CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Analysis

Company Drives Efficiency and Growth

The company has been investing in technology to digitalize its operations and reduce long-term expenses, with such benefits already visible in its P&L. Efforts to increase Average Revenue per User (ARV) through services like PIX are sustainable and show the success of hard work and heavy investment in technology. Financial expenses rose due to an increased number of working days in the quarter. New clients with different profiles contributed to variations in product penetration but expect healthy profitability growth. While specific guidance on operational expenses (OpEx) was not provided, the company aims to offset investments through increased operational efficiency.

Sustainable Technological Investments and ARV Growth

Company executives discussed the sustainability of recent progress, attributing it to ongoing investments in digitizing operations and improving technology. These efforts aim to reduce long-term expenses, and such benefits are already evident within quarterly results. Additionally, the executives highlighted the increased use of data analytics to predict breakdowns and reduce logistics costs, significantly impacting their P&L statement. The Advanced Receivables via PIX (ARV) continues to grow steadily despite fluctuations in product penetration, thanks to competitive advantages such as extended operation times and improved spreads which they believe to be sustainable in the future.

Exploring the Impact of Regulatory Changes and Customer Portfolio Strategy

Cielo's unique composition, which includes an issuer as Cateno, is likely to influence its net profits in the face of regulatory changes. However, the central bank's efforts to understand the payment chain could potentially optimize credit flows, which is vital given the importance of credit cards in payment systems. A proactive approach using concrete data is aiding in navigating complex scenarios. The sales force expansion by 300 people and a 53% increase in volume from this channel are evident signs of strategic adaptation to changing market conditions. Despite losing smaller customers, the focus on more robust clients with higher volumes is proving effective, as seen in the ramping up of productivity.

Financial Expense Dynamics and Productivity Strategies Moving Forward

The company observed an 8% increase in financial expenses quarter-on-quarter, mostly attributed to a higher number of working days. As for product penetration fluctuations, new retail front clients and one-off variations like advances to clients were noted as causes. Yet, overall profitability growth appears healthy. While no specific guidance on expenses was provided, the company is striving to offset investments through increased operation efficiency and is considering different levers to optimize product offerings. Their debt strategy showcased proactive steps taken in 2020, setting up a robust position that now allows them to rebalance the duration of debts and seize opportunities to lower funding costs in future quarters.

Innovation with PIX and Market Position Strength

Payment solutions like PIX revolutionize the sector by prioritizing safety and simplicity. With features such as dynamic QR codes and the ability to innovatively integrate multiple payment methods, the company aims to enhance both security and reconciliation processes for retailers, driving value-added services without directly charging for PIX. Despite potential regulatory risks, the emphasis on innovation, as demonstrated by ARV via PIX, stands as a testament to the company's future-readiness. Furthermore, the positive outlook on volumes and adoption rates, combined with brand strength as highlighted by the Top of Mind award and substantial growth of 40% in the first nine months of the year, underpin the company’s trajectory towards sustained, long-term growth.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and thank you for standing by. Welcome, everyone, to Cielo's Third Quarter of 2023 Results Conference Call. With us here today, we have Mr. Estanislau Bassols; Mr. Filipe Oliveira; Mr. Daniel Diniz, and all the company's executive officers. This event is being recorded and also being broadcast live by webcast and may be accessed through Cielo's IR website, ri.cielo.com.br.A replay facility will be made available shortly after the event is concluded. Bear in mind that participants of the webcast will be able to register by website questions and comments to Cielo that will be answered soon.Before moving on, let me mention that forward-looking statements during the conference are based on the company's assumptions, because they're related to the Company's business outlook, forecast, operating and financial targets and they are based on assumptions on the part of the company's management as well as on information currently available for Cielo.Forward-looking statements are no guarantee of performance, as they involve risks, uncertainties and assumptions, as they refer to future events, which depend on circumstances that may or may not materialize. Investors and analysts should have in mind that industry conditions, macroeconomic conditions and other operating factors might affect the future results of the company and thus lead to results that will differ considerably from those expressed in these forward-looking statements.Based on the presentation published on the company's IR website, this conference call is open exclusively for questions and answers, which will be preceded by a message from Mr. Estanis, the company's CEO, with the highlights for the quarter. [Operator Instructions]I now turn the conference over to Mr. Estanis for his opening remarks. Go ahead, sir.

