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Edited Transcript of CIEL3.SA earnings conference call or presentation 24-Jul-19 4:00pm GMT

Q2 2019 Cielo SA Earnings Call

Boulogne Billancourt Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Cielo SA earnings conference call or presentation Wednesday, July 24, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gustavo Henrique Santos de Sousa

Cielo S.A. - Executive VP of Finance & IR Officer

* Paulo Rogério Caffarelli

Cielo S.A. - CEO

* Thiago Stanger

Cielo S.A. - IR Senior Manager

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Conference Call Participants

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* Tito Labarta

Goldman Sachs Group Inc., Research Division - VP

* Jeffrey Brian Cantwell

Guggenheim Securities, LLC, Research Division - VP and Analyst

* Julie Chariell

Bloomberg Intelligence - Senior Analyst

* Mario Lucio Pierry

BofA Merrill Lynch, Research Division - MD

* Mohammed Ahmad

Foyston, Gordon & Payne Inc. - VP of Foreign Equities and Foreign Equities Co-Portfolio Manager

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for waiting. Welcome to Cielo's Second Quarter of 2019 Conference Call. With us today we have, Mrs. (sic - Mr.) Paulo Caffarelli, Gustavo Sousa, Thiago Stanger and Ricardo Breakwell.

This event is being recorded. (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through Cielo's 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. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished.

Before proceeding, let me mention that forward-looking 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 conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I'd like to turn the conference call over to Mr. Paulo Caffarelli. Mr. Paulo, you may begin your presentation.

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Paulo Rogério Caffarelli, Cielo S.A. - CEO [2]

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Thank you all for taking part of this meeting, this conference. First of all, would be interesting that we could remember our assumptions relating to our strategy in Cielo.

Okay. The first one is to focus on market share instead [much] nowadays because we are thinking in medium and long term. This is very important for us in Brazil, considering that we have 40% of our market share in Brazil, and this can support us to be more competitive in terms of price.

The second thing is relating to the customer experience. This is the name of the game in Brazil acquirer industry. Considering that we needed to take care of our customers, we need to prepare -- to be prepared to give them the best experience in terms of acquire. Also we need to take into account because there is a commoditization product here, we need to focus on price, system availability, suitable products, IT solution and marketing as well.

The third thing is efficiency. Nowadays, Cielo needs to be adapted in terms of size relating with our capacity to bring results.

Another point that we need to consider it, it's related to the Brazilian competition acquiring because nowadays (technical difficulty) Brazil has been increasingly fierce and price continues to be under pressure.

It's also a kind of enormous bet from the other players such as banks, fintechs, larger retailers and IT companies. This is interesting because up to -- until 2010, you used to have just the acquirers in this operation. Nowadays, changes are a lot, and you need to be adapted because sometimes, the product or even the results will be in another part that's not the part of the acquirer. In this case, we need to be available to have all kind of products, all kind of services that we can provide to our customers.

Another thing is to reinforce our strategy for you relating to improve and protect market share, as I told you previously. The second thing is, Cielo is focused on medium and long term. We need to adapt our company -- we need to adapt our products, to adapt our services to be more competitive for medium and long term because these days it's important to gain market share, to gain customers. And you will see in our presentation that you can show you that we already started to do this.

The other thing is to be involved in all the parts -- in all the segments in Brazil in the acquirer industry, from things -- microentrepreneurs pass-through retail and large corporate. We are discussing about to be involved in microentrepreneurs that we -- nowadays this kind of segment grows 40% a year. This is very important because we didn't stay involved in this segment, and now we decided to be a strong competitor in this industry.

The second thing is to change our mix in terms of retail and large corporate. When -- nowadays, our concentration in large corporate, it's almost 6% and in retail is 40%. We need to move this. We need to do the opposite situation. We need to change by retail to reach 65% and corporate 35%. We believe that this mix, it's okay for we have more conditions to structure our prices and our revenue conditions.

