CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Cielo Fourth Quarter of 2021 Results Conference Call. With us here today, we have Mr. Gustavo Sousa, Filipe Oliveira, Daniel Diniz and all the company's executive officers. This event is being recorded and is also being broadcast live via webcast and may be accessed through Cielo website at http://ri.cielo.com.br/en/ where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Remember that the participants of the webcast will be able to register via website questions to Cielo that will be answered soon.

Before proceeding, let me mention the forward 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 the 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 questions and answers, which will be preceded by a message from the CEO of the company, Mr. Gustavo Sousa. [Operator Instructions]

I will now pass it to Mr. Gustavo Sousa for opening remarks.

[Gustavo Henrique de Sousa, executive]

Hello, everyone. Thank you for participating. Before we open the Q&A session, I'll make a few comments. I would like to remind everyone that our presentation and audio presentation, this material is posted in our website. So it's available for everyone. But before we go into the Q&A session, I'll make some comments. So let's start with our results.

Our net income reached BRL 970 million in 2021, practically double of the net income that we saw on the previous year. In the fourth quarter, we had a net income of BRL 337 million, a significant growth over the previous quarter, especially considering the context of pressure on financial expenses. This is the fifth consecutive quarter of annual growth in net income. Once again, net income growth was driven by operating performance.

In acquiring our core business, we saw accelerated volume growth and an important advance in terms of Receba Rápido penetration. This drove our expansion in revenues. Expenses remained under control. We have been able to deliver practically stable expenses even in a context of new investments to transform the operation. The ratio between total expenses and TPV reached the lowest level in Cielo's history.

The group performance in the different business units is translated into a higher consolidated cash generation. EBITDA expansion was strong enough to more than compensate the higher pressure on financial expenses in the context of a higher SELIC rate. EBITDA reached its highest level since the first quarter of 2019.

Now talking about strategy and operations. As you can see in our earnings presentation, we have advanced in many fronts. We restructured our commercial positioning with emphasis on our own sales force. We significantly increased the penetration of the prepayment in the SMB space with the highlights for Receba Rápido. We reviewed the entire cost structure of the company, which today places Cielo among the most efficient acquirers in the market.

We strongly improved customer service, logistics and operations. Today, more than 80% of terminals are installed within 2 business days. We optimized our asset portfolio with divestments that are allowing us to focus all of our energy in the business and customer segments that are most relevant to Cielo. This allows us to better serve our customers, further focus on the business that really matter, optimize financial resources and enable the company to look ahead.

Despite all of the improvements we present today, we continue to strive for excellence in our services. Once again, I would like to take this opportunity to thank our shareholders for their trust and our employees for their dedication.

Thank you for participating, and we'll now open the Q&A session.

[Operator]

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

[Mario Pierry, analyst]

Let me ask 2 questions, please. One, Gustavo, is related to the competitive environment, right? Because when I look at your revenue yield and you show on your presentation, you barely passed on any price increases when I look on a year-over-year basis. However, you continue to move market share, especially in the SMB segment, and I'm focusing on the SMB segment, right?

When I look at Page 8 of your presentation, it seems like the active merchants in the SMB segment is declining. So I wanted to understand is how are you seeing this competitive environment. And why wouldn't you try to maintain your prices stable and try to regain some market share? Is that part of your thinking? Or are you going to try to pass on these higher financial expenses to your clients? And then I have a second question afterwards.

[Gustavo Henrique de Sousa, executive]

Mario, Gustavo here. Thank you for your question. You got cut off a little bit. So if I don't answer any aspects of what you have asked, please follow up, okay? So specifically on higher selling costs for Brazilian companies as a whole, this is a new reality. And we started this year already transferring this new funding cost to our entire product portfolio.

Based on what we have been hearing in public comments from the competition, the industry is doing the same thing. Yes, you're correct. You haven't seen that on the fourth quarter, but this is something that we have initiated in the beginning of this year.

Regarding your comments on the reduction in client base. Yes, we have seen a reduction on the SMB client base. This is not what we want. We do want to grow there. We are still facing strong competition in this segment. However, we have other metrics related to this client segment. We have increased the penetration of Receba Rápido. We have expanded TPV. So we are focusing in gaining clients but also in maintaining profitable clients. That's very important for us.