[Estanislau Llobatera Bassols, executive]

Hello. Good morning, everyone. I'd like to thank you all for being here at our results conference. Before moving to the Q&A session, I'd like to take the chance to highlight some of the numbers we achieved and show the progress we have made across different areas of the company. These achievements are in tune with the priorities set for 2023 and which we announced earlier this year.They are, a focus on profitability, progress in digital transformation and new solutions and enhancement of customer experience. The first point here I would like to address is profitability. We had our ninth consecutive quarter with growth in financial numbers when compared to previous periods.Our profit for the third quarter is the highest since 2018. This result can be mainly driven by the ARV and Cateno revenues, which continue to set new levels in cash earnings quarter-on-quarter. That level of profit was achieved in a scenario where volumes are under pressure and the need for investments is fierce.In fact, the reduction in normalized expenses is yet another highlight for the quarter. This is happening through or amidst a strong demand for investments and the strategy of strengthening our commercial team focused specifically in banks as previously announced.The second point I'd like to mention is our digital transformation process and the development of new solutions. The last quarter, we announced the program PraCimaCielo that aims to accelerate the transformation we are implementing in the company. In previous conversations, I shared a strong focus on transformation, process review and the creation of capabilities so that the company can innovate faster and put further increasingly at the center of our decisions.We are working on how the company operates. PraCimaCielo has among its objectives, to address those issues in a short period and we already see results. And we have about 200 initiatives being implemented in the company. We also have a much better dynamics in development and launching of new businesses.I'd like to highlight 2 recent launches, Cielo Tap, and the acquisition of receivables our ARV via [ PIX until 7 p.m.] The Cielo Tap that was launched a few weeks ago is an important front, because it allows us to advance the solutions without the physical terminal and opens up interesting avenues, such as focusing again on micro-entrepreneur, a segment where the dynamics of competition for equipment subsidies has been shown to be irrational.With Tap, we can generate value and profitability to our clients. ARV via PIX until 7 p.m. is another highlight. We were pioneers. Our customers today can advance funds until 7 p.m. and receive those funds on the same day via the PIX payment made. We have also advanced urban mobility solutions geared towards public transportation, subway, buses and toll plazas. We are creating solutions with an amazing user experience with a very strong strategic rationale as it brings volumes to the industry that did not previously transit through the card rail.The third point I'd like to present is the enhancement of our customer experience. Our NPS has jumped 14 points in just 1 year. We continue to see improvements across different logistics operators or indicators. We are also intensifying the use of data, with the high -- best example being the early replacement of equipment before they generate noticeable maintenance problems. We expect to continue reporting improvements across all indicators. Positioning Cielo's best-in-class in customer service is a company's obsession.Finally, a brief update. We have recently completed the hiring of the first wave of the sales force expansion focused on banks. We are still at the first step of the process, but the early results show that the strategy was successful. We continue to monitor performance to define the start of the next phase. Once again, thank you so much for your attention.I'd like to move on to the Q&A session now.

[Operator]

[Operator Instructions] Our first question comes from Kaio from Brazil UBS.

[Kaio Penso Da Prato, analyst]

I have 2 questions. First, it's about yields. I think you anticipated a mix change. We were expecting that drop, but that was bigger than expected, 4 bps if I'm not mistaken. Can you give us some color on that? Was that because of the mix or price transfers? What was the main reason behind it? And what can we expect in the future? And then I'll ask my second question, if I may.

[Filipe Oliveira, executive]

This is Filipe. Let me just explain the company's strategy. Decreasing prices is not one of our strategies, number one. Number two, the speed remains the same in the marketplace. Let me address Q2. Two highlights. First, the baseline. We've seen major changes, repricing in late March and then prepaid in April that affected the entire quarter.Q2 reaches our peak and then you have a natural distribution throughout the following months. That's the baseline. The second issue, I think it's worth mentioning, there are 3 elements. One, a higher average size in retail. We're looking for more profitable customers in the long run, smaller yield, but somewhat bigger, but smaller churn and a longer RTV long-term.There is a change in capturing new customers and a natural renewal rate. And finally, we had a temporary shutdown of recurring pricing to correct distortions and to better manage yield. We had the temporary updates and the company is refurbishing its pricing models, so that we can gain efficiency in price margins in the long run. We are back on track in the recurring repricing in starting Q4.In late September, we actually resumed that strategy. That has helped us in managing yields in the long run. In sum, there is some baseline, there are some temporary effects in Q3 more specifically. And we believe we can manage yields so that we can maximize profitability in the long run.