The presentation will show you that the first signs of our resumption of growth, we have good figures to show you good performance. And I will hand you over to Gustavo to continue with this. Thank you so much.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [3]

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Thank you, Caffarelli. And starting our presentation on Slide 3, we have a summary of the operational metrics from Cielo. So the -- let me just start off by saying that the comparisons that we will do in this presentation are all related to a growth number of this quarter versus the same quarter of the last year unless otherwise specified.

So financial volume reached BRL 164.5 billion, and that's a 9% growth. The number of equipment sold, so we sold 215,000 POSs, and that's nearly the double of what we sold in the same period of the last year. Actually, in this quarter, we reached our highest quarterly amount sold, and that's excluding last year's Black Friday.

In terms of active clients, we reached 1.4 million. That's a 14% increase. Our net revenue reached BRL 2.799 billion, and that's a 4% reduction as a result of an environment of continued competition in prices, as Caffarelli explained. And also, as a result of that, we had a 33% reduction in net income. Our net income for this quarter totaled BRL 431 million.

Moving to Slide 4, and I'm going to comment on the metrics that I hadn't talked about in the previous slide. So our EBITDA decreased 34.7%, in total BRL 748.7 million in this quarter. Our EBITDA margin went from 39.2% in the second quarter of 2018 to 26.7% in the current quarter.

This reduced profitability is explained mainly by the strong competition in prices, the strengthening of the sales force. We hired 1,000 sales professionals. We call them hunters, and their sole job is to go after new clients. And also as a result of increased marketing expenses.

Moving on to Slide 5. Over here, we have a clear view of how prices are moving. So if we look at our revenue yield on the first graph on our left, we have a 25 bps compression in revenue yield, mainly as a result of price changes, and that's the column in purple, the last column in purple there, that's the main responsible for this reduction in revenue yield. And the same pattern seen on the change from the second quarter of this year to the first quarter of this year, and that's a 11 bps contraction in revenue yield, also mainly led by a reduction in prices.

Now moving to Slide 6. I will start out by commenting that between January '17 and December '18, Cielo lost 10 percentage points in market share. The -- what we see today is that the traditional products of the acquiring industry are under pressure and because of the tough competition that we are seeing. So acquirers must broaden the revenue stream by developing new products.

Because of this environment, early this year, Cielo announced a strategy to strengthen some of its main competitive advantages, mainly -- namely scale and client base. And what we see in this quarter is a continuation of the growth that we saw for the first quarter.

So let's now turn our attention to the 3 graphs on this page, starting on the one on the left, and that's the active client base information. Our client base grew by 14%. Our financial volume grew by 9%. And the credit volume paid in 2 days grew by 29% with a penetration of 21.2% and reaching the highest volume in Cielo's history, which is BRL 21.2 billion.

Moving to Slide 7. On this slide, we show volume and client base growth information. The graph on the left represents year-on-year volume growth. The blue column is the total volume growth of Cielo. In the first quarter, we saw an inflection of this curve of a negative trend. And now, in the second quarter, we present stronger growth numbers.

And most importantly, when we break down this growth in the 2 segments in Large Accounts and SMBs -- and in this SMB view, we are also including the Entrepreneur segment. So it's a view of the Cielo Retail as a whole. So in this quarter, for the first time since mid-2016, we see growth specifically coming from this segment.

If we were to look deeper at the quarter and look at the monthly information, specifically in June, this growth metric, we would have Cielo as a whole growing above 10%, the Large Accounts segment also growing above 10%, and also for the first time, the Retail segment, and that's SMBs plus Entrepreneurs, also growing above 10%, in line with the Large Accounts growth, which is something that is very important for us, specifically for a -- our objective to reverse the pyramid that we have in terms of client segmentation and have a larger participation of Retail accounts in our total portfolio, as Caffarelli explained.

Looking now at the graph on the right, where we see also growth information in terms of active client base and volume. What we see is that for the second quarter in a row, Cielo has presented growth in both metrics.

