yield compression was the rental revenue that declined in the period, mostly due to the compression of our POS base. At the same time that the volumes kept expending. Because of declining numerator, the rental revenue, and growing denominator, the volume, we had 8 basis point negative contribution to our yield, coming only from the rental business. Following the rental, we had to mix still playing against us. While we already had the credit outpacing debit in both first quarter '18 and fourth quarter last year, the carryover is still negative, given the strong growth posted in debit during the period. More important, however, continues to be the contribution coming from the big account segment. Volumes coming from big merchants kept outpacing the ones from small and midsized clients. This is now the main negative mix factor playing against our yield. As a positive highlight, we have prices contributing to only 3 basis points of the contraction seen in the period and our Receba Rápido product, adding 8 basis points in the first quarter of '18 compared to the same quarter of the previous year. More important for us, however, is the evolution of our yield on a sequential basis. On a quarter-over-quarter analysis, as shown on the chart on the right side, the rental business contributed positively to 4 basis points. This was a result of more stable rental revenues. At the same time that volumes naturally decelerate from acquired to another. In this case, due to seasonality. Mix during the quarter had no contribution to the yield as a faster growth in credit versus debit was offset by a stronger performance of the big account segment compared to the retail one. Following what we saw in the annual comparison, our Receba Rápido product continues to boost our yield, adding 3 basis points to the overall number. As an important negative in the quarter, which offset partially the more positive trends, including the ones related to price, we had a higher ISS tax debt. In light of the new regulatory framework for collecting services tax in Brazil the company decided to provision conservatively at the highest level possible. The service tax will be paid. While the matter is still being discussed by authorities with the new way to collect the service tax being questioned in core, the company continues to conservatively provision it. This unfortunately took approximately 2 basis points out of our yield in the quarter. Weren't for a greater service tax, our revenue yield would have been even higher on a quarter-over-quarter basis.

Now moving on to Slide 7, we have the figures for our cost and operating expenses, which were once again kept under control. Together, cost and expenses grew by 1.9% compared to the numbers seen one year ago. These continues to be a consequence of the company's efforts to arrive at the most efficient corporate structure possible, even in a more challenging competitive environment. Our EBITDA, however, dropped by 9.8% year-over-year. Despite having our revenues coming down at a slower pace compared to the previous quarters, they were still the main factor behind the decline of our EBITDA. As a result, we had our margins coming down by 2.6 percentage points on a year-over-year basis. Our reported net profit, on the other hand, stood at BRL 1 billion, practically flat compared to the first quarter '17. This was mostly driven by the ongoing financial deleveraging, which helped support our bottom line. During the quarter, it's worth noting that we had a nonrecurring item totaling BRL 75 million that positively impacted our bottom line. Due to the lower tax rates in the U.S., our deferred tax liabilities in Merchant E-Solutions balance sheet were updated generating a one-time gain. Weren't for these, our net profit would have amounted for BRL 932 million, a 7% year-over-year decline. On the next Slide #8, we briefly talk about the positive contribution coming from Cateno. Following the trends seen in previous quarters, volume growth continued to come at a good levels expending 7.1% year-over-year. This translated into a healthy growth revenue growth, which was partially offset by a higher service tax due to the new regulatory framework. The cost control initiatives that have been in place for a while now continue to help boost the operating performance, driving earnings to expand by 14% year-over-year. As a result, Cateno's cash and earnings accounted for 11.8% of Cielo's consolidated fees. And then, let's move to Slide #9 where we present our guidance, adjusted for the volumes captured under the Multivan model, Cielo posted a 8.2% year-over-year growth, slightly above the high end of our 5% to 7% guidance for the year. This was primarily a result of the fastened credit growth seen in the quarter, which was only partially offset by the slowdown in debit. If a sound pace like this is sustained in the coming quarters, we would be naturally considering a visit our volume growth guidance for the year. On the cost and expense side, we posted a 4.1% year-over-year decline when adjusted for a higher-brand fees in place since the beginning of the third quarter '17. While this is a result of our ongoing effort and commitment to greater efficiency, we note that upcoming figures should be less favorable, given the low base that we are now starting from and the expected increase to be seen in some expenses going forward, mainly marketing. Accordingly, we stick to our 2% to 4% growth in our adjusted cost and expenses for the year. In terms of CapEx, we are still way short to our target range from BRL 300 million to BRL 400 million as most of investments are expected to come in the upcoming quarters, mainly during the second half of this year.

