CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Thank you, and good morning. Welcome to Cielo's Q1 2024 Earnings Conference. Joining us today are Mr. Estanislau Bassols, Mr. Filipe Oliveira, and Mr. Daniel Diniz. This event is being recorded and streamed online via Zoom and will be available for replay at the company's IR website at ri.cielo.com.br. Before we proceed, we'd like to clarify that any statement made during this conference relative to Cielo's business prospects, projections, operational and financial targets are based on the company's management beliefs and assumptions as well as information currently available to the company.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions seeing as they relate to future events and, therefore, rely on circumstances that may or may not materialize. Investors and analysts must understand that general economic conditions, the state of the industry, and other operational factors may affect Cielo's future earnings and lead to results which are materially different than those expressed in such forward-looking statements. Leaning on the material published at the company's website, this conference will be devoted to the question-and-answer session, which will be preceded by a message from Mr. Bassols, CEO of the company, featuring the highlights of the quarter. [Operator Instructions]

I will now turn over to Mr. Bassols for his opening remarks.

[Estanislau Llobatera Bassols, executive]

[Interpreted] Hello. Good morning. Thank you all for joining our Q1 2024 earnings conference. Before we open the call for questions, I'd like to highlight some advances we've made across various areas of our company and the results we've attained during this period. We ended the quarter with a net profit of BRL 503 million. This is the highest recurring net profit since the first quarter of 2019. It marks our 11th consecutive quarter of year-over-year growth.

Moreover, our return on equity reached an impressive 18.7%, making it one of the best in the industry. In this context, I'd like to emphasize the ongoing evolution of Cielo's financial results. Our efforts to optimize ARV profitability and enhance funding structures have made us even more competitive in the market, resulting in year-on-year growth of BRL 115 million.

Furthermore, our focus on tax efficiency and cost management continues to have a positive effect on these results. More specifically, our initiatives to optimize the network of POSs, coupled with our increasing use of data and predictive models, have successfully reduced costs. These efforts underscore our unwavering commitment to a relentless pursuit of efficiency opportunities. Our commitment to efficiency is an integral part of our transformation program PraCimaCielo.

We continue to invest across various fronts to enhance our technological portfolio and streamline our processes. Bearing in mind that, among other things, PraCima aims to explore new frontiers and efficiency; two, innovate the payment industry; and three, pave the way for new avenues of business.

Every quarter, we've shared with you the achievements brought forth by this program. As we reflect on this latest period, one notable achievement in the products and technology domain is the 33% reduction in time to market for implementing enhancements and launching new solutions.

While we've made significant progress, we continue to work on the necessary developments to achieve best-in-class status in our digital and UX/UI journeys as well as our processes and risk management. Our efforts and investments will keep us up to date and put us ahead of the competition.

Additionally, we are strategically investing in distribution capabilities, particularly through our banking partners. This journey allows us to identify process improvement opportunities that will lead us to the pinnacle of expected productivity. These investments span processes, back-end systems, integration and technology. Although this channel requires further effort to reach the productivity levels of more experienced sales representatives, ultimately, it has the potential for superior productivity when compared to traditional door-to-door approaches. These examples demonstrate Cielo's engagement and the adoption of important initiatives.

Another milestone is the first quarter of the Instala Direto program, which was more widely adopted across banking channels. This solution enables on-the-spot delivery of POS devices during sales transactions. It already yielded highly positive results within our own channels. Notably, in the first quarter, over 50% of our POS devices delivered to bank customers were used on the same day of delivery, a substantial increase over the 10% same-day usage recorded in the previous quarter.

On that note, I'd also like to highlight the following achievements from the first quarter. In terms of cashless solutions, Cielo played a pivotal role in handling payment transactions during the Lollapalooza festival, one of the country's greatest pop music events.

We've also made headway in the Cielo app and our Cielo Tap solution, including the innovative tap on phone feature. This environment of continuous evolution and investments in people and processes is essential to keep Cielo at the forefront of innovation in the payments universe. All of this becomes possible when tied to a digitalization agenda with an increasingly intense use of data and AI integrated technologies to enhance our customers' experience.

Lastly, we remain committed and eager to advance in our transformation program and in the strategic objectives set for 2024. We believe that the investments made so far have already yielded significant structural results and that we are on the right path. However, there are still opportunities to be seized, and they will remain a constant focus for the company as we strive for efficiency and value delivery to our customers.

Once again thank you for your time. And now let's proceed to the question-and-answer session.

[Operator]

[Interpreted] [Operator Instructions] Our first question comes from Mr. William [indiscernible] with Itaú BBA.

