Cielo SA ADR. (OTCQX:CIOXY) Q2 2016 Earnings Conference Call August 2, 2016 10:30 AM ET
Rômulo de Mello Dias - Chief Executive Officer
Clovis Poggetti - Chief Financial Officer
Mario Pierry - Bank of America/Merrill Lynch.
Marcelo Cintra - Goldman Sachs
Alexandre Spada - Itaú BBA
Good morning, everyone. And thank you for waiting. Welcome to Cielo’s Second Quarter 2016 Results Conference Call. This event is being recorded. And all participants will be in a listen-only mode during the Company’s presentation. After Cielo’s remarks, there will be a question-and-answer session. [Operator Instructions]
This event is also being broadcast live via webcast and may be accessed through Cielo’s website at www.cielo.com.br/ir, 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. Those following the presentation via the webcast may post their questions on our website.
Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Cielo’s 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 macroeconomic conditions, industry conditions, and other operating factors could also cause results to differ materially from those expressed in such forward-looking statements.
Now, I’ll turn the conference over to Mr. Rômulo de Mello Dias. Mr. Rômulo, you may begin your presentation.
Rômulo de Mello Dias
Good morning. I’d like to thank you all for joining us today on this conference call, in which we will talk about Cielo’s results for the second quarter of 2016. Joining me are Clovis Poggetti, CFO and Investor Relations Officer, as well as members of the management, finance, and Investor Relations teams.
On Page 3, we can see the highlights of the quarter compared to the same period of last year.
For Cielo consolidated, net operating revenue, totaled R$3.1 billion, up by almost 10% compared to Q2. EBITDA was R$1.3 billion, almost flat compared to Q2 of last year, margin of 44%.
Consolidated net income reached R$989 million, up 13.8% compared to Q2 of last year with a margin of 32%.
Some highlights of our most relevant business. Regarding Cielo Brazil, the Cielo financial volume totaled R$143 billion, an increase of 9.9% compared to Q2 of 2015. In the net revenue performance, purchase of receivables operations reached R$339 million, a 21% increase compared to Q2 of last year reaching 20.4% of the credit financial volume.
Cateno’s net revenue increased 6.6% to R$609 million in Q2. The Cateno’s EBITDA margin was 42.7%, a decrease of 3.3 points in relation to Q2 of last year.
With regards to the order highlights I’d like to point out the following achievements. Ranked 1st, in the service category of the largest and the best companies ranking of the Exame Magazine for the 10th consecutive year, amongst the 10th best Brazilian companies according to Corporate Governance Index IG100, amongst the best companies to start a career according to Você S.A. Magazine for the 6th consecutive year.
Ranked 10th amongst Brazil’s most valuable brands in a study conducted by IstoÉ Dinheiro Magazine in partnership with Millward Brown Vermeer.
Cielo is a Company with the highest satisfaction level in the Escolha PME SME Selection Award, prepared by Estado de São Paulo newspaper, in the POS terminal category.
On slide four, we present evolution of the guidance release early this year. With respect to our understanding of the evolution of the credit and debit card financial volume for the industry, we have revised our guidance from growth between 5.5% and 7.5% to a higher range between 7% and 9% with Cielo growing in line with the industry. We cannot refer to the quarter situation, because not all participants have or had released information.
Regarding the cost of sale of Cielo Brazil and Cateno jointly, after eliminating the impact of subsidiaries via equity interest, growth in the first semester of this year was 7.7% given the stronger financial volume [captured financial] was also changed.
The initial [estimate of evaluation] between 4% to 6% was revised to a new range of 6% to 8%, their representation globe will [Indiscernible] for both Cielo Brazil and Cateno.
Finally, with regards to the investments in POS terminals, we invest in the first half the total amount of R$100 million, given the impact of order external factors such as the economic situation which has caused an increase in mortality especially of a small and medium merchants and the implementation of the Multivan project we also changed the estimate for the full year decreasing R$50, the total CapEx in terminals, it means a new guidance of R$400 in POS investments in 2016.
I would now give the floor to Clovis Poggetti who will continue the presentation.
Thank you, Rômulo. And good morning everyone. Moving onto Page five, we present the frame with the information to monitor Cielo’s businesses. The information about Cielo consolidated presented in table one, shows that the net operating revenue in the quarter totaled R$3.1 billion, 9.8% higher than the second quarter last year. The increase in net revenue is mainly related to the continuous expansion of Cielo’s business including revenue from the Ourocard Arrangement in Cateno
M4U’s mobile credit sales and the appreciation of the dollar in revenues generated in the U.S. the emission installations, all of this partially offset by decreased gross MDR.