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

[Operator]

[Operator Instructions] Our first question comes from Domingos Falavina, JPMorgan.

[Domingos Falavina, analyst]

My first question. I have 2 questions. First one is a short one. You used to disclose some data about your overall terminal contraction year-on-year. How much was driven by macro factors? And how much by competition? I remember we did back into the crisis was like 70% macro, 30% competition. You switched to 50-50, so I'd like to get an update on that ratio. And then I have a second question.

[Eduardo Gouveia, executive]

Domingos, about the compression of our terminal basis, we saw that we had less pressure of macro is about 30% to 40% now near the first quarter compared with the past. And the other one is the results about the full acquiring process that was put in place since October last year and competition. Then we decided to go ahead and prepare a lot of actions to support our strategy, mainly to put in a strong market campaign, strong relationship with banks, improving the engagement of the banks in the acquiring process. Then new customer. Then we believe that we are pushing these lines into the medium term to have a -- recovering this number of POS.

[Domingos Falavina, analyst]

Got you. Second question, it's actually a bit more structural and strategic question. It seems to us that like at least reading some of content of small merchant associations and some of their asks that fixed cost is really what sort of drives most of their ask. And it becomes even more clear when we look at the success of some players that are selling terminals, obviously PagSeguro being the just more obvious one. And when we look at the marketing campaigns you guys launched, it seems to be focused on center [indiscernible], which at least to us here in practice seems like you only have rental fees in the terminal rather than [indiscernible] to the extent that it's a [indiscernible] no matter how much your sale instead of the opposite, which seems to be sort of the ask. So my question here is, how was built the project around Seattle [indiscernible]. How many surveys did you conduct and why are you basically incentivizing data in marketing and not Stelo for the sale of the terminal? I'm just getting a conflict of like what we perceive to see the demand on the low end and what you guys are trying to offer. It just -- we can't reconcile that.

[Victor Schabbel, executive]

Victor here. Before Gouveia can add to your question about the strategy and the products that we are launching, I would first talk a little bit about the speech that some on the street might have about having a leaner structure. So fixed costs is really what matters and having a more efficient platform. It's easier for them to reach certain clients and, et cetera. The fact is that Cielo as everyone know is the largest player in the industry with over 50% market share. We are working to serve the best way possible all the type of merchants. So with very different demands. So for this to happen, we have to have a big infrastructure. Right. So logistics, client support for -- that is very important for the big clients and also important for the midsize ones. While when you work with micro merchants individuals, obviously that you rely less on the level of service and much more on marketing and just distributing the devices that you sell, right. So the fixed cost is by nature smaller in this segment. So obviously, the barriers for you to entering that segment is also smaller. So we tease you. It's about invest in marketing and selling devices. So it's not really a big deal there. So in that sense, Cielo wants you to work with everyone, doing the best we can to offer the best solutions. So it’s part of this strategy to have these somewhat big fixed costs that we have. That's why it's so important for us to dilute it with volumes coming from the very different segments, for example the big account segment. But it's part of the market positioning that Cielo has. So for those that say that they are more efficient, I would say that this is -- this could be the seen as somewhat misleading because when you work only with a certain niche, obviously then you can adapt your strategy and your structure for serving just that niche. But we have to be careful, depending on the niche, you might have fewer fixed costs but the barriers for new entrants to come are very small. So that's what I would like to add and now I hand you to Gouveia.

[Eduardo Gouveia, executive]

Adding about the products portfolio, Domingos, we decided to get the first the movement is to sell through campaign and through the all distributors the Cielo Controle. We tried to simply -- it's a very simplistic and easy to understand the results about the product for the customers. It's a fixed monthly based value and we include all the machine, [ MGR ] and the prepayment in a monthly basis and value fixed. Then [indiscernible] to show this project to the to our member base mainly for the bottom of pyramid. With the first movement using this product, rental terminal and we used the Stelo, the brand Stelo, to sell the machine we began 2 months ago with our movement. And we are seeing a good results in this 2 months that we begin to sell the Stelo for the micro business in our portfolio. Then this is the beginning of the strategy to sell more products, to sell more solutions for the -- as Victor mentioned before, we will have today product for all kind of customer in our total member base.

[Domingos Falavina, analyst]

So it's just the first strategy to go with Controle the second one later will be basically it tends to go with Stelo?