So I don't think that there is -- that one thing excludes the other, but it is hard to find a perfect intersection of having profitable clients and expanding client base at the same time. It is still our goal, our focus for 2022. And our challenge is to regain share in SMBs.

And we believe we have the right team, the right incentives for the new commercial team that we initiated early last year to face this challenge, okay, Mario, and trying not to leave any point that you have laid on us unanswered. I'll ask Filipe to make some comments on the yields -- on the yield components for Cielo. Please, Filipe.

[Filipe Oliveira, executive]

So if you have the comparison, the year-to-year comparison, you see 3 elements that are compensating each other there. So the first one is increase in taxes that Cielo started provisioning in the beginning of 2021, and that contributes negatively for most of the negative impact. But when you look at pricing plus Receba Rápido, which is, in our view, metrics that are demonstrating the health and the structural health of the portfolio, they contributed positively year-over-year.

The third element that you see is a net of mix -- client mix, specifically. What we saw during the course of the year is that while we renegotiated some of the large accounts, we lost some of those accounts, but some of those started coming back after a few months because they saw that Cielo's service and the quality of its products were superior than to competitors that they left for.

So when you see those 2 elements together, you see that in the end of the year, the mix of the large accounts started growing again. So that's the major part of this decrease in revenue yields. We don't see that as structural. We see that as a good thing because this incremental volume that's coming from large accounts that's diluting the revenues of the of SMB is healthy and is generating incremental margins.

We see a similar message when we look at the quarter-on-quarter comparison, except, of course, for the taxes because the taxes happened at the beginning of the year. But it's basically the same message. We see price in [indiscernible] contributing positively on the quarter-over-quarter. You see the client mix contributing negatively. But in this quarter-over-quarter comparison, you don't have the ISS taxes. You only have those in the year-over-year.

[Mario Pierry, analyst]

Okay. No, no, that's clear. But let me follow up on this here. When you mentioned, right, that the competition remains intense and that's why you're losing share or your client base is declining, does it mean that the competition is not passing on the higher prices? Because, again, my perception here is what you're doing should be in line with your competitor and still you continue to lose share. So is this something that you still need to fix is the consumer experience or the customer service? What I don't get is this, why are you continuing to lose share in the SMB segment.

[Gustavo Henrique de Sousa, executive]

Mario, what we saw recently, and now I'm referring to the last month of 2021, was a behavior from the competition with a number of promotions of combos that offered reduced prices for a limited period. In our calculation, some of those offers weren't attractive for us. We didn't try to match them. So we are always going to be looking at the competition and seeing what they're offering, but also seeking the best profitability for Cielo. This is what we saw at the end of the year.

However, more recently, I have heard public comments from the competition where they say that they have no alternative but to transfer their high-end funding costs to their client base, which is something that we are doing as well. So the combination of those effects are to be seen in 2021, okay, so at the end -- to be seen during 2022. At the end of 2021, we saw very aggressive competition.

In terms of some price promotions, we didn't follow that. We started the year transferring those higher funding costs. And we believe the competition is doing the same thing based on what they have been announcing, okay?

[Mario Pierry, analyst]

Okay. No, that's clear. And then my second question here, Gustavo, I was a bit surprised on your volumes to see debit card volumes declined 1% year-on-year. And I know, right, like the mix during the pandemic had shifted towards debit cards. So it's natural for debit card transactions to be decelerating, but a negative growth surprised me, especially when I look at Cateno and our debit card transaction at Cateno were up 7%. So can you help me understand what's going on in debit card transactions at Cielo Brazil?

[Gustavo Henrique de Sousa, executive]

No, Mario. Yes. One of the facts that we see is that this is mostly due to baseline problem, right, when comparison to the last year. During 2021, we saw that the pandemic's really boosted the debit mix in the overall economy. And what we're seeing now is a normalization of that mix. So when we compare year-to-year, we see that effect, that it looks like a debit suffering more than credit, but it's actually just a correction through the normal course of things. That's the way we see it. But then it was, of course, an exception that you still saw growth on debit. But nevertheless, you see a growth at smaller than credit. So it's a reversion of mix, that's what we've been seeing here.

