CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Cielo first quarter of 2022 results conference call. With us here today, we have Mr. Gustavo Sousa, Filipe Oliveira, Daniel Diniz and all the company's executive officers. This event is being recorded and also being broadcast live via webcast, and may be accessed through Cielo website at ri.cielo.com.br/en, where the presentation is also available. Participants may view the slide 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 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 open exclusively for question and answers, which will be preceded by a message from the CEO of the company, Mr. Gustavo Sousa. [Operator Instructions]

I now pass it to Mr. Gustavo Sousa.

[Gustavo Henrique de Sousa, executive]

Hello. Thank you for joining our earnings call. Before opening for Q&A, I would like to start this conference with some highlights from our first Q 2022 results. Our bottom line reached BRL 185 million in the quarter, printing a 36% growth year-over-year on a recurring basis. Adjusted net income growth came strong despite the pressure in our net investment due to the hike in the SELIC rates as compared to the first quarter 2021.

Our operational trends remained solid. We posted strong growth in recurring EBITDA both at Cielo and Cateno. At Cielo, this metric showed an increase of almost 40%. Our acquired core business keeps improving as a result of the measures we implemented in the last several years. It's important to note that we start to see more rationality in the competitive environment, which is important to maintain the strength. Operational performance was pushed by higher volumes, growth in the prepayment business and discipline in costs.

TPV grew 24% year-over-year. It's the best first quarter in terms of TPV average. TPV performed well in SMB and even better in large accounts, where we saw a growth of 30%. It's worth mentioning that we haven't changed our strategy in the large account segment. We stay committed to prioritize profitability over volumes. Growth came because these large accounts customers have a good perception of the value we deliver to this segment and because our commercial teams have been gaining productivity, both in the SMB and in the large account segments.

We keep fostering the prepayment business, reaching an all-time record in capital allocation and acquisition of receivables and automatic prepayments, which is a result of our strategy to diversify revenues and optimize returns of the company's cash position. Following the increase in volumes and prepayments, we also saw an acceleration in our revenues with a growth of 14%.

In the first quarter, we didn't have the full impact from repricing. We initiated these measures in January with a gradual approach, which generated somewhat limited impact on the reported revenue yield in the first quarter. In the presentation available in our site, we shared revenue yield information from April.

Looking at the cost side, we saw again a nominal drop in normalized expenses, even with an increase in the initiatives we are making to improve service quality and with a challenging environment in terms of inflation. We are carrying our cost cutting efforts carefully with responsibility, establishing a strong cost control culture in the company.

We had a good quarter indeed, and not only because of financial performance. In the first quarter, we announced the sale of MerchantE. This transaction was a milestone for us since it represents the end of the divestment cycle and allows us to turn the page and to concentrate all of our efforts on core business and to keep evolving in the implementation of our strategy.

Looking forward, we will prioritize even more our capacity to attract and retain customers. We had an objective to resume growth in our client base. We understand that changes in the commercial strategy of our main competitors, which increased the size of their sales teams, drove a hike in structural churn of the industry, a reality we will need to cope with to reach that target. We are evaluating alternatives to curb churn and keep increasing productivity on the different distribution channels. Expanding the sales team is always a possibility, but we will be very careful when it comes to increasing the size of our sales force. We don't want to indefinitely keep increasing sales force, continue expanding Cielo's and the industry's cost structure. However, we will defend our share in the SMB segment and seek to resume growth in our customer base.

Finally, I would like to emphasize our commitment to repositioning Cielo in terms of quality of service. We presented in our previous earnings calls milestones related to improvements in our operations. Our focus right now is to end the cycle of business transformation, repositioning Cielo's perceived service quality.

Once again, I would like to take this opportunity to thank our shareholders for their trust and our employees for their dedication. We can now move to the Q&A section. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Tito Labarta, Goldman Sachs. Please proceed.