[Eduardo Gouveia, executive]

We believe that is the first movement that we did. We decided to go a little bit more strong to show the Cielo brand and the Cielo portfolio. And we begin with Controle we will see LIO we will see Stelo we will some flights off position in the market and then we have another product.

[Operator]

The next question comes from Carlos Macedo, Goldman Sachs.

[Carlos Macedo, analyst]

I got 2. One is just going back to the Controle product. I mean if you compare it to everybody else, it really is less expensive if the merchant does less than the maximum first amount of transactions as you say for the 3G machines say BRL 500. But as soon as you go above that level, it becomes a lot more expensive than all your peers. Just trying to get understanding, how big is that market of client potential clients that make less than BRL 500? PagSeguro that targets that market the average merchant there sells around BRL 1,500 a month last year probably more in out at the end of the year. How big would that market be and then what you think you can gain and how much do you think this can add to your transaction value? Second, question on Cateno. Strong numbers. Good momentum. Obviously, we have, as of October 1, a reduction on the debt interchange. Do you think that the growth can partially offset that? Or will you still have a fairly decent impact -- negative impact on revenues once that comes in?

[Eduardo Gouveia, executive]

Thank you, Carlos. About the Cielo Controle, we saw a strong adoption of the small merchants. As you know, we have today something about 200,000 more merchants that is in our base, now in Cielo. And then we believe that the pillars about is simplicity easy to have reconciliation and it's a little bit easy to understand and to contract these product in our market. The last -- the number of potential merchant depends on the market. We believe that to have a strong potential to implement new merchants to sell for new merchants in the [indiscernible] Premia.

[Clóvis Poggetti, executive]

Carlos, this is Clóvis. We think Cateno -- we hope the growth in terms of volumes can, let's say, offset the impact, okay. But being conservative, let's say, we are going to be impacted negatively in the first moment. We expect a negative impact on Cateno, depending on, let's say, the market, how the market behaves in terms of Cielo and their impacts here, it can be positive in the first moment and then the consolidated figures I will consider something neutral to slightly positive.

[Carlos Macedo, analyst]

Okay. Just going back to the first question. Do you think it's risk? I mean after the first 3 months when we have the promotional price. The take rate for the Controle product, at least the cheap one, if you can average merchant that does take BRL 1,500 a month. It's 12% compared to something like 6% for GetNet, 8% for Rede, 4.5% for PagSeguro. Is it a risk that you might some backlash from these merchants that when they realize that the price went up as much as it did and then you start having some churn in that line, say, towards the middle to the end of this year?

[Unknown Executive]

It's [indiscernible] here. We have been early selling this plan to Cielo Controle for more than a year now. And we have more than 200,000 closing clients on this [indiscernible]. The way we're -- what we're selling [ development ] position as Gouveia mentioned is the simplicity and the control they know what they're going pay at the end of the month. And I don't know if you can do this -- the comparison as you're doing of course when you think of PagSeguro, for instance, they had to buy the terminal. So they had at least for the first year, they have to accommodate the payments their monthly payments on the terminal as well that doesn't happen on Cielo Controle. All the other competitors actually [indiscernible] they have a first year 50% discount. And then we have 3 months and our 3 months is more aggressive than on their first year. So in a different marketing strategies how do you acquire the clients, but for us, we've been seeing like good profitability and good attrition rates on our current clients. So we are not very concerned about that right now.

[Operator]

The next question comes from Craig Maurer, Autonomous Research.

[Craig Maurer, analyst]

2 questions. On the prepayment business, it was mentioned in the text last night that pressure could come on the yield in that business to see great changes and other things. But could you maybe segment whether you're talking about pressure across-the-board or just pressure in the mid-to-large merchant base where you're going to be negotiating but I don't think the smaller merchants in your base have the power to negotiate those rates. And secondly, in terms of the yield, I'm just curious how you view the yield going forward, if you're increasing customization, increasing marketing, all these things seem counterintuitive to arising revenue yield --

[Eduardo Gouveia, executive]

Thank you, Greg. About prepayment, we are seeing pressure in price in the top of pyramid in the big accounts that is paying attention about the cost of money to Selic. And when we see the Selic decline we see high pressure in the big accounts. In the bottom of pyramid, in the small merchants, we see not pressure in price, but we saw some competition in prepayment business. Then the volume is the big charge in the bottom of pyramid and pricing the top of pyramid. The second question, could you repeat the second question, please?