[Kaio Penso Da Prato, analyst]

Perfect. That was very clear. My second question is about TPV. You've shown some stability in the quarter and you're back in the growth cycle, right? But that growth is relatively small, especially when you concentrate in retail, just like you did and a new commercial team. But I want to understand the drivers behind that TPV growth and what we can expect in the short-term, in the near future and the new capture waves, if I may?

[Estanislau Llobatera Bassols, executive]

Well, the first element that we have to take into account, the first wave of capturing of -- we are thinking about -- with a more seasonable or seasoned approach, according to what we have planned before. That capture were spread out throughout some months. We've just concluded the first wave. It's too soon to have a more holistic analysis. The impact is not full. We wanted to grow our commercial side in early '23, late '22.It may take 4 to 6 months so that we can reach an optimal productivity stage. Having said that, we are at a turning point. We're growing back in retail. When we look at results in the quarter, month-after-month the trend is still positive. So we look at the quarter and the monthly trends, which are positive, as I said. So we can expect a more continuum growth, so that we can keep our share.

[Operator]

[Operator Instructions] Yuri Fernandes from JPMorgan asks the next question.

[Yuri Fernandes, analyst]

My question is about COGS. It was 7% down quarter-on-quarter. What have you been doing? What can explain that COGS decrease? Is it going to keep on going down and may offset more SG&A expenses? That improvement caught our attention. So what are the drivers behind it? And then I have a second question.

[Filipe Oliveira, executive]

This is Filipe, Yuri. Starting from the end of your question, we believe it is sustainable. That's the result of what we have been investing. Company has been investing in technology, in digitalizing its operations, that we can reduce long-term expenses. We've seen some of these benefits in the quarter already in our P&L. Let me give you some examples.Data usage, so that we can predict machines from breaking down. This is logistics costs in the end. So we have several other alternatives to improve our operations. So that will be reflect in our P&L. We're not 100% complete. We're not done in that effort. Quite the opposite. We're still investing heavily in that direction.

[Yuri Fernandes, analyst]

Wonderful. My second question is about ARV. It's been growing steadily quarter-on-quarter despite smaller volumes. Volumes were very good in the past and then the product penetration is down, but revenue increased by 17%. Was that because of spread? Was it temporary? What's your take on that indicator for the near future?

[Estanislau Llobatera Bassols, executive]

Got it. Yes. There is an important issue, which is the seasonal aspect that impacted the way we see it. As far as production goes, we had an increase in -- a spread increase with that temporal component. But spreads were better in the quarter. That's true. That will of course result in more improvement. So results have been solid.So we are having ARV through PIX, so we can do that till 7 p.m. Our competitors go in early afternoon, so there may be some competitive advantages. So the way we see it, that is sustainable. But that's the result of the hard work of the team.

[Yuri Fernandes, analyst]

Do you believe that this penetration level should grow to remain flat? That would be smaller than the average, right, where should it be, the way you see it?

[Estanislau Llobatera Bassols, executive]

We're working towards increasing it. There are 2 components. We have been very successful in ARV. We've been working hard to increase both of them. To compare apples-to-apples, I think we should compare comparable segments. Still, we're somewhat below. That's an upside the way we see it. That's why we have been investing time and technology, so that we can reach our maximum potential.

[Operator]

Mario Pierry from Bank of America asks the next question.

[Mario Pierry, analyst]

I have actually 2 questions. Number one is about the industry. There may be some regulatory changes in the cards industry. So they've been talking about limiting payments installments that may affect the company. What's your take on these possible regulatory changes and what would the impacts be?

[Estanislau Llobatera Bassols, executive]

Thank you. It's a relevant topic to us indeed. This will impact Cielo uniquely because we have a issuer as Cateno and the remaining of -- the rest of the operation. So that would impact our net profits. The good news in recent months was having central bank as an agent that is trying to understand the chain as a whole, to understand the relevant impacts, trying to strike a balance as far as the economic rationale behind it goes.So we are adding more value by providing concrete data before they make a decision. We're trying to maximize our credit flows as much as we can so that credit cards remain an important tool in the world of payments and consumers are not affected. Well, I'm a little more comfortable than I've been.So we are trying to look at scenarios that bring in more complexity, because it all depends on the general credit offering. So when you look at direct impacts on Cielo, the total credit will impact it directly, depending on the decision. So we are considering different scenarios so that we can make the best possible decision.

