CIELO SA Instituicao de Pagamento

F:28MA

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Cielo Fourth Quarter of 2022 Results Conference Call. With us here today we have Mr. Estanislau Bassols, Filipe Oliveira, Daniel Diniz and other 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 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 webcast questions to Cielo that will be answered soon.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Cielo management and the 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, industries and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Based on the presentation published on the company website, this conference call is opened exclusively for questions-and-answers, which will be preceded by a message from the CEO of the company, Mr. Estanislau. [Operator Instructions].

I’ll now pass to Mr. Estanis for opening remarks.

[Estanislau Bassols, Chief Executive Officer]

Good morning, everyone. Thank you all for joining our earnings call. Before jumping to Q&A, I’d like to share a few thoughts about our performance and strategy going forward.

‘22 was an outstanding year for Cielo. It marked a turning point in which many indicators evolved and show how the company transformed itself over the last years.

I’d like to highlight some milestones of this journey. The conclusion of the investment agenda marketed by the MerchantE transaction, much more than cash, this investment allowed us to purely focus on our card markets and also provided for a very lien structure. Cielo Cateno became our only business units.

The second point I would like to highlight is that Cielo is a more data-driven company, with increased capabilities, both in terms of costs and pricing. In pricing, the company learned a lot over the last years and used its analytical capabilities effectively. As you saw in the repositioning, we implemented both in large accounts and SBB segments.

On costs, we consolidated our positioning as the most efficient player among the listed acquirers, with the cost ratio reaching the lowest level in 2022. We have also evolved in our capacity to understand our customer needs and therefore adapt our structures to better serve them and improve our commercial effectiveness.

Through the year we saw evolution in many indicators of service quality, such as customer satisfaction with Cateno increased, reduction of complaints to our ombudsman, reduction of complaints to the regulator channels and that led to improvements in our NPS.

Commercial productivity also remained in an upward trend and recently concluded the expansion of our commercial team. The financial metrics reflect all these achievements. Our bottom line reached R$490 million, the highest net income reported by the company since the first quarter of ‘19. The EBITDA margin was 40%, a level that wasn’t seen since the beginning of ‘18 when we had a completely different competitive environment as compared up to today.

In 2023 we want to expedite and increase the visibility over these levels. With this agenda, we should increase our margin and return, improving process to better serve our clients and curb costs and improve the profitability of our customer base, including potential opportunities to optimize prices.

Back in this agenda, we have five pillars that comprehend our top strategic imperatives. The first pillar is to be the leader and acquirer the core of our business. The main imperatives of this pillar are: First, to ensure a sound financial position and efficiency, aiming persistent and sustainable growth. Second, deliver the best of Cielo to each customer segment. The third, excelling process to [inaudible] our customers; and finally, ensure quality of products and service in the journey of customers from end-to-end. Well, this was the first pillar.

The second one is innovations within payments. We want to full and broadly serve our customer needs and payment solutions. The third is distribution of financial service. We aim to expand our product offering with financial service, and the fourth part related with this is value-added service. We intend to increase the value of our customer base, becoming a platform of service. Lastly, the pillar that supports all the others, we have people, technology and data supporting the whole strategy.

We want to be seen as a cutting-edge technology in payment space. Deliver more to our clients with data driven offering decisions, expedite the development of our team and expand the adoption of agile methods, seeking for performance gains spread in the company. And we want to do all of this, taking care of people, implementing the best corporate governance batches and always, always looking for more sustainable ways of doing business.

As you can see, we have an ambitious agenda and we are completely committed to it. Our team has been successfully working in a spectacular turnaround. We have an undisputable positioning in the market, 27% of market share. We are presenting more than 95% of Brazilian municipalities. We have a strong footprint in every segment of the industry. We have been leaders in profitability and efficiently.

Our team is engaged with a strong mindset and inclusive and collaborative culture, which has seen as ESG as a competitive advantage. And I should remember you that we have also have Cateno, a unique story of diversification of revenues in our industry, which generated cash earnings of $1.4 billion in 2022, well above net income due to the amortization of the investments made to explore the Ourocard business in Banco do Brasil. Cash earnings is the relevant metric for investors in our view, and I’m not sure that the market fully understands Cateno and its cash generation potential.

Our purpose is to be the most desired platform, smart platform in Brazil e-commerce. That’s what drives our efforts and folks to reach our vision. We want to be seen as the smartest platform that integrates the value chain of our customers, delivering a broad array of service and also customized solutions.

Those are the main messages I would like to share with you. An agenda to go further in operational transformation in expediting the digital transformation of the company.

Again, thank you all for being with us. Now, we can move to Q&A session and discuss further our fourth quarter earnings. Thank you.

[Operator]

Thank you, Mr. Estanis. [Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.

[Tito Labarta, Goldman Sachs]

Hi! Good morning and thank you for the call and taking my questions. A couple of questions. First, on your payment volumes right, it grew 5% in the quarter. So I mean it seems high level you're maintaining share, but looking on slide 12 in your presentation, the SMB and Long Tail segment only grew 2% on the quarter. So it seems that despite your efforts, you're still kind of maybe losing share in that segment. Can you talk a little about the sort of the competitive dynamics? Will you be able to gain share there at some point? Any comments and any ability to reprice in that segment at all? And then I have a second question on expenses afterwards. Thanks.