And now moving on to Slide 8. We present a recap of the strategy that was discussed in the fourth quarter 2018 conference call that we held early this year. And so I'll make the comments on the topics that were touched on the conference call, and those are described in the gray boxes. And in the blue boxes, I'll comment the results and what has been implemented related to that.

So first, we announced a structural reorganization of the company, and we have finalized the implementation of the creation of 3 business units. Cielo is now currently driven by these 3 business units that are completely client focused and dedicated. The other -- these 3 business units are the Entrepreneurs business unit, the Retail business unit and that's SMBs and the Large Accounts business unit. The remaining departments and areas of Cielo are service providers to these 3 drivers of the company.

We also announced a change in our commercial model. We announced that we were going to hire 1,000 hunters. Those are professionals with a sole job to go after new clients. This was implemented, and we -- in this growth information that we are sharing with you, we have important contribution from the hunters.

We are now undergoing a structural review of our cost structure. And hopefully in the next conference calls, we will be able to share important developments related to that.

In terms of pricing, we are more competitive, and we went through the revenue yield impact of this increased competition in prices. And for this year, our top priority, Caffarelli mentioned the customer experience. So everything that is related to maintaining the relationship with the clients, the quality of service is a top priority for Cielo.

As a result of that, we saw a sharp improvement in both the installments of the first equipment and also in the maintenance of our equipment for our clients. And also, we saw a sharp reduction in the time it takes to address and solve an issue that is raised by our clients in the call center.

One thing and one number that even though we don't disclose the actual number, but we actually share a trend in this number is the NPS. Our NPS showed a dramatic increase in any time comparison that we see. If we compare this number to the first quarter of this year and to the second quarter of last year, we have a dramatic increase in terms of NPS.

The combination of all of that led to this resumption of growth. So 14% increase in client base, 9% increase in volume, and still on first quarter information, a gain of 1 percentage point in terms of market share.

Now moving to Slide 9. On the previous slides, we discussed how Cielo resumed growth by becoming more competitive in prices and also in quality of services. On this slide, we see Cielo's full offering, from terminals to digital accounts. So over the next slides, I'll touch on some selected information about this complete ecosystem that Cielo has.

So on Slide 10, we show that we have a complete portfolio of terminals for our clients, from the entry level equipment on our left to the smart terminal LIO on our right. And we have a highlight here with a new in a green box that shows that one -- the only gap that we were missing in our portfolio is now filled. We have the Mini ZIP, which is an equipment with a SIM card. So whether you're a small entrepreneur or a sizable client, you have a full range of equipment at your disposal.

Now moving to Page 11. We're talking about a pilot that is now under trial. It's still a pilot, which is a product called Receba Mais. The rough translation of that to English is Receive More. And this product has the characteristic of Cielo. By knowing the client well, being able to project the future sales from this client and also to offer credit based on this future sales projection. We started this in late June. Again, still on trial/pilot mode.

Up until this point, we have granted BRL 40 million in credit in this type of product. We will run this as a pilot until the end of this year when we'll make an evaluation and take the necessary steps to do a full implementation of this in broad scale, if that's the case, if our credit methodology is okay, if our systems and our clients are also up to date for that.

And moving on to Page 12. We talk about some features related to our digital account. We currently have over 100,000 clients using this digital account. They can do -- they can pay their bills, do wire transfers and so on.

Just to show you some growth numbers versus the last quarter, we had a 95% increase of the digital accounts of the usage for actual shopping and buying goods and so on, 74% increase in wire transfers, 56% increase in cash withdrawals and a 53% increase in bill payments. This is just the start, the beginning of this product, and we're likely to see further developments of this in our future calls.

With that, I finalize the presentation and turn it over to you, investors and analysts, for the Q&A session. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Mario Pierry from Bank of America.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [2]

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I have 2 questions. Gustavo, you mentioned that you are separating now Cielo into 3 business units, right, to focus on retail, micromerchants and large corporates. I was wondering if you can provide us any color on your growth expectations for these segments. And how are you splitting the 1,000 hunters that you hired last quarter among these 3 units?