[Unknown Analyst]

[Interpreted] We have a question about the larger provision that you demonstrated this quarter. We wanted to understand whether this was really one-off or whether there was any operational issue involved? I'd also like to know if we should be thinking about any recurrence in this impact for the following quarters or whether we should see it as really one-off?

[Estanislau Llobatera Bassols, executive]

[Interpreted] Thank you for your question. This was actually a systemic incident, which was simple and has already been addressed. There's really no threat to the future of the company. We do not expect this to affect any future quarterly results.

[Operator]

[Interpreted] Our next question comes from Mr. Kaio Prato with UBS.

[Kaio Penso Da Prato, analyst]

[Interpreted] Well, first of all, I'd like to ask about your TPV performance this quarter. We saw a decrease by 10% quarter-over-quarter and 1% over 1 year earlier. So if we consider the industry's record, the industry should be or your TPV should be growing 10% year-over-year right now. So that shows a loss of share for you. I'd like to hear from you how you're seeing these figures. And should we expect some change in the commercial area and whether this stems from a movement from the competition. Also, the commercial change that led to the one-off provision for this quarter, did that lead to any sort of churn for you that was different from what you expected for this first quarter, and how that's been going forward in early Q2?

[Estanislau Llobatera Bassols, executive]

[Interpreted] All right. Let's start on a simpler note. We do not see any consequence from the one-off operational issue on our churn. We do not expect any substantial impact of that in the near future. As for TPV, over the course of last year, we saw a decrease in year-over-year. And also in quarter-over-quarter terms, this was slightly different, as you said. But regardless of that, our main lesson, well, we are going into large commercial expansion via the banking channel, and the waves of that are showing that we have significant room to improve both our processes when it comes to sales. And with regards -- coming to the state of the art and the back end, improving the balance between time to market and other aspects.

And just to give you an example of how we onboard our clients or identify the clients that are at the branch and need a different approach than those that call to buy. And we are trying to move forward in all of these processes, which require significant investment in technology, on the one hand for products and services, and on the other hand, one thing we did not imagine we would be learning was that the time it takes for a DDN, as we call it, the sales support for banks to reach maturity is a lot longer than what we have when it comes to door-to-door sales.

On the other hand, it may reach the door-to-door approach profitability much faster. But what we see in terms of profitability for those that reach maturity is much higher. So the result of what we're seeing in terms of sales expansion should mature in about 6 months or 6 months longer than what we see for the door-to-door approach. And peak maturity should involve a slower upward curve than what we were used to seeing.

[Operator]

[Interpreted] Our next question comes from Mr. Andrew Girardi with Morgan Stanley.

[Unknown Analyst]

I'm going to ask in English, but feel free to reply in Portuguese. Two quick questions, one on funding and one on the prepayment business. The first question on funding. I see that one of the FIDCs was, I suppose, closed during the quarter. I'm curious why that was the case and whether that will be the status quo moving forward given that now your total FIDC balance has been reduced materially? Maybe you plan to open a new FIDC later? Kind of curious what your view is there? And then just when I look at total borrowings for the business, short-term debt also reduced a lot. So kind of curious how you're thinking about funding and how that might evolve throughout the rest of the year?

And then the second question, I realize you guys are optimizing the ARV line. So the ARV volumes declined pretty materially in the first quarter. I'm wondering if Q1 is a good benchmark for the remainder of the year or whether you expect that to increase gradually as the year continues?

[Filipe Oliveira, executive]

Andrew, this is Filipe. First, about the FIDC. Cielo has adopted a strategy of optimizing the funding costs to match the average duration of the ARV operations with the funding structure. Just to give a little bit of context there. We had, back in 2020, a little bit of a dead squeeze in Brazil. So we decided to create a longer-term, more stable funding structure for the Receba Rápido product, which is a product that is, in our opinion, a stable and heavy commitment to our customer in the long term. So we match that with long-term funding. And what happened since 2020 is that Receba Rápido hasn't grown as much as Cielo expected it to grow. So Cielo was using some longer-term funding with FIDCs to fund shorter-term obligations, which was inefficient in terms of cost of funding.

So since the end of last year, we have been optimizing our debt structure in order to match the duration of the ARV operations to the tune of their liabilities as well. So with that, we have reduced the FIDC structure, as you mentioned. And that's something that we want to keep doing, right? So this optimization, we understand that this is heavily positive for the company. And as a big consequence of that, our net financial results have improved in this quarter, even though we had less ARV results overall. So we believe that this strategy of matching the cost of funding or the duration of funding to the duration of the ARV operations has been highly successful, and that's something that we want to keep doing in the future.