Quarter-over-quarter, revenue increased by 0.7%, the growth is related to the increase in revenues of subsidiaries due to continued business expansion partially offset by the average dollar depreciation in the quarter applied in the consolidation of foreign investments and due to concentration of the Agro product in the second quarter of this year.
Our total Cielo consolidated expenditure was R$1.96 billion in the second quarter, 17.7% higher than the same quarter last year. And the main impact in this comparison were the cost of subsidiaries Merchant e-Solutions, due to the average dollar appreciation in the quarter and its continued business expansion and also M4U, due to the increase sales from mobile credit sales.
Quarter-over-quarter, the amount is 4% higher mainly due to the cost of subsidiaries M4U and Merchant e-Solutions and higher sales and marketing expenses in Cielo Brazil.
And finally, we have our Cielo consolidated net income, which totaled R$989 million, up 13.8% year-over-year and down 0.6% quarter-over-quarter. Other tables will be discussed in the next slide.
Thus let’s move on to Page six, on this page, I would like to discuss the table for Cielo Brazil, but let’s first check the evolution of the main business drivers. The financial volume presented a growth of 9.9% year-over-year, reaching R$143 billion.
Excluding the product Agro, such a growth would be of 6.8%. In the breakdown by product, credit grew by 4.5% while debit grew 17.9%.
Quarter-over-quarter total volume increased 2.2% and excluding Agro it went down by 0.4%. By product, credit and debit increased 1.7% and 2.8% respectively. Regarding the change in volume, I would like to remind you that although the ELO brand is already being captured by other acquirers according to the Multivan project its entire volume is still reported by Cielo this quarter, ELO’s total volume was R$22.1 billion.
In terms of POS terminals numbers, came in line with the second quarter of last year and the increase in migration to wireless terminals was of 4.3 percentage points.
Compared to the first quarter of this year, the base fell by 0.6% mainly as a result of the current economic scenario reflected in a lower number of affiliations and a higher number of uninstallations and the Multivan project.
Finally, the operations of purchase of receivables are the important lever for Cielo Brazil. The purchase of receivables volume increased by 15% year-over-year reaching R$16.5 billion representing 20.4% of the total credit volume. The net revenue pro forma reached R$339 million in the quarter or 22% up compared to the same quarter last year. Sequentially from the first quarter of this year while volume increased 3.3% the net revenue pro forma decreased 1.4% due to the lower average turn.
Now, after discussing the behavior of Cielo Brazil business [Indiscernible] that analyzed its performance. Net revenue increased 4.8% to R$1.8 billion in the quarter. The increase is related to the higher financial volume capture due to the continuous expansion of the business, partially offset by a decrease in the revenue yield that was 126% in the quarter compared to 132% in the second quarter last year.
This decrease is directly related to the concentration of Agro product volume in the quarter. Importantly, without considering the Agro product the yield would present a lower variation from 134% in the second quarter last year to 132% in this quarter.
Quarter-over-quarter, Cielo Brazil net revenue decreased 1.6%. The reduction is related to the decrease of 5 basis points in the revenue yield when compared to the first quarter of this year which was 131%. This reduction is mainly related to Agro product concentration in the second quarter. This considering the Agro the yield variation would have been two [bips].
Speaking now of total spending, it increased 9.3% to R$857 million in the quarter compared to the same period of 2015. This increase was primarily due to higher financial volume capture, increased number of transactions and expense concentrated in the quarter related to higher expense due to retirement, severance payment and increasing sales and marketing expenses.
As can be incurred from the justification, the total spending of Cielo Brazil, there is a variable component related to the financial volume capture, number of transactions or logistics. That’s why at the beginning of the presentation, Rômulo mentioned that we have revised the guidance as the financial volume one of our matrix will be above our initial expectation.
Quarter-over-quarter, the total expense increased 4.9% due to the same reasons. And finally, we have the Cielo Brazil net income which reached R$1.1 billion in the quarter up by 13% year-over-year and decreased 4.8% quarter-over-quarter.
Let’s move to page seven to discuss Cateno performance. In the first table, we present the comparison with the second quarter last year. Cateno’s net revenue went up 6.6% to R$609 million in the quarter. The increase is mainly related to the increase in financial volume captured in the Ourocard arrangement, partially impacted by the concentration of the Agro products. Quarter-over-quarter there was an increase of 2.8%.
