CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2021-Q2

[Filipe Oliveira, executive]

Welcome to Cielo earnings release presentation for the second quarter of 2021.

Moving to Slide #4, we start with the quarter highlights. Payment volume increased by 29% year-over-year and 3% quarter-over-quarter. SMB and long tail volume grew by 49% year-over-year and 7% quarter-over-quarter, now representing 39% of total TPV. The company also made significant advances in its operational efficiency agenda with a new reduction in normalized expenses, which decreased normalized expenses by 5% year-over-year and 2% quarter-over-quarter.

The company delivered a net income of BRL 180 million in the second quarter of 2021, which represents a growth of 33% on a recurring basis comparison with the first quarter of 2021.

The company also made advances in its customer centricity agenda with improvements in logistics and the quality of customer service, which will provide an enhanced experience to our customers during the next quarters.

Now jumping to Slide #5. Social distancing measures still had an impact in second quarter of this year. In April 2021, we had 91.8% of Cielo's customers operating compared to around 97% to 98% [ in a normal month ]. Still that impact was significantly smaller than what was observed last year. When we look at April 2020, we had around 70% of clients operating within Cielo's space.

Now jumping to Slide #7. Our recurring net income recovered from BRL 135 million to BRL 180 million, which represent a 32.8% increase quarter-over-quarter. Our net operating revenue increased by 3.3%. Our EBITDA increased by 24.1%. Our EBITDA margin increased by 3.5 percentage points, and our net margin increased by 1.4 percentage points.

Now jumping to Slide #8. We show the last 3 quarters of the company and in comparisons with the last year's same quarter. This graph shows that net income has recovered on a year-over-year basis for the third consecutive quarter with the fourth quarter of 2020 with an increase of around 35%, the first quarter of 2021 an increase of around 45% and the second quarter of 2021 an increase of BRL 255 million.

Now jumping to Slide #9. Our TPV has increased by 29.1% year-over-year and a 3.3% increase in quarter-over-quarter comparison. Our active merchant base has decreased 2% year-over-year; and within the SMB segment, which is our focus, has increased by 15.2% year-over-year.

Our prepaid volume has reached BRL 18.5 billion in the second quarter of 2021, an increase of 71.5% year-over-year, and now reached a penetration of around 20%.

Now jumping to Slide #10, focusing on SMB and long tail. The growth in those 2 segments has reached 48.8% on a year-over-year basis. And those 2 segments have now reached a penetration in total volume of sale of 39.3%. Our total prepaid volume has reached BRL 11.2 billion in the second quarter of 2021, an almost twofold increase over last year's volume. And total penetration has reached 36%, an increase of around 8 percentage points over last year.

Cielo's revenue yield has remained relatively constant with a decrease of 0.02 percentage points over last quarter and 0.08 percentage points over last year. This decrease is mainly caused by the decreases of prices in the market overall due to increased competition; and has been partially offset by the improvement in client mix, product mix and 2-day prepayment.

Now moving to Slide #12. Cielo had another good quarter in terms of operational efficiency. Total costs and expenses have been reduced by 3.8% in comparison to the same quarter last year, and normalized costs and expenses have been reduced by 4.5% in comparison to the same quarter last year. The ratio between normalized costs and expenses and TPV has been reduced from 0.42% to 0.39%.

While strong spending control discipline will continue to be part of the company's day-to-day activities, we expect that, with further focus on service excellence and new initiatives to increase customer service, we may require additional expenses in the second half of 2021.

Now jumping to Slide #13. Cielo has increased liquidity through issues and strategic moves. In the first half of the year, Cielo has issued new funds for prepayment products and credit with FIDC Emissor, totaling BRL 6.5 billion; and [ FIDC BNDES ], totaling BRL 200 million. Additional to that, the sales of Orizon and plataforma Elo had total proceeds of BRL 509 million, totaling a liquidity increase of BRL 7.2 billion, yes, from those strategic issues and moves.

