CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and thank you, everyone, for standing by. Welcome to Cielo First Quarter of 2023 Results Conference Call. With us here today, we have Mr. Estanislau Bassols, Filipe Oliveira, Daniel Diniz and all the company's executive officers.

I'd like to inform you that 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/en where the presentation is also available. We'd like to remind you that participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Before proceeding, we'd like to mention that forward-looking statements that may be made during this conference call related to business prospects of Cielo, projections, operating and financial goals are beliefs and assumptions of the company's management as well as information currently available to the company. Forward-looking statements are no guarantee of performance since they involve risks and uncertainties and assumptions since they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions related to the macroeconomic conditions, industry and other factors could also affect future results of Cielo and may lead to results that differ materially from those expressed in such forward-looking statements.

Based on the presentation published on the company's website, this conference call is open exclusively for question and answer, which will be preceded by a message by the CEO of the company, Mr. Estanis. We have the highlights for the quarter. [Operator Instructions]

I pass it to Mr. Estanis for his opening remarks.

[Estanislau Llobatera Bassols, executive]

[Interpreted] Good morning, everyone. Thank you very much for taking part in our conference call. We have been very clear in our conversations with the market around our focus on profitability and value generation, which are the main drivers for our business with Cielo. The first quarter results reflects this agenda.

We reported a net income of BRL 441 million, a strong growth of 131% over the same period of the previous year. The result was driven by yield in our fee business and costs and expenses management as well as Cateno's performance, which showed high volumes and margin year-on-year.

In our core acquirer business, the revenue [ reached 0.78% ]. The [indiscernible] margin is mainly a result of the focus on our customers' profitability in the SMB segment, but also lower volumes in the accounts given the higher competition in the segment.

Regarding SMB, we have prioritized the most profitable niches, which impacts the TPV of the segment. [indiscernible] to maintain the focus on profitability, but to resume TPV and market share growth in the SMB. To achieve that, with the recently concluded margin expansion, we are implementing measures to boost productivity in our channels, and we are investing to improve customer service and, thus, reduce churn. We expect that the efforts being tracked in the coming months with relevant results in terms of TPV to be received in the third quarter.

Throughout 2022, we have implemented improvements in our acquisition of receivables processes. The growth of ARV results reflects those efforts and also conduct provisions. In times of greater credit restrictions, retailers know that they can count on Cielo that we seek to help them with the management of their cash flow, and we have differentiated position in terms of financial strength. In that scenario, we have achieved a record penetration of prepayment products, elevating the TPV of credit cards, 26%.

In addition to the financial results, I would like also to share improvements in our agenda regarding quality of services. We have been relentless in this agenda, and we have begun to reap significant results. We want to position ourselves as best-in-class in quality, and we want to have faster results. Having high-quality relationship with our clients is instrumental to the strategy to position ourselves in the center of the ecosystem, expanding developer position agreements, financial service and value-added solutions.

At this sense, we reported in our results presentation evolution in the customer service indicators. The indicators in the presentation are, for example, we have made advances in the entire customer's journey while interacting with Cielo, we have reviewed all the customer digital onboarding, improved services actually across inbound channels and we're increasing data analytics. We are using predictive models, for example, to anticipate problems with terminals and to interact with our customers proactively before they need to come to us.

Finally, I would like to cover a little bit about Cielo's transformation process. In previous conferences, I had the opportunity to highlight the recent advances in the company. Much has been done to improve focus and the soundness of our balance sheet and our capacity to compete effectively. But in a higher commodity market like payments industry in Brazil, transformation is an ongoing process. Cielo is no different.

We have made a new leap in payment card optimization, seeking new frontiers of financial efficiency to delight our customers; innovate and gain relevance to our clients beyond the payment core, which includes financial services and value-added services agendas; and finally, operate as a real tech company, which involves cultural processes and work methodologies with a greater focus on data and analytical capacity. We have made -- making investments, adjustments to the organization structure to move forward on this front. I hope to share highlights of this journey in our upcoming conversations.

Again, thank you all for being with us. Now we can move on to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from -- and it will be in English, and you're going to listen to this in advance translation into Portuguese. Our first question comes from Tito Labarta with Goldman Sachs.

[Daer Labarta, analyst]

I had a couple of questions, if I can. I guess, first, on the TPV growth that we saw in the quarter, a big drop. If you can help us just think about it. How much of that was related to seasonality? How much of it related to slowdown in just the industry? And how much in terms of competition where you could have lost some market share? We did see SME segment fall a little bit less than the large accounts, but both kind of fell in the quarter. So just to think about the TPV growth outlook and the competitive environment.