Regarding the ARV optimization, you have a good point there. Cielo has decreased its total exposure to the ARV operation quite significantly from year-to-year and quarter-to-quarter. So if you look at the total capital allocation or funding allocation from last quarter, we had a decrease of 24.2%. But on the other hand, when you look at the ARV revenues, we had a drop of only 3.3%. So that means we have been able to increase our effectiveness in selling at higher rates to better customers while reducing the total overall cost of funding. So this has been highly accretive and this has been highly positive for the net financial results, and that's something that we are keen to do in the next quarters as well.

[Unknown Analyst]

Got it. And just if I could follow up real quickly on the first question. Also on the balance sheet, I saw like the short-term borrowings fell materially. Does that also have an impact to your financial -- your interest expense for the remainder of the year? I'm trying to gauge like to what extent the interest expense could actually continue to fall from here?

[Filipe Oliveira, executive]

Yes. That's a factor of how much we sell in terms of prepayment, both in ARV and Receba Rápido. So I can't really give you guidance on what the final number is going to look like. But what we have been seeing as a trend and the average cost of funding and percentage points dropping over the last couple of months. So we have been able to be a lot more efficient in getting new funding at cheaper rates, especially because we have been focused a lot more on the short-term funding as well.

[Operator]

[Interpreted] Our next question comes from Mr. Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

[Interpreted] I have a question about Cateno. We saw there was more pressure in the cost of services. And our impression is that, that may have something to do with Ourocard. So I'd like to ask you, where has that pressure on Cateno's costs come from? And how long do you expect that to last? And when should it return to normal? Thinking more about the margin for Cateno on your side? That's my first question.

And if you allow me a second question, this week, we saw the tax reform bill and it's one of its earliest drafts, and it's still early, but one thing that caught our attention is that payment firms were expected to go into the special banking regime. I'd like to hear from you if you have any understanding of that? And if you think this should lead to a decrease in your tax rate, because right now you're paying [indiscernible] 9% something in IFRS. And if you reach a rate that could be changed, if you expect to see any decrease? So whatever your take is on tax reform, there are obviously a number of other topics involved, but whatever you can tell us about the tax reform, it would be very helpful at this point.

[Filipe Oliveira, executive]

I'll start with Cateno and then Estanis may address the tax reform issue. Well, Cateno is at a higher point in its investment cycle. You saw that in our statement. Especially this quarter we saw an increase in embossing rates, something we expect to be positive for the business in the long run. We cannot provide any guidance relative to the future of Cateno within Cielo, but we can tell you that Cateno is an important point in its investment cycle.

[Estanislau Llobatera Bassols, executive]

[Interpreted] Thank you, Filipe. As to the tax reform, we have several fresh analyses here. And to your point, yes, we do expect to fall under the special regime. As for rates, it's still early to say, but so far, we're looking at it with a positive set of eyes. But that being said, the process is involving every stakeholder, and it's being built on a very technical basis. And all things being constant, that should establish a good governance for those decisions to be made. Bearing in mind that no final decision has been made yet, so lots of changes may still occur, and we are paying close attention to that alongside the entire industry. So again, so far, it seems really positive.

[Yuri Fernandes, analyst]

[Interpreted] Perfect, guys. If I could just follow up on the Cateno side. How long do you expect the investment cycle to last? Is it a 1-quarter thing, a 1-year thing, just so that we have an idea?

[Filipe Oliveira, executive]

Well, we do not expect the time horizon to be that long, but we really can't provide any specific guidance.

[Operator]

Our next question comes from Mr. Wagner Biondo with Genial Investimentos.

[Wagner Biondo, analyst]

[Interpreted] Well, we have been seeing Cielo developing programs such as PraCimaCielo and hiring new help, but we're still seeing a decrease in the number of customers and a decrease in the TPV. So I'd like to hear a little bit more from you about how do you expect to turn that around and start increasing the number of customers and increasing your sales in retail and your TPV? And also understand a little bit better what have been your challenges to at least keep your customer base steady and begin to grow your market share again?

[Filipe Oliveira, executive]

Thank you so much for your question, Wagner. When we look at what's necessary for us to grow in a robust way, not only in terms of client numbers, but also to grow our market share, I think we may have 2 different elements to 2 different sectors. And I'll go into the elements first.

First of all, we need products, services, user experience, and user interface, all on par with what the industry has, and we are making efforts to precisely tackle that. A lot of PraCimaCielo approach is just that. We are looking not only into services, but also products. And also, there's something what has to do with distribution. And on the distribution side, what we've seen for nearly a year is one of the company's most important colleagues is to use its banking distribution arm in an excellent way.

