CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Cielo's Second Quarter of 2022 Results Conference Call. With us here today, we have Mr. Filipe Oliveira 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/en, where the presentation is also available. Participants may see the slides 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-looking 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. Filipe Oliveira. [Operator Instructions].

I'll now turn the conference over to Mr. Filipe Oliveira for opening remarks.

[Filipe Oliveira, executive]

Thank you, everyone, for joining. I'm Filipe Oliveira, I'm CFO of the company. And I'm also joined here by Daniel Diniz, who is our Head of IR. First, I would like to present to you some highlights of this quarter and then we'll follow up with questions in Q&A.

So this quarter was marked by an operational turnaround of the company. We believe this was a turning point in our strategy of consolidating operational gains before we can move on to new revenue streams and to new strategies regarding additional payments, credit distribution and also value-added services and software.

This quarter, Cielo has presented a recurrent net income of BRL 383 million, which represents a growth of 112% year-over-year and 108% quarter-over-quarter. This quarter was also marked by the largest TPV of the company's history with BRL 221 million in terms of total transacted volumes, which represent a growth of 34% year-over-year and 11% quarter-over-quarter.

This was also a good quarter for total prepayment for volumes, which reached BRL 29 billion or a growth of 58% year-over-year, compared to the 34% growth in TPV, that presents an increase in total penetration of prepayment products. This was also a quarter in which Cielo has continued to gain operational efficiency. Total normalized expenses have grown 4.6 percentage points below inflation over the last year. This was the seventh consecutive quarter of growth -- of expenses growth below inflation, so showing that sale has not only been able to gain operational leverage over its TPV, but has also been able to reduce costs on an inflation-adjusted basis.

This was also a significant quarter in the sense that Cielo's SMB client base has grown. Cielo's SMB base has not grown for the last 3 quarters. So this was the first quarter in a little while, in which it has grown. And this consolidates our strategy to focus on SMB clients and consolidates the operational gains that Cielo has conducted over the last few years have really been able to change our ability to attract and retain customers in our base. This was also a significant quarter in the sense the sale has concluded its divestment cycle with closing of the Merchants transaction in the beginning of April at closing the divestment strategy the company has conducted over the last few years, allowing the company to focus more on its future endeavors as we mentioned in the beginning of this call.

With all that, Cielo's total cash generation has shown another increase, [ approxi ], which is recurrent EBITDA has totaled BRL 915 million, which is a growth of 58% year-over-year and 29% quarter-over-quarter. Another important recognition that Cielo has received from the market, is that our stock has been the most balanced stock in the Ibovespa Index over the first half of this year, showing that the market has been recognizing our operational gains and the evolution of our strategy.

With that, I open the Q&A session, and I hope to hear good questions from you. Thank you.

[Operator]

[Operator Instructions]. Our first question comes from Mario Pierry with Bank of America.

[Mario Pierry, analyst]

Congratulations on your results. My question is related to your revenue yield, right? You showed that due to pricing, your revenue yield went up 7 basis points. Can you be a little bit more specific in detailing how much of this increase in prices is coming from MDRs and how much is coming from the prepayment product? And if part of this increase is associated with the SELIC. So meaning, if the SELIC goes up, your pricing goes up, but if the like goes down, you're going to have a negative impact. Also, if you can tell us, provide us with a little bit more color on how you're seeing the competitive environment and your ability to continue to reprice specifically in the SMB and large corporate segments, that would be very helpful.

[Filipe Oliveira, executive]

Thanks a lot, Mario. So first, talking about the breakdown of the price increases between MDR and prepayments. First, it's important to note that in our revenue, we only have the [indiscernible] product, not the ARV product for -- that's accounted in our revenue because ARV for us is financial revenue. So that's outside of that revenue. So that's the first point I would like to point out.

Specifically in the numbers that we reported with the 0.07% increase, this has happened both with our products with the prepayments -- with automatic prepayments and with MDR revenue stream, right? So we have repriced both price components. And I'm not going to give you the exact breakdown, but both were significant contributions to that year that you mentioned.

Now specifically talking about the SELIC impacts on this repricing. The SELIC is linked completely. The pricing is completely linked to SELIC in the ARV products. So that is automatically repriced with SELIC. [ RR ], which is the one that's reflecting on this revenue that has been reported is not linked to SELIC in our contracts. So it doesn't automatically go up or down according to SELIC. So any variation in SELIC will not be automatically reflected on the revenue that you see. It will, however, affect our strategy to eventually reprice up or down clients in the long term.