And the second part of my question, we did see good growth on the prepayment income, which grew quite a bit despite the weaker TPV. So just help us think about how the -- is there more upside to that from here? And how much of that will be tied to the growth in the TPV over time? TPV growth is slowing. Would that naturally come down? Just to think about those 2 different dynamics here.

[Estanislau Llobatera Bassols, executive]

Thanks for your question. When you decouple these questions among the 3 main segments of the company, Large Accounts, Small Medium Companies and Long Tail, we can see a different perspective. On the Long Tail, the client base is dropping and answers for most of the -- we have lost in terms of volume of clients, 95% quarter-over-quarter. Here is the movement that we have done a few years ago of not incentivize the POS.

In terms of the Large Accounts, we can see that the competence has focused in few clients. That answered for, I would say, most of what we have lost. And on this segment, we decided to work only with positive margins. And we are sure that these clients have been going to the competence in negative terms.

When you think about the small medium businesses, we have focused in the niches where we can find an amazing profitability, but also a lower volume. And that answers a big part -- a big portion of what we have lost quarter-over-quarter.

Having said that, we are working on how to decrease the churn, how to scale the volume of the sales coming from the sales force that we have put in place in the last quarter. And finally, we have been working in digital channels in the digital onboarding and also in how to scale the pilots that we have been working with the banks to make them more with a higher productivity. I don't know if I answered your question.

[Daer Labarta, analyst]

Yes, no, that's helpful. So just, I guess, maybe think about what that means for revenues from here. I mean it sounds like you want to try to reduce a little bit the lower volumes going forward. But you were also able to improve profitability, right, so that take rates kind of come up quite a bit. So when we think about the relationship from here with that TPV growth and revenue growth, if you do lose market share, will you be able to offset that with better pricing? Just to think about what that means for revenue growth going forward.

[Estanislau Llobatera Bassols, executive]

Think about revenue growth moving forward, we will add what we are doing well, that is the focus on the more profitable niche with other strategies to increase the volume. So what -- our main objective here is to have both, keep growing on revenues, but also keep growing the profitability as a final result.

[Daer Labarta, analyst]

I see. Okay. Great. And then the second question I had on the prepayment, right, which -- that jumped quite a bit and just think how sensitive should that be to the TPV growth. Is there room to continue to increase that, particularly if you're not growing TPV as much?

[Filipe Oliveira, executive]

Yes. Tito, this is Filipe. I'll take this question. So we believe there's a few factors behind the success of the ARV product in this quarter. The first one is the internal restructuring that we have done in selling this product over the last year. And we have been seeing steady results if you look at both total TPV that's been prepaid and also revenues over the last quarters. So that's the continuous improvement that we've been implementing over the last year that we believe that's still going to have effects in the quarters coming.

The second effect that you see in the rise of ARV revenues is the interest rates, right? So we had an interest rate increase in Brazil. We have managed to keep the same levels of spread that we had before the increase. So that has been extremely profitable. And we believe that regardless of whether the interest rates goes up or down, we can still keep the same amount or the same levels of spread that we have currently.

The third point here that's very important for us specifically this quarter is that we have seen increased demand in prepayment activity, especially from the very large accounts because Brazil is currently experiencing a credit tightening, given just some corporate events that have happened in the beginning of this year.

So with that increased demand, we have been seeing increased spreads as well, even though it's been lower than we expected initially, but mostly increasing volumes. We expect that to remain in the next couple of months, at least, but it's hard to predict whether or not this credit tightening will happen in the long term.

[Operator]

Our next question comes from Thiago Paura with BTG Pactual.

[Thiago Paura Mascarenhas, analyst]

[Interpreted] Congratulations on the results. I have 2 points to ask. One is along the lines that was commented by Tito, it's nearly a follow-up in terms of volume. Everything was clear in terms of results. And the initial explanation you gave, you have been focusing on profitability, not only on large accounts, but also SMEs. And the negative point of all this is that you're going to lose -- tend to lose a little bit of the market share.

But our question is, how can we understand or any -- how will your appetite go along those lines? Will be -- would there be a time when Cielo will be more aggressive in terms of pricing with subsidies in order to protect the market share? Or if this is the way we are going to go down the road? And if this is the case, what would be the strategy for the SMB segment, which is where the biggest challenge lies, right? Correct me if I'm wrong. Basically, this is it.