Total expenditure increased by 10.1% to R$445 million mainly related to the continued expansion of Ourocard arrangement, which impacts related cost and expense and the [focus] given in the second quarter to the issue of ELO cards by Banco Brazil.
Excluding extraordinary expenses that totaled R$23 million in the quarter mainly due to the embossing and [overseeing] of ELO issue cards the total expenditure would have increased 4.4% year-over-year.
Quarter-over-quarter, Cateno’s total expenditures extraordinary would have decreased at 1.5%. And finally Cateno’s net income was R$129.5 million, up 5.1% year-over-year.
Quarter-over-quarter, net income increased at 1.6%. It’s important to note that in Cateno there is amortization of intangible assets for the period of 30 years representing R$96.4 million per quarter. In the figures presented in the second table, amortization is not initially considered creating what we call Business Result. In this view, the net income in the quarter was R$193 million, this will serve as the basis for the analysis of its contribution to Cielo in the cash analysis.
In the accounting column, the net income already reported of R$129.5 million is the starting point for the analysis of Cateno’s contribution to Cielo, after the impact of financial expenses related to the creation of the new company. As we can observe there is a negative contribution of R$70.6 million in the quarter, this number comes from R$90.6 million contribution representing 70% of the net income, net of financial expenses contracted by Cielo after tax effect in the amount of R$161.2 million.
Similarly, but excluding only amortization between the cash basis concept as shown in the final column, the contribution of Cateno to Cielo after the impact of financial expenses is negative at R$3.1 million as already Cielo considering the cash analysis Cateno becomes accretive in the second half of this year.
On the next slide number eight, we present Cielo’s current debt. The company’s leverage decreased to 1.2 times net debt to adjusted EBITDA for the purchase of receivables revenue, attesting here the company’s strong cash generation capacity. It is also important to mention the milestone in the quarter which was the payment of R$1.5 billion in principal and R$300 million in interest related to the public debentures which took place in April.
Now, I would like to hand the call back to Rômulo.
Rômulo de Mello Dias
To conclude my comments, I’d like to announce that we have repositioned our brand in order to sustain our relevant position that impacted the industry which has been receiving a [torrent] of new entrants. To do that, we even changed our slogan. Now, we are a machine of ideas. We understand that such change is necessary in view of the evolution of the means of payments industry worldwide. [Indiscernible] took years to get develop, now, rising only a few months. So, for us not to be Cielo by an audacious startup, we decided to change. What brought us here would not be enough to move us forward.
Within this context, Ceilo's challenge is not only to innovate, but offer new service to merchants and its clients. Thus to change the mindset, we have reorganized several structures by promoting the young talents.
To translate innovation into a language closer to the retail, we also launch a new marketing campaign called Fantastic Entrepreneurs. This will show how Cielo's diversified portfolio of products and service can move any business to a new one at a real machine of ideas. We are really excited with this change and remain determined to deliver our mission of delighting our client with the best solutions of a leading, profitable and sustainable company with devoted employees.
So, I conclude my comments here and thank you for your attention. We are now at your disposal to answer your questions. Operator, please.
Ladies and gentlemen we will now begin the question and answer session. [Operator Instructions] Our first question comes from Mario Pierry, Bank of America/Merrill Lynch.
Hi. Good morning, everybody. Can you hear me?
Rômulo de Mello Dias
Yes. We can.
Okay. Sorry about that. So, my main question is related to -- if you have any concerns about potential upcoming changes in regulations specifically for the pre-purchase of receivables, if you have any updates that you can give to us?
Rômulo de Mello Dias
Thank you, Mario for your question. I understand that right now the industry is having some discussions with the Central Bank. And it's clear for us that what we are doing, it's completely following what's written in the law. So, right now we are very, let's say, comfortable with the situation that we have. And there are some options that we're examining such as -- orders.
Okay. Are there any dates that we should be watching out for and do you expect Central Bank to formally make an announcement either way?
Rômulo de Mello Dias
As you may know, Central Bank is not responsible to say anything about laid out [sooner] or something else -- or something similar. And why, because it's something that is not under his supervision -- each supervision. Having said that, we are having let's say, good conversation with them, trying to address what we -- the industry as a whole has been doing so far. And let's remember that also other companies do the exactly the same thing even the factoring companies.
