CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, and thank you for waiting. Welcome to Cielo First Quarter of 2021 Results Conference Call. With us here today, we have Mr. Paulo Caffarelli, Gustavo Sousa and Daniel Diniz.

This event is being recorded and is also being broadcast live via webcast and may be accessed through Cielo website at ri.cielo.com.br where the presentation is also available. Participants may view the slides in any order that they wish. The replay will be available shortly after the event is concluded and participants of the webcast may be able to register via website questions to Cielo that will be answered soon.

Before proceeding, let me mention that forward statements are based on beliefs and assumptions of Cielo management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and, therefore, 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.

Based on the presentation published this morning on the company's website, this conference call is opened exclusively for questions and answers. [Operator Instructions]

I now give the floor to Mr. Paulo Caffarelli for a brief opening remark.

[Paulo Caffarelli, executive]

Good morning, everyone. Thank you once again for being with us at our conference call. We use this system to provide more time for us to be able to answer all the questions that will be put. All the senior management of Cielo is here. If necessary, you can call some of our VPs, some of the directors. We're going to have them during our conversation. So without further ado, let's move on to our Q&A. Thank you very much.

[Operator]

Our first question comes from Mr. Victor Schabbel from Bradesco BBI.

[Victor Schabbel, analyst]

Good morning, Caffarelli, Gustavo, Daniel. In this first quarter, we had some nonrecurring effects and also the increase of ISS or the local service tax that impacted the results and based on our calculations took 2, 3 basis points of the revenue yield of yours. I'd like to hear from you, especially from you, Gustavo. What you see from now on and sort of offsetting these numbers for the next ones and the macro view that we have today?

[Gustavo Henrique de Sousa, executive]

Victor, Thank you for your question. First of all, the math you did of revenue yield, the impact of ISS, is quite accurate. So our results have increased 45% regarding -- year-over-year. As we reported previously in our presentation, it's being strongly impacted by nonrecurring items, but there are nonrecurring items that are positive. We had our participation in [ Oracle ] BRL 95 million and also the sales of the platform processing for Elo BRL 380 million transaction. Even nonrecurring items that were expenses, they are items that are going to generate efficiency to us, as I'm going to mention in a while.

As to recurrent items, we had a drop of 18% year-over-year, BRL 31 million. So you've talked about ISS, the local service tax. As of January, we created a new methodology for calculation, had an impact, 30 million sellers bottom line. It explains all this variation, although there are several other effects in the dynamics of our outcome. So what we -- we have put to the market that our focus is in retail market. Our base, customer base, grew 8 on that. Our TPV on this segment grew 11% year-over-year.

When we look at the time, term products, we reached 36% in a quarter in which we have received 500 new employees. As we mentioned to you, we started a new commercial model, and we've added new employees. And in this first quarter, we haven't yet a team that has no traction, they have just joined the company, and we have an increase in the base in volume.

Talking a bit about term products, I mentioned the penetration metrics. We have a new FDIC of BRL 11 million. That will be channeled for our [Foreign Language] . So the prepayment product and the retail in terms of expenses, we've shown evolution. We have a table on the presentation in our release showing that normalized expenses free of effect is, nonrecurrent effect, they are -- have dropped 1.7% compared to year-over-year, 2.4% in the comparison that is sequential.

So I mentioned in the beginning that we had nonrecurrent items of expenses, provisioning of about BRL 31 million that were expenses related to dismissal because we reduced the number of employees of 144 associates. And we've also reduced our physical space in our central office, in our headquarters. These 2 combined measures will generate in the next 12 months, as of April, a projected savings of over BRL 40 million. This more than offset the impact that we are going to have of this new commercial team that I've mentioned to you, that we hired late last year to early this year and to conclude, we were just talking about result that is important in our bottom-line, it's important to talk about the subsidiary in the U.S. MerchantE. The third quarter in a row it has improved results in dollar, very close to our breakeven when we only look at the MerchantE without looking at Cielo U.S. sales.