[Craig Maurer, analyst]

Yes, just was curious about how you view the revenue yield over the course of the next call it year or 2? It doesn't -- it's counterintuitive to think the revenue yield might stabilize if you're seeing -- if you're driving toward increased customization across your merchant -- across your merchant group plus you are also talking about significant increases in marketing and promotional spend.

[Eduardo Gouveia, executive]

In the short term, Craig, we are seeing the stabilization in -- and we're working hard to recover part of the rental revenue. We are pushing the banks, we are pushing our sales team. We are pushing our marketing campaign to try to recover part of the deals coming from the rental fee. Depends on the mix of product credit and debt, we are seeing the credit volume is a little bit more health compared with debit. Remember that we are losing part of Elo sales because the full acquiring mode. That was implemented in last October and the mix of the accountant and small merchants. This is -- we believe that we'll have stabilization this year in short term and increase -- gradual increase in the long term.

[Operator]

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

[Mario Pierry, analyst]

Let me ask 2 questions as well. The first question is looking your EBITDA margin, you used to be a 65% EBITDA margin company, roughly 10 years ago. And your margin has been coming under pressure pretty much on a consistent basis, you are now at 44%. I want to try to get an idea of where do you think your margins will eventually stabilize? The second question is related to the recent implementation of caps on interchange fees on debit card transactions. I know that becomes effective later this year. I was wondering how do you think that the banks are going to react to this loss of revenues, and how are you planning on -- or if you're planning on passing on the benefits that you have to your cost to merchants, what is your strategy that Cielo is going to take?

[Clóvis Poggetti, executive]

Mario, it's Clóvis. Regarding the margin, I think it's worthy mentioning here that the point at taking such a long term analogy, we should take into consideration the fact that we have been in addition to let's say, this more competitive environment that we are leaving, since a couple of years ago, but we also had been consolidating new companies with lower EBITDA margins. So, for example, we had in 2012 the acquisition of Merchant E-Solutions that has a different accounting system and we discussed this in previous meetings and calls, okay. We had later for example, the joint venture with Banco do Brazil in the creation of Cateno, a beautiful business, but it had in the first year a lower margin compared to Cielo. Now we see, given all the efforts in terms of making it more efficient, great and beautiful margins as well. So this consolidation, let's say, should not be kept apart in the analysis. Going forward, of course, we are in a scale based business, okay. And then it's also depends on let's say, how the whole market is going to behave in terms of aggressiveness. We are seeing, as already, let's say, mentioned by Gouveia in the midsized to the bottom of the pyramid, a more active scenario. We had also our considerations in terms of the receivables business, let's say, facing let's say a tough scenery because of the Selic rate. But you know what hits us, let's say, hits everybody and we expect it is too early to say that this can bring certain level of rationality because it's our understand that some of our competitors were being very aggressive in MDRs and rental, and funding such aggressiveness through the receivables. Bring the receivables under pressure, that's our belief and certain moment we should see more rationality in terms of MDRs. And what is, let's say, easier to face whatever depends on cost and expenses being more efficient to sustain -- help to sustain the levels, the company will continue to do. But I cannot let's say, give you a full answer given the lack of visibility how the market is going to behave in terms of the top line. And also, let's not forget, one last comment, that Brazil is still very low penetrated so several actions are being taken in order to help foster the increase in penetration, more volumes, also better results for us.

[Eduardo Gouveia, executive]

Both Mario about capping in debt, we -- depends on the speed of changing the market that we will adopt. For big accounts, we believe that you have more speed for the small merchants that we believe that you have not so intense speed to change price. For Cateno, it is immediately, then we believe that in the short term, we will have a nil to impact. We -- you will not see any movement with banks. We didn't discuss in any point about the any reaction about banks about the -- we believe that the banks will solve this problem internally.

[Mario Pierry, analyst]

Okay. Now that's clear. So just to go back then on the banks. Because this is a loss of revenues for them. And there're many ways that they can compensate for this, they can increase different cards and things like that. And they can also increase rebates charge from Cielo. So there has been no discussion about changing rebates or anything like that?