Now looking at the competitive environment and our ability to continue with the pricing increases and adjustments over time. What we have seen is that Cielo had started a little bit later than the other competitors in repricing. We have done particularly strong repricing initiative in April, which is reflected in these results that we published today. But we also have continued some of those repricing initiatives in the course of July and August. So there are numbers that are not reflected in these results that we published today.

What we have seen? What has motivated us to continue repricing in the third quarter? First, we have seen really significantly low impact in churn and the repricing that we've done in April. And also, we have not repriced all the clients in April. So we were able to reprice some of the clients that we save for later -- [ now for ] in the third quarter. Looking forward, what we see is that -- we do see some opportunities in reprice in the future, particularly exploring opportunities in SMBs and long tail. We also see an opportunity to start repricing at the large accounts. Of course, that's more difficult because we have contracts there that usually last around 3 years. They're usually more price sensitive, but we have done so in the past. So I believe there's an opportunity to reprice also large accounts over the medium to long term.

And we're also going to keep observing how the macroeconomic conditions are going to evolve. We're going to observe how the competition is going to react to our results and to our pricing increases, and we'll adjust our strategy moving forward. So to sum it up, we believe we've done most of the repricing that had to be done, but we still believe that there's opportunities out there to explored.

[Mario Pierry, analyst]

That's very clear. Let me ask you then a second question here. On Slide 5 of your presentation, right, you're showing your TPV growth accelerating and you say that you have been gaining market share. Can you be a little bit more specific in which segments you're gaining market share? And how do you see your volumes going forward? Do you think this is a function that you were later to reprice? Or is this gains market share because you are offering a better service than you were before?

[Filipe Oliveira, executive]

Of course. I think we have to divide this answer in the 2 segments that are represented in our TPV. In large accounts -- so maybe a first answer. We believe the bulk of the market share gain comes from our large accounts, right? Going into large accounts, remembering that we had repriced large accounts starting in 2019. So that led us to lose share in that segment. And what we have been seeing over the last few quarters is that some of those clients that left us because we have repriced up are starting to come back because our service is better for large accounts. So we hear a lot of good feedback from our large accounts saying that Cielo has better availability of service. It has a better availability of network and so on. And that has been leading some of those accounts to come back to us even with higher prices than we had before. So that's the bulk of the market share gain.

Now looking at SMBs. In SMBs, we have seen a plant-based decrease over the fourth quarter of 2021 and the first quarter of 2022. And so that probably indicates that we lost some share in SMBs in those 2 quarters. That is not our strategy. Definitely, that's not our strategy to share in SMBs. We have, however, gained some market -- some client base in this quarter of 2022. We most likely gained some market share as well, given that our volumes have risen around 11% quarter-over-quarter, which is quite a lot in a quarter-over-quarter.

So we believe that our strategy in SMB has been allowing us to grow again in this segment. And we are going to reinforce the strategy by further increasing our commercial or sales force by 400 people in the second half of the year. So those elements, I believe that together, I'm not going to give you any guidance for TPV, but they show that -- at least underlying trends are showing that these gains are probably sustainable over the short term.

[Operator]

[Operator Instructions] Our next question comes from Tito Labarta with Goldman Sachs.

[Daer Labarta, analyst]

Congratulations on the strong results as well. A couple of questions. Maybe one following up a little bit on Mario's question on the competitive environment and repricing. As you mentioned, the revenue yield has gone up a bit less than some of your peers. So just curious, do you think that, that is also contributing to those market share increases that we see this quarter? Like how much of it, if you can quantify? Is it because of maybe pricing and maybe if you're repricing less than you can continue to take market share? Just to get a sense of how much of it is based on -- strictly on repricing and some of the improvements that you made on client service. Can you say is one having more of an impact versus another in terms of those market share gains?

And then second questions on costs and expenses. You also did a very good job there. You showed some operating leverage. Is there further room to increase margins and increase that operating leverage? Or do you think you showed the EBITDA margin now above where you were pre-COVID levels? I mean, is there more room to increase that? Or is this a new steady state? Any color on that would be helpful.