Of course, we have a role in the indebtedness of the bond that we have hired. MerchantE has had the third quarter of consecutive improvement. As we've mentioned to you in the previous webcast, this asset is about to be completed in terms of its turnaround. So with that, what are we going to have in terms of the bottom line of the company in next quarter? So as every company in Brazil, we have to see the behavior of the economy, considering the evolution of the pandemic and dynamic regarding the company, we're going to continue to show the market work that is very focused on spending efficiency.

And I believe that in a few quarters, we're going to have positive news to share with the market regarding the work of the new commercial team focusing retail and I'm sure that in a few quarters, we're going to get traction, and we're going to have a growth in our base. Okay. Thank you very much.

[Operator]

Our next question is from Mr. Mario Pierry, Bank of America.

[Mario Pierry, analyst]

I'd like to ask 2 questions. The first, if you could elaborate on this agreement that Caixa made with [ Pfizer ] to process the volume in the next 20 years. I'd like to understand what the impact would be to you in terms of volume and also regarding profitability? And the second question, I'd like to better understand at Cateno. These operating losses that seem to be related to fraud. I'd like to better understand that. How this is level fraud compared to what you have at the Banco do Brasil?

[Unknown Executive]

Mario, thank you for your question. I'm going to start with the second on Cateno. Unfortunately, with the beginning of the pandemic, late first quarter last year and the movement of greater participation in spending in e-commerce and digital channels, Cateno started having a greater volume of operational losses. The company and the Banco do Brasil are taking measures to try to mitigate these impacts. The channel and the number of transactions are non-presential, and this has greater impact in these losses of Cateno. Measures are being taken. Unfortunately, we haven't yet seen the effect of the mitigation of such risks related to the increase of digital transactions because of the pandemic, we haven't seen the results yet in the first quarter, which I believe we'll see that shortly.

Regarding Caixa, let me tell you that the commercial relationship with Caixa is ruled by a contract that has commercial confidentiality. The maximum I can comment regarding that is the following. First of all, Caixa has been a long-term partner of Cielo, valuable -- valued partner regardless of the commercial agreement with Caixa, or not -- we actually like to have and keep and are fond of this basis. They are banking customer of Caixa and we -- they are also acquiring client of Cielo.

Regarding the acquiring of Cielo and banking relationship of that, Cielo will keep on providing all the service to them. So Caixa is responsible for a bit over 5% of the Cielo's TPV.

When we look at the main banks, if we look at the basis of TPV of Cielo and the main banks that contribute to the space, the main banking marketplaces, Caixa would be the fourth bank. Within these 4 banks, we have the banks that have commercial relations with us, the controllers, and those that have no commercial relationship with us. This leads us to understand that Cielo, based on its volume and presence, has a fair share of acquiring with any bank.

We believe that Cielo today has over 50% of the volume of acquiring that of -- what isn't Caixa. As to the competitive process like this happens, Mario, we have 2 viewpoints of those that are "incumbent," those that have contract with Caixa, and those have none. Those that have none as the winner have all the incentive of having a proposal that is quite favorable to try to get as much as what they can in terms of value generation of the space. We had over 50%. So we have to make very accurate calculation as to how much we have to gain increasing the economics in this relationship with Caixa. So that -- and having additional volume vis-a-vis what -- how much we have to lose when this kind of process happens.

When they lose this kind of commercial relationship, there is no automatic drop from one to the other. Actually, the only automatic thing that happens is that the acquiring part no longer pays a commission of incentive to the bank that was until then the partner. So from now on, Cielo, as I said, will continue providing -- giving all the service to this customer that is a customer of Cielo. It has all the motivation of maintaining the customer at Cielo and actually, the opportunity of taking part of this volume that was the commission that was previously paid to the bank in the marketplace and improve the relationship with this customer.

It may be a proposal that is still further competitive to this customer that potentially -- that will be by a new sub-account or a new account.

[Mario Pierry, analyst]

But just a follow-up. You said it's only 5% of your TPV and the contribution for the profitability of this is similar?