[Mario Pierry, analyst]

Okay. Do you think that PIX is having a negative impact on debit card transactions overall in Brazil?

[Gustavo Henrique de Sousa, executive]

We don't see any material evidence yet, Mario. We believe it could be the case in the future with some impact, but we don't see any material impact yet.

[Operator]

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

[Daer Labarta, analyst]

A couple of questions also, one following up on Mario's question on the competition. In terms of the repricing which you said you started, how much room do you have to reprice? I'm just thinking if we look at the industry interest rates for receivables, discounting have come down a lot and you compare that to -- like spreads have really collapsed over the years, right?

I mean, do you -- is there room for spreads to increase? Or do you think spreads kind of remain flattish? Or could they even be more pressured because of the competitive environment? So even if you're able to reprice, you're not able to reprice the full extent of the impact from higher financial expenses. And how long does it take to reprice your entire merchant base? And then I'll ask a second question after that.

[Gustavo Henrique de Sousa, executive]

Tito, thank you for your question. I'm not going to provide a time line for the completion of this repricing movement, okay, because this is very sensitive competitive information for us. The movement has already been initiated, and it is something that shouldn't take long, okay? I don't see need to increase spreads, but I know that we have to equalize, normalize spreads based on the recent funding cost increase that we have seen in Brazil.

[Daer Labarta, analyst]

Okay. And maybe another follow-up on the competitive dynamics. In terms of the share that you've lost, you kind of alluded to it, it's because you weren't willing to match sort of lower pricing. And do you think it's just that? I mean are you seeing in terms of your client service or like software offerings, how important is that? Or do you think it really is just pricing?

[Gustavo Henrique de Sousa, executive]

I don't think that this reduction in client base is related to client service. I don't think it's related to software that may be offered in a combo in the acquiring business. I have seen very aggressive competition in terms of price promotions and also an increase in the sales forces of the competition. That's what's in our radar right now. And right now, we are evaluating on how to fight back. But what is very clear for us is that we do want to regain share in SMB but, at the same time, preserving profitability for the company.

[Daer Labarta, analyst]

That's helpful. And then my second question was more on the cost and expense side, right, so some good cost control and expenses. How do we think about that going forward? I think costs were more from Cateno and expenses more at Cielo Brazil. But do you think you can maintain cost and expenses under control going forward? Are there still a lot more investments that you think you need to do to kind of catch up with the competition? If you can help us think about what type of cost and expense growth that we can kind of expect from here..

[Gustavo Henrique de Sousa, executive]

Tito, I'm going to give you a directional answer in terms of our behavior and attitude and not a guidance, okay? So -- and the reason we do not provide a guidance on that is because the efficiencies that we have been extracting, they come really on a daily basis. It's zero-based budgeting that we do when we follow up every week, every month, trying to extract efficiencies. If I had a great room for improvement, very clear in front of me, that would have been already announced, okay? So it is really a daily grind trying to extract efficiencies. So you can expect the same type of behavior and commitments from us. However, I can't point you towards any numerical guidance on that, okay?

[Daer Labarta, analyst]

Okay. That's helpful. So I mean do you think there's room to improve efficiency from here or just kind of keep it relatively stable?

[Gustavo Henrique de Sousa, executive]

I'm going to answer this differently, Tito. There has to be room, okay?

[Operator]

The next question comes from Antonio with Bank of America.

[Antonio Gregorin Ruette, analyst]

Just on a question on credit origination. I would like to understand how is your appetite for credit goods or rises on receivables and clean credit.

[Gustavo Henrique de Sousa, executive]

Antonio, thank you for your question. Currently, we are reformatting our credit product. So we do not have a negative product on credit yet. We are -- every participant in the industry is doing, analyzing how to act on the new receivable central. And I hope to have a new product shortly and to announce it shortly, okay? But I don't have it yet. I don't have a time line. We are reformatting our product, okay?

[Operator]

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

[Gustavo Henrique de Sousa, executive]

Thank you, everyone, for the participation. We do follow up with remaining questions with our IR team. Thank you very much. I'll see you the next time.

[Operator]

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