[Estanislau Llobatera Bassols, executive]

[Interpreted] First of all, I would like to thank you for the question. I'm going to start from the end, okay? I'm absolutely sure that we are going to provide them the subsidies for the segment Entrepreneurs. We are going to continue working on a profitable manner on Large Accounts. And we have the conviction that we're going to continue adopting a healthy pricing policy in the SMB segment. That does not mean that we are not going to add the strategy that we are employing with other elements.

So I'm going to talk about each of the segments. As for Entrepreneurs, when we think about the basis, it concentrates more than 80% year-over-year negative, okay, in terms of basis. I mentioned 95% of negative variation. On the other hand, it's not as representative in terms of TPV. In this segment, when we work with solutions such as payment links, QR code dynamics for mix payments and WhatsApp, we find that this is the right way to work with profit in the segment. It's clear that the democratization of the digital means of payment in the segment is not sustainable when we compare using the [indiscernible].

When we think about major accounts, in fact, along the year -- along of last year, we had a drop that came from more focus on some specific players in the 120 days. It was a drop of 15% margin on order, out of which 10% were concentrated in some clients. There was a margin which was marginally positive in Cielo, and there was an offer from the competition which was much lower than our price.

So this -- we understand that the way we have been operating is very limited for the competition. In 2022, you know that clients then have to kick back in conditions of equal prices. So we understand that this is a cyclic movement. And we are working on the major accounts to improve the profitability, the reliability because we understand that the clients will come back.

You mentioned the SMB segment, which is our biggest challenge. I can see that we have sent the word front and even though we have the price [ clearing ]. So -- because we want to work in a smart rate, we are going to continue breaking out the niches which are more profitable because we saw the results brought to the company on past quarters. On the other hand, we can add to what we are already doing and other actions.

One of the actions which we have already been implementing that we are enhancing, and it is [ time ], is related to the quality. The correct way of providing service to the client using analytics in order to [ enhance ] the client, delight the client to decrease the churn. On the other hand or the other is that we have just incorporated 400 salespeople being not reaching their peak productivity yet, which is likely to be reached along the second half of the year. So we are going to hold this strength of full capacity in the third quarter.

In addition to that, there has been work. We'd learn that we provide to them support together with partner banks. This support adds [ 2 points ]. It increases utilization level, which would help us in more sophisticated actions such as how to use banks, how to use the physical card. For many folks, these are more or less companies that, when we have the support, we understand that the conversion will increase a lot.

In addition to this, all this innovation can also be in the logistics client. And thus, we also can be installed up [ pending ]. And that is going to recover capacity a lot. So we are [ converting ]. So all those top [indiscernible], and I can scale them up this year. We have also been able to increase the productivity into the channels and also in the digital onboarding [ of this ]. Together, it may lead that when we're going to increase the capacity along the first half of the year. And in the third quarter, we are going to start seeing the results in a different way. This is what we expect.

Now [ everything ] is added what we have already been doing over the enhancing of our stability. We have been very clear in the conversations we have had with the market saying that Cielo wouldn't accept to see market share reducing. We saw growth in the SMB segment in this quarter, which was a little bit below for us to maintain the market share.

In addition to all those initiatives that were mentioned, which were very broad, there is evidence that we may need to have some expansion in the commercial front. So we want to improve the profitability by doing this. But we observed the results, we understand that now we may need to have a new expansion.

[Operator]

Our next question comes from Antonio Ruette with Bank of America.

[Antonio Gregorin Ruette, analyst]

I have two questions on my side. The first is related to costs. We saw there was an increase in the commercial force, so I would like you to talk about it. And where do you see opportunity is in the cost area, how this can be offset in order to avoid any decrease in efficiency in the future?

And also related to volumes, I think everything was very clear in the previous answer, but I would like to understand a little bit better how the volume of major accounts and that under [indiscernible] this is regarding the major accounts that you lost to reduce the -- and how this can affect the margin of contribution and profitability.

[Estanislau Llobatera Bassols, executive]

As I said before, we had seen accounts that accounted for the drop or accounts that were marginally profitable, and the scale is still very large. When we look at indicators compared to volumes, we see the indicators better. And what we do is pure mathematics. It's important to mention that when we look at the 15 percentage points of market share, that loss in terms of profitability was very low. Again, the numbers are all there, demonstrating all this. Have I answered your question, that part of the question?

[Antonio Gregorin Ruette, analyst]

Yes, it's clear.