With that, average maturity of debt has dropped from 25 months to 16 months. And total cash position in the company in June 2021 has totaled BRL 11.9 billion compared to BRL 11.8 billion in commitments and obligations for the next 3 years.

Now jumping to Slide #15. Cielo's strategy continues to be focused on 3 main initiatives. The first one, which is the maximum short-term focus, is to reinforce acquiring position mainly through initiatives that will increase our quality of service and increase our commercial capabilities. The second main strategic priority is payments innovation, in which Cielo aims to continue being the most innovative payments company in Brazil. The third main strategic avenue is expanding operations in the value chain with value-added services, basically [ software ] and credit issues.

Now moving to Slide #16. Our short-term priorities can be summarized in 5 topics. Within those priorities, Cielo had significant deliveries in the first half of 2021: logistical improvements and the heroes pilot completion, the sales force expansion, evolution which aimed at joining the functions of hunting and farming within a new model called consultores de negócios, a reduction in normalized expenses, the start of WhatsApp P2P operation and partnerships on the value-added services agenda. Next step on those priorities will be expanding the heroes [ market ] in logistics, the continuous optimization of the commercial model, the review of remote customer service focusing on quality improvement and expanding working capital credit lines.

Now moving to Slide #17, here a deep dive on the improvements made in the logistics operation in the first half of 2021. We have 4 main points that have been implemented. The first of them is the implementation of [ instala direto ], which is a model in which a salesperson installs the POS at the moment of the sale and starts the onboarding of the client at that moment, aiming at reducing the lead time of installation of new equipment; adjustments on contracts, with a focus on improving SLAs; logistics process improvements within the company and also together with suppliers; the completion of heroes pilot, which is aiming to be the future last-mile logistics model for Cielo. And those 4 improvements have resulted in an increase of the percentage of installations performed in up -- 2 business days from 59% to 75%, an increase of 16 percentage points over March of this year.

Now moving to Slide #18, we give a more detailed view on the heroes model, which aims to be the next last mile model for the logistics of the company. In this model, an aftersales agent delivers, installs, gives maintenance and support to merchants and facilitates onboarding of this merchant in Cielo's ecosystem. These will be provided by Cielo's exclusive and uniformed field team, with an objective of delighting the customer and turning interactions into sales opportunities.

The result of the heroes pilot, which was conducted in 6 cities in Brazil, had a percentage of requests fulfilled on time, which is 2 business days, of 99.6%, which is a significant increase to the average of the current operations. Addition to that, the percentage of need of a second visit, in which a first visit wasn't effective in installing and satisfying the merchant, had dropped significantly to 1.2%. Those 2 factors have increased satisfaction of the customer with installation service to 96%, which is way above benchmark rates in the market in Brazil.

Next steps of this model will be the expansion of this model to 153 cities in Brazil, which represents 80% of new installations. We understand that those 153 cities are the cities that have enough scale to support this more personalized model of logistics. Implementation of the new logistics management system; and integration of logistics, commercial, sales and call center in order to provide a unified experience for the customer across our channels.

Now moving to Slide #19. Here we deep dive on improvements made in the commercial and sales side. According to what was announced by the company in the fourth quarter of 2020, the company was starting a commercial model restructuring aiming at joining the functions of hunting and farming into one function called business consultants. This new model aimed at greater efficiency in commuting; fewer customers per portfolio, providing a more personalized and closer relationship with the customer; and greater flexibility to direct commercial force actions. The sales force expansion that followed this has increased the number of salespeople from 1,500 to 2,000 people within the last 6 months and has achieved significant results. One of those will be the 30-day activation index 31% over the last 7 months.

Next steps in evolving this commercial model -- and which intensify focus on hunting. This focus was impacted negatively by the restrictions in circulation that have been implemented across the country in the first half of the year because of COVID. Spreading best practices from older and more experienced salespeople to newer salespeople in order to increase overall productivity of the sales force; and implementing new data systems, yes, in order to provide better recommendation, increased conversion of the commercial sales force on the field.

With that, we end our presentation of the second quarter results. Thank you all for listening.