[Mario Pierry, analyst]

Do you share the TPV percentage that you capture today? Are these more than 12 installments?

[Daniel Diniz, executive]

This is Daniel. Thank you for your question, Mario. We don't announce that, but it's a small percentage. That's as much as I can say.

[Mario Pierry, analyst]

Let me ask you the second question then. The sales force results. You've hired 300 people. I'm looking at Slide 15 of your presentation, all the amount, you increased that by 53% in the quarter. When you look at the total number of customers, you have a 50% loyalty rate. What does that mean? Is that high debt rate? Why is it the number of clients are coming down?

[Estanislau Llobatera Bassols, executive]

Hi, Mario, thank you for your question. When we look at that growth, we show the volume from that channel on the month. That shows that the channel is ramping up production, gaining productivity in recent months. But of course, that metric cannot be looked at on its own. We are cleaning up. You have smaller customers leaving and that remains the same.Well, that performance in the channel shows what studies showed us before. We're gaining traction in the quarter and we expect that to result in more favorable numbers. And we talk about the customer base renewal, just like Filipe had said before, the 2 things are connected.

[Filipe Oliveira, executive]

Well, let me just add to the answer, if I may. Well, it's clear, based on our strategy, the base is coming down, but volumes are going up in the same period. So there's that component. Customers that are more robust, they carry more volumes. So that explains.

[Operator]

Next question comes from Pedro Leduc from Itau BBA.

[Pedro Leduc, analyst]

One about financial expenses vis-a-vis revenues, deadlines vis-a-vis volumes, we see those numbers going up across the quarter. I'd like to have some more color on the financial expenses side, which went up 8% quarter-on-quarter, even though the gross number went down. If you could explain that a little bit more, the dynamics underlying that and what can we expect as we move forward?

[Filipe Oliveira, executive]

This is Filipe. The main impact was in working days. We had a higher number of working days in the quarter and that has a direct impact on financial expenses. So the 7.5%, over 5% have to do with working days. Then an average balance was slightly higher. That basically explains your question.

[Pedro Leduc, analyst]

Okay. If I can ask a second question about the penetration of other products that pay -- are paid installments. There was a drop quarter-on-quarter. Does that have to do with the mix of clients which may be changing or maybe a change in inventory levels or one-off item? Can we expect more stability and the stability going forward? Or if there are other leverages to be activated and see those numbers grow in 2024?

[Filipe Oliveira, executive]

Hi, Pedro. That variation, this oscillation was slightly a low ranked, or quite low, actually. That came from new clients joining our retail front, clients with a slightly different profile, higher scale, but lower penetration sometimes. And also important to mention, there are one-off variations, advances to some clients which happen throughout the quarter.That's also a variable. So that could explain the downtrend. But if you look across the board, we see a very healthy growth in profitability throughout time and we still see leverages will be activated going forward to optimize both products.

[Operator]

Next question, Daniel Vaz from [ Safra ].

[Daniel Vaz, analyst]

Two questions from my side. The first one about costs. You mentioned that to Yuri, you have a more efficient COGS level. My question is, going forward, when you look forward to 2024, what can we expect in terms of OpEx? So looking at the cost of the expenses, how do you expect to see those effects being neutralized? That's the first question, please.

[Filipe Oliveira, executive]

This is Filipe. We cannot announce the guidance around expenses, right? But I can give you some color. We have been working to be more efficient both in terms of expenses and in terms of expenses. Even though we have increased our commercial front, our commercial personnel, we still saw numbers going up. And that has to do with the numbers I've just mentioned.When we look ahead, forward, our ambition is to offset as much as possible the investments, which have been made as we increase efficiency in all operations. Of course, I cannot give you guidance because we may need to have extra investments, but that's just to give you some color around that issue.

[Daniel Vaz, analyst]

Okay. That's good enough. The second question about funding, about the ARV, you showed an interesting chart around CDI. When you look at the level of expenses, they may appear high. It's also an opportunity to bring that number down. How can you expect to bring those numbers down? Have you thought about reducing duration of the debts, or something like that?