[Estanislau Llobatera Bassols, executive]

Okay. Great. And as for the cost inflation, as I answered before, first, relationship distribution, part of distribution is digitalized [indiscernible] slower, more encouraging relation to the [indiscernible] from the like branches or like partners. All the [indiscernible] agents that are working through this have a naturally higher [indiscernible] working on the [indiscernible] segment. So we improved the capture in those cost, and we also have some opportunities in terms of automation in this digitalization that we are part of this. We have to make investments in the short term. So I understand that the banks [indiscernible] together to continue making investments, but we have our [indiscernible] and it's a return that will be seen in the short term.

So you will decrease almost, [ your delay ] is generally tied to Cielo and also with the client's journey. We are going to improve the operational results [ and will take some ] benefits to the company. It's a [indiscernible] but this is what we are seeking. Would you like to add something?

[Filipe Oliveira, executive]

Yes. I think investments work just upon [ theory and risking ], and it's hurting our P&L. If we look at the costs and we see the normalized costs and we have an increase of BRL 50 million, this is great, reached about [ 40% ] in terms reported from the call. And just so that we can services [indiscernible].

What's important to mention is that the gains that we had so far have a different nature of what we are going to have in the future. The cost could be offset by improving the service with [indiscernible] relation to the share loss, a big investment of cloud [indiscernible]. There will be a time when investments will stop and we're going to disconnect on the legacy since that. So this efficiency actions that we see that is to be implemented in the future will improve our efficiency in the future.

[Antonio Gregorin Ruette, analyst]

Can I make a follow-up in terms of volumes? In the previous reviews you've reached a potential loss [indiscernible] in the segment. How does it weigh considering the new pricing? Do you see any churn in the new pricing strategy? This is my question. That's a very important question. Would you make it halfway in our pricing total?

[Filipe Oliveira, executive]

We mentioned we have a niche client that can be more sensitive. Today, we can do something more precise than we did in the previous round indicators. It's still early to say, but it shouldn't be very slow, very similar behavior to what we saw in the pricing that we implemented beforehand. This is one of the points.

The other point is more specifically in relation to the relationship between prices in the market. As we see it, mismatch, it is more related to the capacity of channels, the sizing in relation to the different channels such as bank channels. This is something that is very broad for the company. I usually say that this price optimization based on the cost and [indiscernible] by the clients is something that has to be done continuously. It should be a one shop action. We have to go after the initiatives with higher profitability and also includes the quality of services so that we can be more sustainable in the segment.

[Operator]

Our next question comes from Kaio Da Prato with UBS.

[Kaio Penso Da Prato, analyst]

I have two questions from my side. The first would be about the [indiscernible] situation and also pricing. Despite of all the efforts that you have made and the actions of the commercial team, we understand that it has still [indiscernible]. We have seen this drop since the fourth quarter 2021 with a penetration basis of the company. So how do you see the dynamics? Do you understand that this is a result of the price? And what would be the strategy down the road in order to increase the penetration in those line? And how can it is with the higher price? And then I'll come back with my second question.

[Filipe Oliveira, executive]

This is Filipe speaking. First, looking at SMB, what we saw in the last year was a replacement of the -- our product to ARV and the cost of capture to play. But when we look at the tool penetration, including ARV and RR, we do not see that strong growth.

The second point in relation to the penetration is that our commercial focus about the last year was very focused on the pricing, repricing. So when we look at that, we waited a little time for the cross-sell. And we go into normalcy, you can understand that we can go back and resume growth in the penetration.

[Kaio Penso Da Prato, analyst]

Okay. Perfect. That's clear. And second question, I would like to after this first half with -- change, can you share with us the magnitude that comes from the prepayment [indiscernible] just add with similar to what we had last year was a bit higher than last year. And what's the impact to expect from the competition? So is the competition following suit?

[Estanislau Llobatera Bassols, executive]

Thank you for the question. In relation to the pass-through measures related to the interchange [indiscernible] that may impact the payment product. And what the regulator did was to decide or to resolve a problem that we have in the market because we use debit cards, and we have the interchange above the cost of transaction, I think the regulator avoid this from happening.

Related to the other question you asked, we reached into the action that we had in [indiscernible]. We did not have any sort of [indiscernible] details, but we had to say that it was a big [indiscernible] and it has affected [ earnings through the base ], the SMB segment, but it was related to the magnitude than the measure that was seen here at the end of March last year. This is what we can share with you.

[Operator]

Our next question comes from Eduardo Nishio with Genial Investimentos.