And there's a challenge that this entails, which is for our sales agents to help us, they need to understand about the institution they're working with, whether that's Bradesco or Itaú or Banco do Brasil. They need to understand Cielo's products. They need to understand Cielo's processes. And they need to deal with stakeholders on both sides. And what we came to understand is that it takes a lot longer for them to reach that than it takes to train someone to work on door-to-door sales. So what we're working on is how to reduce that time lag. What we understand today is it would take us another 6 months to be able to match the sales capabilities from both sides. But again, those capabilities without what I mentioned before, sales, services, UX, UI and other features, it wouldn't move forward. So this is a trail that we're blazing in parallel. And this has an impact on both sides. On retail, I think that's precisely the answer.

For resellers, there are 2 aspects. First, we need capabilities to dematerialize our POSs, and we're already working on that. Those are the arguments we worked on over the last 4 months. And again, these are newly launched products. So they involve all of the improvements that we've made on the products we're launching. But there's another aspect, which is, it takes an end-to-end journey that's fully digital. This is something that we're still working on, and it takes longer. So to grow the number of clients in an industry that's thriving, but especially amongst smaller customers, that's critical.

To grow our TPV, what I said is critical on the retail side, but what we're also doing on TPV is to grow, first of all, our number of clients, and then our market share, that's the journey we have outlined for the next 6 months.

[Operator]

[Interpreted] Our next question comes from Mr. Thiago Paura with BTG Pactual.

[Thiago Paura Mascarenhas, analyst]

[Interpreted] Estan, Filipe, Daniel, I just wanted to maybe follow up on what you see when it comes to the revenue yield trend. We continue to see the data show that the market is still operating at a very rational state. We still see a negative pressure on price, especially because of penetration and the effect of your new mix. But over time, there's an expectation that with the decrease in the benchmark interest rate, prices will reflect that. I just wanted to understand where you're at and what you think about this trend? And if you could maybe separate each of the segment, if there's any more specific trend for either one of them and so on, that would be great.

[Filipe Oliveira, executive]

[Interpreted] Thank you for your question, Thiago. This is Filipe speaking. In general terms, our head is still at the same place, we're very rational. And for each client segment, we make the matching decision. We have not seen any change with regard to what the market has been doing. It's still very rational. We expect a more rational scenario for the market in general, and there's no incentive for Cielo to move away from that balance.

Now looking at SMB, the message is also the same. We see the market is very rational, too, and Cielo made some very interesting movements that moved the revenue yield up, and initiatives in churn and TPV were even better than what we saw in the last year, which shows the market is still rational and not very aggressive when it comes to price and shows that it is still favorable. What I see today, being very honest, is there's little incentive for anyone to move away from this rationality. When we look at our P&L and that of the customers, we see little room for change. And as I mentioned before, the situation is simply not favorable. If we had to spend more money to increase our number of customers, while not gaining market share, it's more difficult when we compare, for example, to sales operations, most of them dealing with services. So I do not see a rational incentive that makes sense for us to lower prices in the medium term.

[Estanislau Llobatera Bassols, executive]

[Interpreted] If I may add to what Filipe just said and maybe underscore what he just said. Again, elasticity is still positive in the market. So we do not see anything different with regard to that. We're working at full capacity in diversity and analytics to be able to assess that elasticity client to client. We see that the market is also growing those capabilities exponentially, which is very positive, too. But on the other hand, I see that the competition has moved to a different arena, which is building skills and complements to their products, and it is precisely on that arena where we need to evolve. So PraCimaCielo is pricing for major investments in generating and building on existing skills.

Now Filipe mentioned this quickly, but it is also important to stress that when we look how the industry has organized itself within the 4 parts unit, there's a significant share, say, you look at BRL 100 in MTA, between BRL 78 and BRL 80 of that goes to something that's shared by everyone, so taxes and prepayment. And then there's time to market. So there's little space to imagine that the competitive advantage in price will be constant regardless of what that advantage is.

So this vision, which seems mature across every player, because it is structural, I think that, that allows us to expect the current status to persist, and this is a status of more maturity, which what we've seen for a few quarters, and we do not see any new element that might change that.

[Operator]

[Interpreted] The question-and-answer session is now concluded. Let me turn over to Mr. Bassols for his final remarks. Please, Mr. Bassols, you may proceed.

[Estanislau Llobatera Bassols, executive]

First of all, thank you to everyone who joined us in this earnings conference. And remember that we're still focused on working to improve all the variables that we need to work being best-in-class and improving our UI and UX and also improving the distribution capabilities for these products, so that we can begin to grow again our market share and our profitability as we've been pointing towards in the last few quarters, as we said earlier. So again, thank you, everyone, and have a great day.

[Operator]

[Interpreted] Cielo's earnings conference is now closed. Thank you for joining us, and have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]