[Victor Schabbel, executive]

Mario, Victor here. Well, that's a good and important point. You are right. This could have been a way to think about that we're seeing the smaller revenues that they are going to get with the interchange in debit transactions, but once we as an acquirer, we start paying more rebates for example, we lose competitiveness compared to other acquirers that don't pay these rebates. So and the banks are obviously aware of that. So at least at this point, we don't see these as a way to address this kind of smaller revenues that they should be making from October 1 onwards, in debit. So I don't think they should be moving that direction at least this is something that was not put into discussion at any given point in time. So we are not discussing this and as Gouveia said, they might find a way to mitigate these smaller revenues elsewhere, not through the relationship they have with us because as you all know, we are in a much more competitive environment than in the past. And we require everything that we can have in terms of competitiveness to get back to the threats that we have on the Street.

[Operator]

Our next question comes from [ Mohammed ] Imad, SGP.

[Unknown Analyst]

One quick question on terminals. I know that you broke it down by 70% competitive, 30% macro, but could you give us a sense of the 5% quarter-over-quarter decline. What percentage of it would have been to merchants switching to purchased terminals versus rented terminals? Just trying to get a sense of how much of it is from a model change of competitors versus simple competitive losses to people with same model as you, and then I have a follow-up.

[Eduardo Gouveia, executive]

Thank you, [ Mohammed ] The first quarter of this year and the first quarter of each year is impacted by the seasonality. We saw that by Christmas and Black Friday, a lot of merchants asking for acquiring company. Second terminal was not a terminal to support the demand to support seasonality. And it's very common in the beginning of the year, we have the return of this second terminal to support the seasonality of the end of each year.

[Unknown Analyst]

No, I understand that because I mean even last year in Q1, you had 5% quarter-over-quarter decline. So from that perspective, I understand there was a degree of seasonality, but I would've expected compared to Q1 last year, where you had just started consolidating of this installed base of terminals post the opening of the remaining parts of the market, this quarter would have been a bit better than that or Q1 '17 on a quarter-over-quarter basis. And given that it wasn't, I'm just assuming if there is an added factor that the yesterday's improvement on that end added competition coming from the selling of terminals. And if you could give us a sense of like was it like responsible for like on a sequential basis 1% decline in installed base or 2% decline installed base? Just from your customers switching to a purchase terminal.

[Eduardo Gouveia, executive]

Remember that we had last year compared with this year put in place the full acquiring model that we saw the second terminal depends on the potential acquiring company we had turned in the second quarter. We had more competition and we continue to have in Brazil mortality, the micro scenario has not recovered as we expected.

[Unknown Analyst]

Okay. Just in addition to that, do you guys sort of break down how big or how material is bottom of your pyramid in terms of your terminal rental base -- revenue base. Is it bottom of the pyramid?

[Victor Schabbel, executive]

Yes. [ Mohamed ] Victor here again. We don't disclose this information, but in order to try to help you out understand the contraction of the POS base on a sequential basis, we had as Gouveia said the seasonality playing against us. The macro recovery at the beginning of this year wasn't as strong as most people expected, including us. So I think this also weighs a little bit and contributed to the seasonality should be also worse. The migration to the full acquiring model also played, continued to play against the POS base and on top of it, as you mentioned and as you asked, how much of the decline is related to clients migrating, for example to the sale of device type of approach. Here, the thing that we have been reiterating is that although we have some migration, clients that calls us and ask to leave Cielo because they basically bought a device elsewhere, although we have that, this is not the most significant part of the churn that we have. What happens is that we are not absorbing the marginal growth, at least not yet or not in the first Q that we could have been absorbing that would offset the churn in our more conventional business, which is the rental in the midsized merchants. This is what is happening. So it's not a matter of losing the merchants to the sale of devices in a meaningful way, but not gaining the ground in this segment, in this market that could help have been helping us offset the decline in our more conventional business.

[Unknown Analyst]

Yes. That's great. Thank you, Victor. Just a question on acreage type then could you give me a sense of -- from a merchant pricing perspective, I know you have the higher brand fees, which you carve out. But the revenue impact is different than the expense impact I think it's 72.3 versus 60.6. So can you give me a sense from a merchant perspective do they see the difference in the pricing? Or is it that you just carving it out for our benefit and from market's perspective it's all part of one pricing, therefore, really going forward we should be looking at overall pricing and not carving out the brand fees.

[Victor Schabbel, executive]

Yes, sure. When we talk about the extra revenue that we are making with the new remuneration structure of this local brand, this is a revenue that we make with them and not that we charged from the merchants. So from the merchants, you have the rental, you have the MDR, you have Cielo Controle, which is a package with a flat fee. These are the revenue refers exclusively to the processing of the brand and it's not charged from the merchant.