Second question, Caffarelli mentioned in his opening remarks, right, the need to continue to improve costs, especially to adapt the company to the size of revenues that it is generating. But we were wondering, how can you be improving your cost structure now, especially as you recently hired 1,000 people. So I was wondering if part of this cost improvements are related to renegotiating the rebates that you have with the banks? Or what measures are you contemplating taking?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [3]

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Mario, thank you for your question. So starting with the first one. In terms of growth, and I would call everybody's attention to Slide 7. This is actually a tough question because what we are now very happy to be disclosing to the market is a second quarter of a continuation of growth, but market competition is still fierce.

That being said, what we expect in the upcoming quarters, are growth numbers in line with what we saw on the second quarter. And let me go over information that I think touched on very briefly here on the call.

So, on Page 7, what we see are growth numbers in the -- divided by quarter. If we were to look at the month of June specifically, we have very balanced growth. 10% of growth in Large Accounts and 10% of growth in the combination of SMEs and Entrepreneurs. So that's what we expect, Mario. But it's hard to guarantee or even to provide any type of guidance on that because again, that's -- that will be the consequence of the tough competitive moment that we have in Brazil.

The question on hunters. They're actually 100% dedicated to SMBs. They are not going after clients on the entrepreneurs -- the microentrepreneurs space. So microentrepreneurs are currently served by banks, by partners that we have such as ISOs, web, digital, call center and so on. It's actually a matter of the cost acquisition -- the client cost acquisition. So given that the hunter sales force is a relatively expensive one, it has to be dedicated where the profit pool is concentrated.

And on your second question related to cost, let me start out by saying that it's important that we take the following steps to look at the cost structure of Cielo. So first, we should look at Cielo Brasil just to concentrate on Cielo as the acquirer without its subsidiaries.

And Mario, if you were to look at this number and the total costs and expenses related to this number, even with the addition of the hunters, and you make 3 exclusions and I will explain why I have to make those exclusions. So if you look at this number, hunters [full on] discounting 3 items. You will have stability on Cielo's cost per transaction for the last 3 years.

The 3 items that I'm excluding from this calculation are marketing expenses. So -- and this line item will fluctuate as a function of our increased appetite to go after new clients and to compete. Also, the card brand fees, and that's a function of the negotiation with MasterCard, Visa and so on. And also on the losses the -- that accounting losses, the accounting provisions that we are making, that given this environment of intensified competition, it is common for Cielo to gain a client, and 3, 4 months down the road, the competition go after this client and wins the client back over.

And sometimes the client does not cancel the contract. When that happens, I'm still charging rent. And when I don't have the financial schedule of the client with Cielo anymore, the client is unable to pay and I have to account for a provision.

This is an issue that we can manage, and we have efforts to reduce that. But -- again, I'm being long-winded here. If you discount these items, you'll see stability on the Cielo cost structure. We are doing a full review of our cost structure, but I will not provide you with the guidance of where that may go because savings that we find on the Cielo, let's call it, business as usual can be channeled to the development of new products.

And to your point on the agreement with the banks on the incentives contracts with the banks, the expiration date of this contract is the end of this year. And of course, we will go through negotiations discussions. But at this point, we have no information to share about a trend or concepts related to a new contract that will have to be enacted until the end of this year.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [4]

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Okay. That's very clear. Let me just follow up then on the first question related to the business units and the comments made at the beginning of the call, right, that the focus remains on market share. Can you share with us what is your target market share for each segment? So if we think about the large corporates, retail? And then if you can be more specific in retail between SMEs and micromerchant?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [5]

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Mario, first I'm going to start by saying, I'm sorry, not to give you an answer with a hard number, but that all has to do with the environment that we are facing today.

So strategically, what we believe is important is to maintain strong presence in this market, and that's a realization of the fact that the current product from the acquiring industry will remain under pressure and that we have to develop new revenue sources that will come from the usage of data from our transactions, from being present in both the large clients and on the retail.