[Eduardo Nishio, analyst]

First question is about the regulation [indiscernible] area the fact the interest rates and of course, this case will impact all the chain. I would like to understand the opportunities for Cielo in this area. Is there any risk that will touch upon the chain of core acquiring businesses, considering all the discussions that are being made? And then I'll ask my second question.

[Estanislau Llobatera Bassols, executive]

Thank you for the question. We are monitoring this movement with a lot of attention. In fact, any changes that change the balance point and all the variables, of the parts and depending on how this is recomposed, the biggest risk is to have a decrease in the consumption. It's something that will adversely affect the consumers and the SMB segment and all that which will take part in this relationship.

And we have an expectation that the regulator is being very confident based on the exhibition guided by the industry and of elasticity. We look at it with a lot of caution, but we expect that rationality is going to come to the bank.

[Eduardo Nishio, analyst]

To mean that those changes do happen or the decisions that will happen in the short term, do you have any idea when the decisions will be made? Because discussions are being very intense at the moment, right?

[Estanislau Llobatera Bassols, executive]

Yes. We probably resorted to the same sources of information. It is difficult to see for sure when things are going to materialize. It's not the first time the market has been [indiscernible], something like this.

[Eduardo Nishio, analyst]

My second question is in relation to your technology. You're operating with [indiscernible] and another set of different systems. So how is the integration of those systems? How did you evolve? What was the migration like? How long does it take to build to the cloud? This is related to technology. Do you think this would be a hindrance, would be a problem for you to launch new products or to be more competitive in the market? Technology, things changed a lot in the past 5 years. How important is technology considering all the commerce that you made that had some results in 2020?

[Estanislau Llobatera Bassols, executive]

In my opinion, those changes were more related to other things, which were not related to technology. Yes, we continue using the same concept within all the [indiscernible] goes to the client. We are accelerating this migration, adopting cloud and service, and so native solutions in the cloud.

And with this, we are going to add additional costs as well as benefits in a very clear way. When we look at the core that we have, maybe it can be an advantage within the capacity of processes that we have nowadays. It meets all the demands of Cielo. And what about the future? We are going to look at all the overlaps which are significant. We are going to reduce the overlaps, and we are going to optimize the technological segment as a whole. And we are going to provide services and we are going to bring on this into our company.

The automation trail is very relevant and requires some investment, but we also observed that in terms of benefit, we see that automation decreases manual interaction and the client's journey becomes much more simple. So investments are made, right? At the end, our product is technology.

[Operator]

Our next question comes from Pedro Leduc with Itaú BBA.

[Pedro Leduc, analyst]

Going back to volumes and based on digitalization, you mentioned the 6 accounts that had moved to the competitors that impacted rather not the profit. So my question is, what's the size of this profile client, let's say, during your basis? And what would you do which is different to make them more profitable? Why have they gone to the competition?

[Estanislau Llobatera Bassols, executive]

I'll start here. Again, when we talk about major account segments, what happened is that the major accounts, when we look at their costs, even the marginal cost considering what is regarding the fixed costs, then we see the margin. The margin is more than a positive. When the prices are below, for sure, they are being upgraded in a negative way by the competitors because we can't compare costs among the segments. I have no questions about that. What brings to us the need to continue looking for the opportunities which may be new nodes, B2B nodes and we focus either operating in the segment of bigger accounts or maybe smaller accounts. And with our differentiator, we track those accounts with the same prices that were charged by the competition, and we want to reach the balance.

When we look at the segment of major account, we understand that major accounts have their own dynamics. So they have -- there is a base of prepayment and it's spread in it, payment installment in all e-commerce. So all this changed local lines of client [indiscernible] marginally positive [indiscernible] marginally negative. What I can say that all that coming on parts are in a positive way. And so we have to [indiscernible] this is how the segment as a whole to grow to B2B and government, just to give you example.

[Operator]

This concludes today's question-and-answer session. I would now like to hand the floor to Mr. Diniz to proceed with his closing remarks.

[Daniel Diniz, executive]

I would like to thank you all for attending this event. It just happened [indiscernible] that we have positive results. We reached a record of 26% of credit cards, which are very important results for Cielo. And Cielo has very solid results, and it's a very important portion of our net income. And analysts are not looking at continuing issue, which is very relevant point for us. And we are very optimistic in relation to the year, and our capacity to further move results in a solid manner and add value to our clients. Thank you.

[Estanislau Llobatera Bassols, executive]

Thank you.

[Operator]

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