[Unknown Analyst]

Okay, and what about the 72.3 in expense, how does that flow then? That's also relative with brand [indiscernible]

[Victor Schabbel, executive]

This is the brand fee that is charged from the acquirers. So other acquirers capturing this brand also pay this brand fee. Obviously, depending on the volume that they capture since they're smaller than us, they should be paying less in terms of this brand fees so should be smaller than the BRL 70 million that we posted. But for example, in an extreme situation that will never happen, but if we were not to capture this brand anymore. This expense would be 0, while on the revenue side, we would still be capturing some revenues because we do the processing. So we do the processing for them even when the transaction is captured by other acquirers. Was it clear?

[Operator]

Our next question comes from Carlos Gomez, HSBC.

[Carlos Gomez-Lopez, analyst]

Two questions. The first one is if you can refer to competitive pressure on the MDR and -- both on the credit and the debit side. And if anything has changed significantly there in the last few quarter, and you can define that in terms of in basis points. The second refers to Argentina. We know that there is the sales process going on you have referred to it in the past. We would like to know if, and obviously, you are going to look at that, that, if that is something that you feel you would do on your own or with somebody if you were to approach it? And if Argentina is a market where you might think of starting a green field operation?

[Eduardo Gouveia, executive]

Thank you, Carlos. We are seeing the MDR levels -- the behavior of MDR is stable. When we see in there -- our bridge about yield, we see that in the more -- the high impact is not price. When we compare competition landscape, we are in the high competition landscape now compared with last year. Then, we are seeing the pricing in MDR and quite that in a stable way.

[Carlos Gomez-Lopez, analyst]

Okay. So if it is done correctly, the competition expresses itself in other ways, but not necessarily in the presence of the MDR?

[Eduardo Gouveia, executive]

Not yet. We have, but the most important part of our huge compression comes from the handle fee.

[Victor Schabbel, executive]

On your question Carlos -- sorry, about the potential transaction in Argentina, where we have a potential acquired there, selling its operations -- or the bank's basically selling the operations there. We usually say that we look at all the opportunities that we have on the market. We are always evaluating whether it makes sense or not. So -- and this applies to any kind of transaction that might be going around here in our market and elsewhere. So Cielo is a big player in that industry. We are always paying attention to the opportunities. And this also applies in this specific case that you mentioned.

[Carlos Gomez-Lopez, analyst]

That is fine. But if you could [indiscernible] we because we understand that you would look at it. But again, is this perhaps too large for you to go alone or would you think of linking up with somebody? And second, as I say, is it a market where you might think about entering, even if there is -- if you don't buy anything?

[Eduardo Gouveia, executive]

The evaluation that we are doing, Carlos, is to go alone. But it is possible to build a group of companies to invest there. Today, we are not seeing to go with another player to see and to evaluate the opportunity in Argentina.

[Operator]

The next question comes from Alexandre Spada, Itau BBA.

[Alexandre Spada, analyst]

I have one question on the LIO terminals. The number of terminals has been growing by approximately 4,000 per month, which translates to about 200 new terminals per business day. At first sight, that number seems to be low for a company with the capillarity that Cielo has. That's said, does the company consider this level satisfactory? Was that -- is this within the plan that has been established for this initiative? Or if you expect an acceleration, what could be the drivers behind this acceleration?

[Eduardo Gouveia, executive]

Alex, this is Eduardo Gouveia. So first of all, I mean, in the past 3 months we've been introducing more the next generation of the new terminals and, of course, we have been having some substitution of the old one, the first version. So when you take it in consideration only the difference between the base, so there is some exchange on the old version for the new version on those numbers as well. And that you have to take it into account that we still didn't make any kind of strong marketing effort to promote remotely, also. We are only selling that on our channels, and as the clients get interested so -- on the website, on our internal sales force, but we, of course, we plan to be a little bit more aggressive on that on the next couple of months, I would say.

[Alexandre Spada, analyst]

So that means you do expect an acceleration in the expansion rate?

[Eduardo Gouveia, executive]

Yes. I mean, the number that we've been disclosing right now is the expect of 100,000 terminals by the end of the year. That's the number of [indiscernible].

[Operator]

Our next question comes from Zane Keller, Barrow, Hanley.

[Zane Keller, analyst]

I have 2 sets of questions. The first is around point-of-sale terminals. You explicitly said in your press release that you expect the terminals to grow either in second quarter or the third quarter of this year. Can you give some color on why you're so confident you think that will happen after the very substantial churn you saw in the first quarter? And the second question related to that is previously, you had said that you expect POS terminals to bottom out between 1.4 million to 1.5 million terminals. Do you have any updated expectations around that figure?