So, there is -- I'm just trying to provide you more information in order to allow you to conclude by yourself what should be done or not, but we are not expecting any kind of let's say secular or new resolution saying something about that because it’s something not under its supervision.
Okay. Thank you very much.
The next question comes from Marcelo Cintra, Goldman Sachs.
Hi, good morning everyone. Thank you for taking my question. My first question is regarding your costs and expenses guidance which were increased to 6% to 8% growth. You mentioned during that they call it was mainly related to stronger expectations for transaction growth. So, I just like to hear from you like if transactions were to remain in line with your initial expectations for the year, is that costs and expenses would be up for this year?
And I also will like to have some color on Cateno, we saw some margin pressure, I understand that there were some non-recurring costs over there, but my main doubt here is when we can see maybe some synergies or further improvements on margins for Cateno? And then I will follow-up with the second question. Thank you.
Rômulo de Mello Dias
Thank you, Marcelo for a question about the costs and expenses, the new guidance that you provide between 6% and 8% as you said, it's mainly due to stronger transaction growth that we are delivering, so this is as you – as also you mentioned – already mentioned -- Clovis mentioned there in the call that more than 60% is variable costs.
And when he said that the total financial volume would grow at the beginning of the year between 5.5% and 7.5% taking into consideration inflation of 7% and also the fact that Cielo at that point in time were expecting that we will grow below the industry and now you've revised this guidance. You're saying that it’s not between5.5% and 7.5% and now it's between 7% and 9%, and Cielo will grow according to the industry.
So in the -- in line with industry. So with this two things together, and if you consider the midpoint just for the sake of the arguments, we are talking about the number, I'm not saying that they're going to grow 8%, but just to make some math here. If you say that our growth would be 8% and before our growth would be between 4.5%, 5%, which is below the bottom of your previous range, you can see that there is strong difference between the order guidance and this new guidance that you are providing.
So in other words what you are saying, that we are not increasing the total cost and expense of the company that earned our control. In other words, and in a bit more what we said there in the first conference call in Portuguese language, if the performance of the company and the industry would be the one that is [Indiscernible] during the first call, our results, our total expense plus cost would be in line with this former pervious range -- with the former range or between 4% and 6%.
So, with this kind of statements I'm trying to stress the fact that we continue to concerned about to deliver it at the range that you said that we'll be achieving in terms of costs and expenses. And -- but on the other hand, if the performance of the industry is bad and the performance of the sale is bad considering the total sales volume, we need to address some costs because we consider another kind of range in terms of growth.
About Cateno, your second question, the margin pressure that you mentioned, I would say that's mainly due to some normal current events such as R$23 million that you have due to -- mainly to embossing cards.
So, there is also other no recurrent events, but we decide to focus on this, because this was the most important one. So in other words, the second quarter of Cateno shouldn't be considered as a proxy for the whole year. So, if you take it to consideration the first quarter of Cateno compared to the second quarter, there is a disconnection between the performance of the first quarter and the second quarter. I would say that of course because of the deterioration of the macroeconomic situation Cateno is also suffering in terms of the revenues and other things. But I would say that the second quarter as we said before is a novel current event, in the revenues that we'll grow more than expenses of the common.
Okay. Thank you. Just a follow-up on Cateno, should we expect maybe some synergies mainly using first quarter to [view] as a reference or in the last year, could you expect some synergies improvement of margins or the levels reported on first quarter and last year should be the normalized level?
Rômulo de Mello Dias
The synergy is something that we always take a look what can be done. What should be the performance of each line. What I can tell you that we are working on this kind synergies and some of them being already up the year in the first, because we have more than one year operating Cateno. And if you take a look at the performance, of course you don't have and we don't have the performance of 2014 third quarter, but you have the performance of the whole year. So, what we can tell you that we continue to take a look as I said before, and something in [Indiscernible] here in the short term.
Thank you. And if I may just a quick last question, it's related to the Multivan project, I just would like maybe to get a follow-up from you. When we will see all the acquirers on the market accepting all the card brands and the entire client base of Cielo also accepting Ourocard brand? Should we expect these for this year, or it's only something for install of the [Multivan]? Thank you.
Rômulo de Mello Dias
Yes. Multivan project for sure this year is going to be concluded with the main players of the industry.
Thank you very much.
The next question comes from Alexandre Spada, Itaú BBA.