[Unknown Executive]

Mario, it's a bit over 5%. I cannot make any comments on the profitability. And then I will go into the confidentiality issues that I have in the agreement with Caixa.

[Operator]

Our next question comes from Ms. Mariana Taddeo from UBS.

[Mariana Taddeo, analyst]

I'd like to understand a bit and start thinking about trend in terms of TPV and what it would be from now on? The TPV this quarter was a bit similar. SME grew 16% of the total. So in the large calculations, so we -- you had a drop of 5% year-over-year. Can you expect this pace of reduction over the next quarter or this will be sped up a bit more as you're thinking about reducing the large accountings and SME? And the count [ due to ] the increase in participation of SME in the mix and also recovery of the credit card account, will that be enough of offsetting some kind of pressure coming from competition?

[Unknown Executive]

Well, Mariana, there are quite a few moving parts that you've asked in your question. I'll try to approach them all. The dynamics we have for this year that we've mentioned with you late last year, was the dynamics of continuing with the focus absolute on retail with the increase of the commercial team, so that we have a greater growth or stronger growth in this segment. It's hard to project the account volume, Mariana. It's difficult to calculate. Because in the first quarter, so those accounts that we were able to get new contract and have a new negotiation with account that was very tight margin or even with a deficit margin.

For most accounts, we managed to keep the volume at Cielo with appropriate profitability for the company. When we talk about large volumes, dynamics of those large accounts in the next quarter as well. If you gain 1 or 2 or lose 1 or 2, it makes a great difference to this delta TPV accounting large accounts. You had a point that both for large accounts and retail will keep on being a question mark to us. The pace of the economy, considering the evolution of the pandemic, we started in January, February with an economy that was a bit stronger, more activities. In March, we suffered a bit. And April comes with a lower level than what we had seen in January and February.

With regards to revenue yield, pandemic, the pandemic also brought something from the -- it's beginning last year, a greater participation that we've seen in the history of the volume of debt. This has taken yield from us. Of course, another point that was mentioned in the first question. Another thing that took our yield or revenue yield was the impact of the ISS, the local service tax. Mariana, I can give you a bit of this view and those are the moving parts, but it's hard to see the effect that were going to be more important. So when we see the effect of the pandemic, normalization of the pace that we are seeing of credit and debit, it's hard to talk about this accurately.

The year -- the last point, there was a point of competitiveness. The year started strongly in terms of competition for this segment of SME in terms of price. We believe Cielo has an appropriate offer and is well positioned to keep on strong in this segment.

[Mariana Taddeo, analyst]

And if you allow me a follow-up regarding the competition, have you seen the pressure in MDR, rentals or receivables part? Or is it in everything?

[Unknown Executive]

It ends up being in everything. As customers see this as a sort of compound in prices. Even on SMEs, where we have some subsegments, customers see the compound of everything. It's more a competition than MDR. And also, we have participation of the compound of prices that acquires an accounts offer and the customers evaluate.

[Operator]

Our next question comes from Mr. Domingos Falavina from JPMorgan.

[Domingos Falavina, analyst]

I have 2 questions. One more detail, the other one is a bit faster. I'll start with a larger question. We remember following Cielo back then was to process Elo. It was a difficult decision for the company to take for various reasons. Information secrecy that other accounts didn't want the banner to be processed. And also minority cost. Elo was only of banks and Cielo minority. The time the management said there was a processing that generated positive result for Cielo, that's why it was made.

And the question is a following, how much would you have in terms of revenue? What should we expect in terms of revenue of the sales of Elo? And my second question, much briefer is, if it makes sense, even without going in great details in the agreement with Caixa, I believe that it was -- well, Caixa is very big in terms of SMEs and not so big in large accounts. It has a rating that is -- the average rate is higher than Cielo's.