[Victor Schabbel, executive]

Zane, Victor here. So we are, as you know, working hard on many fronts, right? We are trying to control, the best way we can, the churn, right, in order to reduce it. I think this is one of the size where we have a long way -- we have a long way ahead of us for many improvements. And on top of it, on the affiliation side, we also can do better and push harder. And this is exactly what we are doing now with more marketing campaigns, a closer relationship with partnering banks so we can boost affiliation, control more properly the churn so we can once again post increasing numbers off POS terminals, right? So this is a goal that we have internally to, once again, post growth in a market that has a lot of potential. So we have to change this trend, this negative one that we have been witnessing in the last quarters. So we do want to capitalize or to take advantage of the marketing campaigns that we are doing so we can have, more likely, a much better second half in that sense, right? So we have figures don't really improve in the very, very short term. Second Q, for example, we are working to have it coming in the second half with better numbers as we push our sales efforts, marketing, et cetera. So we can again benefit from the growth in the market and also economic recovery that we are going through, right? So these I would say about the recovery of the POS, the number of POS from us. And you mentioned -- sorry, the second question or the follow-up that you did, could you repeat it, please?

[Zane Keller, analyst]

Yes, sure. So, I think, previously, there had been this guidance out there that the company expected the number of terminals to bottom out at approximately 1.4 million to 1.5 million terminals. Is that still the expectation or are you revising that potentially higher?

[Victor Schabbel, executive]

Yes. We currently have almost 1.6 million terminals out there. There has been some pressure, as you saw, over the last quarters. So we do believe that we are close to the bottom, right? So we do believe that we are likely going to change the trend. So we can resume growing again at some point anytime soon, right? In the next quarters, you guys are also going to see the number of terminals that we are selling, as well. So not only terminals that we are selling at this point through Stelo, but the active clients that we have there as well. So altogether -- obviously, we are going to keep showing separately, but altogether, the numbers should show you all that we are in a much better trend, hopefully, in the next quarters. Again, if not, in the second Q, probably in the second half, we are going to post better trends. We are working very hard to have that happen.

[Eduardo Gouveia, executive]

This is my point. We are working hard to involve the banks, to involve our sales team to put a strong campaign -- marketing campaign in TV, in the Web. We believe that the -- the whole way that we are putting pressure to recover the trend of the terminal base.

[Zane Keller, analyst]

Okay, great. And just one more set of questions around the fact in the prepayment business, how quickly do you expect spreads to compress? And what is the worst-case scenario for spreads?

[Victor Schabbel, executive]

If I may, here on the spread side, in the past, we were used to see the prepayment rates that we charged close to 2x the Selic. In our previous call in Portuguese, there was a question basically in that sense if the rates would converge likely to the historical levels. And the answer was, probably no. Today, we have the rates close to 3.5x the Selic so converging to 2x is not the most likely scenario. Mainly, because of the change in the mix of clients that we have been having over the last 5 years in this product. So we have been increasing our exposure to the smaller merchants also as a way to improve the returns and also increase the value generation here at the company. Because, as you know, it's a very cash-intensive business, so the returns, depending on the use, are not exactly that great, although they contribute a lot to the earnings. So with that in mind, we have been working harder to increase exposure to the mid- and small-sized merchants. Now with these more competitive environment, it seems we have been seeing some of the inquirers lowering quite a lot the MDR, offering very attractive POS Rental offers so they can make money only through the prepayment. This has been a strategy adopted by some of our competitors. We do want to bring some rationality there also lowering the rates going forward should be more competitive in that product as well. So as a result, the use should -- or the rates in the prepayment product should come down, but probably not to the 2x the Selic as in the past. So maybe something between 2x and 3x, so maybe 2.5x should be the point of convergence at some point in the medium term, probably not as fast as this year, but maybe in the next 2 years, something like that. So this, I think, is the best answer for your question.

[Operator]

[Operator Instructions] The next question comes from Olavo Arthuzo, Santander.

[Olavo Arthuzo, analyst]

I just wanted to know more about the Selic, the Cielo index for the retail segment. In March, it has reached one of the most improved numbers, almost 5% in nominal terms. So what are the company's expectations for the following quarters?