It's very hard for us to establish an internal goal of market share because again, we are happy to be showing the market 2 consecutive quarters of growth. It's very hard to say that that will be maintained over the next 2, 3 or 4 quarters. It is again a market of strong competition.

So the overall strategic rationale is Cielo has to remain as a sizable player and with a strong presence, guaranteeing scale and presence throughout the different segments of the economy. But we don't have internal goals of market share in any of the clients.

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Operator [6]

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Our next question comes from Tito Labarta from Goldman Sachs.

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Tito Labarta, Goldman Sachs Group Inc., Research Division - VP [7]

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A couple of questions also. I guess following up a bit on the market share, just to understand a little bit how you're seeing this because if we look at the growth today, you're growing your volumes around 9%. But if I understand correctly, the market's growing closer to 15%. And also, you're still growing faster with large merchants than with SMEs, and presumably SMEs are growing much faster than that.

So are you actually gaining market share today? I mean do you think you will be gained -- able to gain market share because even on the growth you said of around 10% roughly in all of the segments, it could imply that you're still losing market share.

So just want to just a little bit in terms of how you're seeing the market growing and if you're taking share or is it just the market's improving and you're benefiting from that improvement in growth? And then I have a second question on pricing, which I'll ask after that.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [8]

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Well, first, and that's a very appropriate question that the 1% market share gain that we talked about, and that's a gain that we saw in the first quarter, is a sequential growth, is from the fourth quarter -- from the first quarter. And that's specifically for market share. That's how we are tracking our evolution, where the 9% growth in volume is year-over-year information. I'm glad that you asked this question because it's important to clarify this.

To your point on what does this look like, today, we don't know because we don't have the full information from the market. Some of the players have started to disclose their numbers at this point from the ones or the one that has disclosed. We have gained -- in our view, we have gained some momentum and possibly market share.

We expect an evolution of market share gain in the second quarter. We will only be able to assess that once all of our -- at least the most relevant players of our industry have disclosed their numbers.

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Tito Labarta, Goldman Sachs Group Inc., Research Division - VP [9]

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That's helpful. And then -- and the second question, going back to Slide 5 in the presentation where you show the changing in price, particularly on the product mix because you grew faster in credit, that should have probably helped your pricing.

But given that you're growing faster in Large Accounts still at this point, I was wondering if you can actually separate that. What was the impact of your growth in larger accounts? And how did that impact the pricing, excluding the shift from debit to credit? If you can give any color on that, will be great.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [10]

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Well, Tito, to your point, I don't have the actual breakdown with me right now. You are correct by observing the trend that a greater volume of credit should have generated a pickup in revenue yield, but that was offset by the stronger growth in the Large Accounts segment.

I will follow up with you to provide you a proper breakdown and possibly include that in our website. But the fact is, the breakdown of this variation, I don't have it with me right now. I can gladly provide that to the market.

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Operator [11]

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Our next question comes from Neha Agarwala from HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [12]

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My first question is on regulation. Do you see the discussions on D+2 coming back? And how do you think you can benefit or you can -- what are the risks that you see from the -- the centralization of the accounts receivable?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [13]

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Thank you for your question. Your question was a little bit muffled over here in the way we heard it, but I understand it was a question on D+2 payments, correct?

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [14]

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Yes. Do you see the discussion on the settlement period coming down to D+2? Is the discussion coming up again with the regulators? And the second part was on the centralization of the accounts receivable. How do you see that impacting your business next year?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [15]

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Okay. So first, we haven't seen an evolution of the D+2 settlement in terms of regulation in our interaction with the regulator in Brazil. What I know, you saw and you're referring to, is that on the first quarter, we had a competitor implementing this alternative without an extra cost for the credit sales for a portion of their clients.

We haven't followed. We are not discussing the implementation of a similar strategy here at Cielo. So I think that answers your question in terms of what's being discussed here at Cielo. So we're not planning to follow that movement.