[Gustavo Henrique de Sousa, executive]

Domingos, thank you for your question. What's happened now in this transaction with Elo was concession of the processing platform. So Elo owning this platform can make the improvements, developments, all the needs and whatever they need to do. Cielo continues with the contract of processing with Elo, duly disclosed in our documents. So what was sold was the ownership of the platform, but there is another contract, which is processing contract. And today, it accounts for BRL 100 million yearly, and it's still effective. What we had previously was a contract for the use of this platform and this contract ceased to exist, as we've disclosed. We received BRL 187 million for the use of the platform. There was a monetary correction on this, of BRL 40 million, and we sold the platform for BRL 178 million. So this contract remains, Domingos.

[Domingos Falavina, analyst]

And the contract, how much? So very clear. So what was the revenue of the other contract that you no longer receive with the sales?

[Gustavo Henrique de Sousa, executive]

The revenue from the other contract was approximately BRL 4 million a month and there was the depreciation, amortization of the development cost of the platform, which was BRL 2 million. So the net of this on the monthly basis was BRL 2 million gross, right, Domingos. So from the impact on the result of this revenue, of this component of the platform, it is an impact that is not relevant.

[Domingos Falavina, analyst]

I see. Quite low.

[Gustavo Henrique de Sousa, executive]

But Domingos, I think your second question was a bit cut to me, you were a bit cut off. It's just if it makes sense, because actually Caixa is much more focused on small retail SMEs. If an average-sized customer would not seek Caixa as much as Cielo. So you're correct. The base of Caixa is more concentrated on retail, yes.

[Operator]

Our next question comes from [ Mr. Otávio Andanelli ] from Bradesco BBI.

[Unknown Analyst]

My question is actually a follow-up from Mariana's question earlier. We see a debt mix quite strong in the past quarters. I'd like to know if at the very end, do you see an improvement of credit returning a bit more power -- with a bit more power? And what do you expect for the remaining period of the year?

[Unknown Executive]

Well, Otávio, what it has of relevant and main important is difficult to forecast. What we see now, first quarter, you've seen all the information that is available now. In April, we haven't seen a return to this previous mix. So when do we forecast normalization of the mix based on the historical one? From what we've seen, it depends very much on the reduction of the impact of the pandemic. It's hard to predict. So the more the pandemic impacts in the reduction of activities and the situation of people, the debt participation is higher. I don't believe anyone in the country can say when this will normalize, right?

[Operator]

Our next question comes from Mr. Vinicius Figueiredo, Itau BBI.

[Vinicius Figueiredo, analyst]

Adding to Mariana's question, we have seen much stronger growth in retail in SME, 10% a year considering a stable growth of the year. I'd like to understand how much of this growth do you believe comes from market share gain for the company in these specific segments? How much came from dynamics of better sales in this segment, vis-a-vis large accounts? Also in this resumption, do you perceive the same dynamics? So the outperformance of these players vis-a-vis large accounts. If so, how much within them, some SMEs or retail?

[Unknown Executive]

Thank you for your question, Vinicius. For the first quarter, we don't -- we cannot yet forecast a share. So this increase that we -- our last piece of information, market share that was fourth quarter in terms of our inference in terms of our retail market share. If we look at 2020, we maintain stability in the retail market share. So the increase we have seen in terms of volume is also due to the very, let's say, resumption, recovery of volume in our customer base that was being impacted by the pandemic.

With regards to how the mix is evolving for the segment, we also have another feature of the impact that the pandemic brings to the activity of companies, which is, well, we realized that just as when the pandemic has more -- a stronger impact, there's more participation of the debt than the history. And there's more participation of the volumes for larger customers, possibly because people channel their purchasing in large merchants, e-commerce and large retailers. So something that we see. So dynamics for the end of the first quarter and what we see in the beginning of the second quarter in April is still an impact in activities as a whole, an impact in which smaller customers suffer more. Retail and SMEs suffer more impact of the pandemic than large customers. Okay, Vinicius.

[Operator]

[Operator Instructions] That concludes our Q&A session. And this concludes Cielo conference call for today. Thank you very much for your participation, and have a nice day.

[Statements in English on this transcript were

spoken by an interpreter present on the live call.]