[Filipe Oliveira, Chief Financial Officer]

Actually Tito, its Filipe. Thank you for your question. So talking about the TPV and SMB and Long Tail. It's too early to say whether we lost market share or not. One thing that's important to notice is that in the fourth quarter of the year, it's natural that SMB and Long Tail performs a little bit worse than large accounts. Simply because Christmas and Black Friday sales are mostly concentrated in a very large accounts.

So it’s natural to have this discrepancy in growth between the two mutual segments. However, if we’re looking in the second question regarding the share, if you’re looking at 2023, it is a strategy to at least maintain market share in SMB and Long Tail. Of course their absolutions are variations in time, which are natural, but that’s not our strategy at all.

And then, talking about pricing specifically in this segment, we’ve seen a large increase in prices, already pricing during the course of 2022. But still want to look at the P&Ls and the ROE for main competitors. We still see that the profitability in the market as a whole is still not in adequate levels in our opinion, and it's still not paying the shareholder its fair amount. So we still see space for repricing in the industry as a whole.

Cielo by itself, we did some weighting in the fourth quarter. We're still going on to do some weighting in the first quarter of this year. But you know we still believe that the market needs to move forward in repricing a little bit further.

[Tito Labarta, Goldman Sachs]

Great, thanks for that. Maybe one follow-up there just in terms of the room to increase our ROE for the sector. I mean just given some players are private and that may be less of a focus for them in terms of improving profitability, particularly in payments. I mean, do you see that as a risk? Have you seen any of these private competitors being more aggressive on pricing at all?

[Filipe Oliveira, Chief Financial Officer]

Most of the private competitors here in Brazil, they are controlled by banks that are listed, and those banks have been following an ROE agenda very closely in the market and most of the market is looking at ROEs quite closely. So we believe that they probably don't want to be diluted. Actually they are a major shareholder in bank. So I do see some of those players engaging in repricing during the course of 2022. We have seen that, and we still see them committed to reprice in 2023, and we haven't seen any signals change from them.

[Tito Labarta, Goldman Sachs]

Okay, great, thanks for that. And then my third question on expenses, just actually particularly on Cateno, where expenses were down in the quarter, you mentioned some provision amounts in reimbursements. Could you give a little bit more color on that? Is the level where you're at now, it looks like it was at BRL 21 million in the quarter. Is that the right level? Help us think about how that should evolve from here.

[Filipe Oliveira, Chief Financial Officer]

Sure, yeah. So we do believe that the current level is the right level. We have seen some provisioning in the past that has moved around and has confused a little bit of your analysis, but we do think that the current level is the right level.

[Tito Labarta, Goldman Sachs]

Okay, great. Thank you very much.

[Operator]

Next question comes from Daniel Federle with Credit Suisse. Please go ahead.

[Daniel Federle, Credit Suisse]

Good morning everyone. Thank you for taking my questions. The first on the ambitions for new products, right? It seems that the company wants to explore opportunities outside the core business, mostly like credits, products or software solutions. I would you like to understand, is this possible to continue seeing rising efficiency, rising profitability, even exploring those new products, that's the first question.

The second is more like a follow-up on Tito's question on this SMB segment. The company expects to not lose market share this year right, but we continue to see net disconnections. So are you expecting to see net disconnections reducing or potentially becoming net additions in the future? And when are you expecting these turning points?

[Filipe Oliveira, Chief Financial Officer]

Thank you for your question. The first point, we are working first. We improve the products that we already have in our core and we do believe that having a platform where the client can assess their information easily and compare that information with similar markets, it will open the doors for new products.

So the first wave is, expand the financial services. So in terms of new financial service solutions, a good example is the big solution where the retail can find a more easy and mostly more safe way of receiving through the PIX using Cielo. The second point is we are working to have a platform of value added service and also financial service. But the way we are doing it is doing small pilots to be sure that what we have, what the client wants, what the client perceive that they can obtain through us are in the best point possible. So making these, through small pilots, we do believe that we can keep our efficiency agenda and that's what we had already been doing so to be clear.

The second point about the net disconnection. When we see the big client segment or the small to medium business segment and compare the first quarter with the fourth quarter, we have a net gain. When we see the micro companies, then we can see that we are losing companies, yes, but this is part of our strategy of not subsidize the segment.

So we do believe that we will have – that we’ll keep the focus in the small to medium businesses and that we will keep losing possibly part of small merchants in our base. But year-by-year, month-by-month, the remaining very small businesses that we have in our base are more help than the last cohort. So we do see that this will move all the time.

[Tito Labarta, Goldman Sachs]

Okay, thanks very much

[Operator]

Excuse me! This concludes todays question and answer session. I would like to invite Estanislau to proceed with his closing remarks. Please go ahead sir.

[Estanislau Bassols, Chief Executive Officer]

Well, thank you all for being here. 2022 was an amazing year for Cielo where we have been working on the fundamentals that will bring 2023 to even a better condition. So I'm proud of being part of Cielo, and I would like to thank you all for being here.

[Operator]

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