[Filipe Oliveira, executive]

I think a first point I'd like to emphasize is that, when we look at the debt that we have from the last debentures we issued in September 2022 at CDI plus 1.2, the cheapest level in the country. So our assessment is that the funding costs are relatively low. The issue is around duration, as you mentioned. Why is there a mismatch in duration today?Today, we have long-term funding and that goes back to our 2020 strategy, something we have been using for 3 years. And this was put together at a moment where we were sure about liquidity levels. So we have built that position that we have today, a very solid, robust position. And the idea was to provide funding possibilities. But now the scenario has changed.We have some debt maturing in the coming quarters and this will allow us to have a better match between short-term and long-term as we can raise short-term funds at a more efficient way. That's the understanding. You are correct. There is an opportunity and the company will work on it in the coming quarters to capture that opportunity.

[Operator]

[Operator Instructions] Our next question comes from Thiago Auzier from Goldman Sachs.

[Thiago Auzier, analyst]

I have a quick question about the initiatives around the PIX payment means, about some advance payments. Can you see other opportunities in terms of improving monetization through those solutions? And if you expect some regulatory risk around those payment means, any risk on that front?

[Estanislau Llobatera Bassols, executive]

No, thank you for your question. The broader view is that all payment means need to be safe and simple. Those are core benefits and that's why PIX is such a success. What we tell our client, retail client and that we see clearly, is that they are seeking to increase safety even further, security. A good example is the dynamic QR code of a retailer that has several offices, several outlets.They are able to make sure that payments are really happening and the money is going towards the company's account and not any other account. Another important component that we see is that the reconciliation. I'm talking about reconciliation around all payment means combined. That's also very important for a retailer, right, in all scales of retailers, small and big.And as this happens increasingly more frequently, the omni-channel, social media, bank channels, e-commerce and they are going back to physical. So it's a very omni-channel approach. So the whole thing became very complex for retail as a whole. So we are also trying to address that with this solution. As to other risk possibilities that you mentioned to your question, one of the main elements of the PIX payment means brought to market is the ability to innovate.So today, we are doing ARV via PIX until 7 p.m., as it was mentioned during the presentation. This innovation is nice, because it provides liberty. We're looking at the client, client sees values in that -- value in that. We do not charge PIX. We charge for the other services we offer, to increase security, to increase reconciliation capacity. That's important. We do not charge for the PIX, right? And that's where customers see value being added to our basket of services.

[Operator]

Our next question comes from Eduardo Nishio.

[Eduardo Nishio, analyst]

A question about the dynamics around volumes, [ PPV ]?

[Estanislau Llobatera Bassols, executive]

His sound is very, very low, difficult to understand.

[Eduardo Nishio, analyst]

If we can expect the changing mix to continue to impact or that dynamics, or that could change in the coming quarters? And also in terms of volumes, we see rumors saying that second half of the year will be better. Last year, we had a weaker second half. So what are your perspectives in terms of volume for this period of the year?

[Estanislau Llobatera Bassols, executive]

Your sound was really, really bad, I could hardly hear what you said. So what we captured, from what we could understand from your very poor audio is you're asking about volumes, right, basically? That's all we could get. If it's not the case, just get back to us. But that's what we could understand for your very poor sound quality. So this is a continuous movement as we see it.So throughout the quarter, we see we are bringing in more customers as planned and also larger clients, lower churn, but customers that also carry a lower take rate. That of course, has been reflecting on the numbers of the quarter. For the coming quarters, our assessment is quite positive because we're going to be comparing with this quarter, which is somewhat a quarter that really felt the burden of the whole transformation. And that has to do with your second question about the volume.We see an inflection point in volume now, as Filipe mentioned just now. In detriment to the customer base, we saw a growing volume throughout the quarter. So we are in a very different position when compared to the position we were before. If we look, within the months that make up the quarter, third quarter, the same thing happened on a month-by-month basis, right? So that gives us an idea of what's coming ahead in the coming months and quarters.

[Operator]

This concludes the Q&A session. I now turn the floor over to Mr. Estanis for his final remarks. Over to you, sir.

[Estanislau Llobatera Bassols, executive]

We received a question from Neha. I can read the question. Well, when we look at the results for the quarter, there is some innovation elements. Cielo acquired the Top of Mind award yesterday that shows the strength of the brand. When we look at the growth in the first 9 months when compared to 2022, the growth was 40%. When you look at 2021, it's 2.6x, 2.7x when compared to 2020 numbers.Coupled with 14% growth in NPS year-over-year, a record adoption rate with Cateno, we are in the top 30 companies to be the Great Place to Work. So we're growing very healthily focused in the long-term with a good track record. So we are only excited to keep on going in the same direction. Thank you.

[Operator]

Thank you. This concludes Cielo's earnings call. Thank you for attending. Have a great day.