[Daer Labarta, analyst]

A couple of questions. First, on the revenue yield. You mentioned that it increased to 76 basis points in April. Just to understand why sort of the sudden increase in April, when in 1Q, I mean, you were only slightly higher than in 4Q? So did something change in your strategy on the repricing in April? And is that something that can continue? And as you -- would that have any impact on churn?

And then my second question is more related to Cateno. You mentioned you had lower operating losses and also reimbursements related to Ourocard. Just want to understand, is that recurring? Is that onetime? I think it was like BRL 53 million, just to understand the recurring nature of that. Or some of that is onetime?

[Filipe Oliveira, executive]

This is Filipe. First, on your revenue question. Indeed, we had a reclassification of our repricing strategy during the course of April. What we did in January was basically shy repricing, trying to understand how the market was going to respond and trying to understand what the churn levels would be. And we gave ourselves a few months to measure the effects of those repricing initiatives. And what we've seen is that churn has been lower than what we expected, that's one. And second, the competitors started repricing at even higher levels than what we expected. So with this new information, we decided to move forward with a little bit more of an aggressive approach in this price repositioning and that's why we have the higher yield in April.

Looking forward, we don't really give any guidance looking forward. That's what -- the number that we gave is already, in our view, some form of formal guidance regarding the quarter. However, we are going to continue measuring what's that in terms of churn. We're going to approximately matching what's happening in terms of pricing with the competition, and we will adjust our strategy as time goes by with this new information.

Regarding Cateno and Cateno cost, basically, the lower losses that we see in the P&L are the result of increased efficiency in managing losses and managing fraud has been done in the side of Cateno. And we understand that those operational improvements are -- they are recurrent and they will keep benefiting in the future. Of course, the company has some sort of loss as risk, and we never know how that's going to behave in the future. Or I heard a company, it has been improving its capability in that sense.

[Daer Labarta, analyst]

Great. Just one follow-up on Cateno. First, on the reimbursements related to Ourocard, can you quantify that? And is that recurring? Or is that onetime?

[Filipe Oliveira, executive]

We had a variation. So if you compare it year-over-year, last year, we had a reimbursement that have -- that was returned. So this we have a [Audio Gap] and that can change over every quarter. Last -- the last year, we had a reimbursement that has been returned to the [Indiscernible] from Cateno, so that's almost nonrecurrent because we shouldn't see that level of the payback from Cateno.

And when we look at this quarter, we have BRL 8 million that has been paid to Cateno from Banco do Brasil and that could be recurring. We don't know exactly what the level is. It depends on exactly what the volume is going to be and other variants in the contract, so we can't really give any guidance. But it is expected that the number that we had last year is probably not going to repeat itself, okay?

[Daer Labarta, analyst]

Okay. And sorry, that number from last year, is that related to the BRL 8 million from Banco do Brasil?

[Filipe Oliveira, executive]

That's last year's and minus 20 that you see in the yearly comparison for the first quarter of 2021. That's a minus 20.5.

[Daer Labarta, analyst]

Okay. Perfect. If I can ask just one follow-up. On the -- are you still repricing into May? Have you paused that? Just to get a sense of if there's still some more offside, I know you don't give guidance, but just is that a strategy? Are you still in the repricing mode?

[Filipe Oliveira, executive]

We're going [Technical Difficulty] we're going to do some [Indiscernible]

[Daer Labarta, analyst]

Sorry, Filipe, you cut out for a minute, so I don't know if it was me, but I didn't hear your full response.

[Filipe Oliveira, executive]

Can you hear me now? Yes? Okay. So basically, we're going to keep looking at the market dynamics and see how it's going to evolve over the last -- over the next months. And we'll adapt our strategy from there. We don't have a strategy set out for May yet.

[Operator]

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

[Gustavo Henrique de Sousa, executive]

Thank you, everyone, for participating. And if you do have any other questions, please follow up with our IR team. Thank you very much. See you next time.

[Operator]

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