Hi, gentlemen. Good morning. Thanks for taking my question. You reiterated in the Portuguese call being [patient] you have 50,000 LIO terminals installed until late 2016. Can you provide at this point any comments on what will be the pricing of those terminals as far as I know in the last conference call, the price that had not yet being fully defined? Can you make any further comments on that?
Yes. Spada, right now we are making some pilots in order to see the reaction, the acceptance of LIO in terms of the product that we intent to Brexit. What I can tell you as I said early the call in Portuguese is that the demand continues to be very high and right now we have a good [problem] is to supply and to offer the demand that you are receiving.
But for sure, the price is going to be more expensive than regular terminal because you're not comparing apples-to-apples, its apples-to-bananas because we also have not only electronic payments but we also have the management of the business and some important tools that you are delivering in the marketplace of Cielo LIO.
Okay. Thank you. So at the end of day it’s not yet fully defined?
Okay. Clear. Thank you.
The next question comes from [James Peterlin] Barclays.
Yes. Thank you very much. My first question actually was on the Merchant e-Solutions business. If I adjust for foreign currency in that business over the past four quarters or so, it looks that the growth is being trending down from double digit to low single digit, can you talk a bit about what's happening in that division?
And then, secondly on terminals I think last time you spoke you were in the process of completing a large tender for point of sales terminals. Can you talk about this has been concluded and whether that's benefiting your CapEx guidance, the conclusion of that contract? Thank you.
Rômulo de Mello Dias
You ask about the evolution of Merchant e?
Right. Merchant e- Solutions just before full FX?
Rômulo de Mello Dias
The FX as you know it’s something that really affect the performance of Merchant even though at [Indiscernible] because at the end of the day we have a hedging accounts in terms of the amount of money that you raise in order to fund the acquisition of Merchant e. But the performance of Merchant e is -- we see that the fact that is when you decide to make FX that should be necessary in order to go another step in terms of platform achieve platform.
We are -- the total results of this means that together with the fact that now since the beginning we're seen in EBITDA, so in other words this CapEx if you want to have a new platform should be necessary – should be implemented anyway because we have the will to provide the better service to our clients, but on the other hand what you have when you decide to buy Merchant e is that we also have the EBITDA so it was the CapEx that came together with EBITDA.
So the total – the combination of the two things, these are something that we are really happy with this step that you took. And about this questions when we adjust by effect is the results -- sorry I will ask Clovis and [Indiscernible] to provide more information. There is something’s that happen such as that -- we changed the Company. We moved the Company to Atlanta a new place where the -- sorry to say is the place where usually the acquirers stays. The cost of living is much lower when compared to the cost of living in [Indiscernible]. We also have some savings in terms of tax and other things, so to talk about the effects that we have in Merchant e, I will ask Clovis to...
Hi, James. The point is that we had also -- we are having this year some one-off events with regards to Merchant e, let’s say events that are not so relevant for example in a consolidated basis. But when analyzed it in individual basis for Merchant e, they are somehow relevant with regards to moving from California to Atlanta, Georgia, okay.
And also some partnership fees that were renegotiated increasing for this quarter the [cost of debit] transaction, but that’s it.
Rômulo de Mello Dias
And about your other question, James in terms of the bid for POS, we actually did a [Indiscernible] and we don’t have only one supplier, we have [Indiscernible] back and have orders and we were able to have must be a very good deal in our opinion and it’s not a firm order something that we indicate how many and also -- as I forgot to say, sorry in [Indiscernible] in fact but coming back about the price and the indication it’s not a firm order.
If you make a comparison between aligned companies, then you have to indicate to the suppliers, the manufacturers of the airplanes we give, you provide an indicator I want to have ten new airplanes during the next two years. To some extent it’s almost the same on what we give. We indicated to this big name supplier the amount of terminals that you have the intention to buy and as well the price that we have intention to buy. It’s almost a firm order, but at the end it’s not completely a commitment if you will.
[Operator Instructions] This concludes today’s question and answer session. I would like to invite Mr. Rômulo de Mello Dias to proceed with his closing statements. Please go ahead sir.
Rômulo de Mello Dias
Thank you guys for [participating in our] conference call of Cielo’s result. And as usual, we are here to answer additional questions that you may have with the team of IR and also with myself and Clovis. Thank you and have a nice day.
That does conclude the Cielo’s audio conference for today. Thank you very much for your participation. Have a good day. And thank you for using Chorus Call.
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