[Filipe Oliveira, executive]

Thank you, Tito, for your question. First, talking about prices versus quality of service in terms of the market share gain in SMBs. We have repriced gradually the SMBs now to a level that we believe it's pretty much on par with what the competition is charging. Maybe the deltas are different, but the [ tunnel ] level really is getting very close to what the competition is charging. So we don't believe that this gain that we have been seeing is completely based on prices, right? We do believe there's one very clear element that our operational turnaround has increased service levels for our main clients, and that clearly leads to lower turnover in the client base. So that's a good indicator for sure. But we also believe that our commercial effectiveness particularly in the productivity of our own sales force, has been probably the main cause of this reversion of trend in the SMBs.

As we mentioned in our presentation, we have had around 76% increase in productivity per salesperson over the last year in a quarter and that reflects in our ability to bring in new clients. And that, of course, replenishes our client base. So I believe that those 2 elements are probably more of the reasons why we have seen this increase in SMBs. I

think another evidence that I think is important is parcel siting SMBs is not as high as it was thought of before. The increase in prices that we had, we showed in this one of the slides in our presentation had an impact of around 0.9% in churn, which is comparatively -- really low compared to the increase of revenues that we had. So we believe that those factors together are needing us to a certainty that we'll be able to compete without [ creating ] new price war.

Now talking about the efficiency and operating leverage that you mentioned. We have had very, very aggressive goals in terms of increasing efficiency. Basically, our goal is to grow below inflation, which is, again, not only increasing operating leverage, but also in real terms, reducing costs over time, right, even though volume is growing by around 34%. Of course, in the very long term, it's not sustainable to grow below inflation forever, right. But we believe it's a very attainable goal for the next few quarters to grow below inflation, and is a very attainable goal for the long term to grow way below TPV and way below revenue, which should increase operating leverage over the lot term. So I believe all else equal, trends continue the same, especially pricings continue the same, margins should go up over the [indiscernible].

[Daer Labarta, analyst]

Great. That's very helpful. Maybe just one follow-up on competitive environment to some extent. Just looking at some of your peers have done over the last year or so in terms of like either investing in software, investing in banking. Is that something you think you would need to pursue at any point to continue to improve your client service, I mean, about even leveraging the relationships you have with the parent companies where you can leverage their balance sheet to some extent? Just to think of -- is there other things that you can do to continue to increase your service to improve your own competitive advantages versus your peers?

[Filipe Oliveira, executive]

Absolutely, Tito. I think that's a natural evolution of our strategy. It is not a new strategy for us. Our strategy has been at least from 2019 "to invest in fixing the operation". So we have seen an operational turnaround that's now showing very clear results. And that was our main focus, right, to divest companies that didn't make sense for us to stay with to increase our commercial productivity, to increase operational efficiency to -- in some points repricing as we've seen some of the focuses here. So that was the main focus, right? You fix internal processes to allow the company to compete in their business-as-usual core business of acquiring.

The next step of the strategy has always been to expand what services and offerings that the company offers, right? We believe that joining payments, digital payments, innovating digital payments with distribution of banking products, [indiscernible] services and software were appliable. Joining all that is going to create an ecosystem that's going to allow us to retain the customers more profitably and overall increased satisfaction over our services. So that is definitely our strategy.

Now we are at a point in which, given all the restructuring has been done, we now -- management has more time to focus on expanding those offerings. More specifically, we believe that expanding towards digital payments, it's key, right, fixed, what's our pay, looking at things, for instance, as dematerializing the POS, which is still very present in Brazil. So that's definitely a way that we're going to follow. Increasing our services that are value-added to our customers and eventually getting into software is also a path that we're going to follow.

A caveat there, we have been looking at software offerings for a while. It is difficult to find a software company or a software offering that's going to really add the value that we expect from our customers so we keep looking. We're not going to take a hasty decision of acquiring a company that we don't believe there is a great fit for instance. And then the third way, the third [ asset ] we're going to follow is distributing banking products, not necessarily operating, not necessarily getting risk in our own balance sheet, but distributing banking products, we believe is something that's very important for our clients as well.

[Operator]

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

[Filipe Oliveira, executive]

Well, first of all, I want to thank you all for participating in this call. I believe that this quarter marks as I mentioned in the beginning, a turning point for the company in which it consolidates a new level of profitability and growth. And we expect to keep those levels on those trends over the last -- next quarters. We thank you a lot and wish you every day.

[Operator]

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