[Eduardo Gouveia, executive]

I will pass -- that one to Gabriel Mariotto that is our guy that's -- intelligence guy here in Cielo, but it's important to see the seasonality of the ICVA. Please, Gabriel?

[Gabriel Mariotto, executive]

Okay. So, hello, Olavo. What we can say is, as I mentioned earlier, we -- if you take last year for example, we saw, let's say, May -- we have -- May or March, sorry, just take the number here, one second. But it's March. Yes, we had a month that we expected a very high growth rate. So if we -- if you asked this question last February, we would tend to say that it was a pace of recovery -- stronger pace of recovery, but then we were surprised. So that is why we usually focus on what really happened, because we have the data here, and it's difficult to make prognostics. But what we see is that the trajectory is very consistent if you take the series of ICVA growth rate, you can say that is a clear trajectory going upwards. It's very difficult to make any forecast.

[Operator]

The next question comes from Thiago Auzier, Goldman Sachs.

[Thiago Auzier, analyst]

On Stelo, I think it would be quite relevant if you could provide us with any quantitative guidance on how do you expect to be the ramp up in terms of number of clients, and [ CPC ] growth going forward? And with that, how long do you think it should take for Stelo to catch up in size with its main competitors?

[Eduardo Gouveia, executive]

Thiago, thanks for the question. We began, in fact, 2 months ago with the Stelo, the distribution using the sites and the web and the banks, the branch. Then we are in the beginning of the process, the results of the 2 months encourage us to -- we see a strong path to Stelo and we put a lot of pressure to go in a little bit more forward and with more speed to see the result -- the real results of Stelo. We very -- we are very happy with the beginning of this process, and we believe that we have some good sounds about the results of the new merchants. As Victor mentioned before, probably in the next quarter, we will deliver the figures and the number of Stelo to show you that the strategy for the both of permit is doing well selling terminal for -- we believe that we will be a relevant player in this segment.

[Operator]

Our next question comes from Domingos Falavina, JPMorgan.

[Domingos Falavina, analyst]

Just on the marketing, I think, was a bit more explored in the Portuguese call. It's clear that you intend on raising some of your marketing expenses. My question is just, what kind of metric are you looking at, specifically, like, we're comparing some of the Google trends in terms of search or keywords of, like, some of your competitors and yours. And it was a bit striking to us that despite being by far the largest player in terms of market share that the brand awareness of Cielo today, at least using that metric, is not as high as some of your significant smaller players. So as you boost up your marketing campaign, what kind of metric are you looking at, like, is there something we can also check? There will be the method you're looking to see if you're going to continue to invest more or less once you reach your goal in terms of brand awareness?

[Victor Schabbel, executive]

Thanks, Domingos. While we carry out many type of different surveys frequently here internally with the support of consulting firms that are specialized in marketing and brand awareness, so you mentioned 1 type of, let's say, tool that we have to say is not exactly the one that we rely exactly on as its limitations, so we do have internal ones that, in our view, are more accurate and shows Cielo's positioning depending on the different type of clients, different niches, different type of size of clients. So we do carry out studies that are very detailed to assess our position in terms of brand awareness. Given what we are seeing, we identify that for certain type of clients, there was a big need to push campaigns in the big media because our clients that are more exposed to these type of, let's say, media. For example, micro merchant individuals. For the more conventional and regular markets that we were exposed to, the mid-sized and large-sized merchants, the regular B2B approach that we had has proven to be extremely successful, right, using all of the different tools, digital channels and et cetera, and we are extremely well positioned there. So we identified the need to not just the marketing strategy for certain segments, and this is exactly what we are doing. Since we decided to answer more aggressively -- go ahead.

[Domingos Falavina, analyst]

Sorry, sorry. I understand that the metric you were looking is not ideal, and I understand you have Vero. But is there anything public that we can look at, I guess, that's what I'm trying to get.

[Victor Schabbel, executive]

I don't think so because for any player now, this is very strategic information. Because for this niche, that the acquirers are exploring the most now, which is micro merchants and individuals. Basically, the players realized that it's a matter of YouTube in front of the client the most that they can. So investing a lot in terms of marketing and selling devices. So it's key for any player willing to go there to have this information. So I think all the other players are also working internally with their own data, instead of relying on any public one.

[Operator]

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

[Eduardo Gouveia, executive]

Thanks for the call of the first quarter. See you soon in the next quarter. Thank you very much.

[Operator]

That does conclude the Cielo's audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.