And in terms of the -- if I may call it, that centralization of receivables, I believe it's a trend. And I believe that it will give the merchants more options in terms of how to use in discounts their receivables.

So everything that we're talking about in terms of making Cielo more client focused also revolved about the fact that it will be increased competition. So what we have to do on our end is to be ready to compete in any scenario.

And I agree with the trend of your question, which is, it is a scenario of increased transparency, competition and alternatives for the clients. What we have to do is to become the best alternatives, both for receivables prepayments and also I touched on the presentation in terms of credit products based on the history that we have with the clients.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [16]

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That would also mean lower yields for all the players if there's more transparency and competition in the receivables prepayment?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [17]

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So since the announcement of the D+2 payments with no extra cost by one of our competitors in the last quarter, we haven't seen any significant move from the competition on that type of product or that type of product offering to the clients.

So not only we haven't seen an attempt to replicate this by the competition, but also we haven't felt the effect of clients calling Cielo and asking us to do the same. So up until this point, we haven't felt impact associated to that.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [18]

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If I may ask 2 different questions. The first one is on the pilot program for the credit business. What is the kind of model that you're adopting for this business? Are you doing it with your own balance sheet? Are you doing it in collaboration with the controlling banks? What is the model that you're looking at adopting? I believe you've already given BRL 4 million (sic) [BRL 40 million] in credit so far, but any more color on that would be very helpful.

And the other question that I have is on the cost base. How do you -- now you're trying to grow more in the micromerchant segment. What is the kind of structure that you're adopting there? Is it all digital? I believe the farmers and the hunters are for more the SMB segment, not for the micromerchant. So what is the different strategy that you're applying for that particular segment? Is that a new segment that you want to penetrate in? And how does that impact your cost -- how are the costs in that segment?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [19]

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Thank you very much. So starting on your question on Receba Mais, the credit product. I think the most important thing that I need to convey to the market right now is that it's a pilot. It's still a trial that we do. Most of the credit that we granted was through a [FIDC], but with Cielo's funding. And we also are ready and able to do that with one of our controlling banks.

But the most important aspect is, throughout this trial period, and that will be finalized at the end of this year, we will improve characteristics of this product and we'll be able to assess if we have to change anything on that.

So the message that I want to give you is we are working on this. As soon as we have a final product, goals, the final funding strategy and everything, the market will be promptly informed of that, where again, the timeframe is until the end of this year for a final evaluation of this product.

In terms of how we are competing in Entrepreneurs, you're correct, hunters are dedicated to the SMBs. We're not using hunters because they are expensive to go after clients for the Entrepreneurs segment. So for that, we rely on the distribution network from the banks, on our Internet where we offer the sale of equipment and trying to become as digital as possible in these relationships with the clients, having a very friendly app, very friendly web access and a very -- not on the digital front, but a very efficient call center. So that's how we look at that.

So if we were to look at these items that I mentioned alone, they are relatively light in terms of the cost structure. The 2 items that we have to be with permanent -- to look at with permanent attention, well, the first one, and that's a direct -- has a direct effect in client acquisition, which is marketing expenses.

If there is a segment today that is overcrowded is marketing for POS for entrepreneurs. We are there. We are there marketing our product, and the competition is there as well. So that's an important item to follow.

And the second one is the level of subsidies that we have -- that we offer our clients for their acquisition of the equipment. This is currently a heavily subsidized segment. Of course, we wouldn't be subsidizing if we weren't expecting a positive result from that.

But what I can tell you is that Cielo has, depending on the type of equipment, probably across all of them, most of the -- in most of them, the best cost offering, the best -- the lowest total cost for entrepreneurs that look for Cielo as their acquiring partner.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [20]

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That was very helpful. On -- one last thing, if I may, ask you is, you made significant changes in your business model in the way you look at the market, and you're changing with the changing times in the industry. If you can point out 1 or 2 areas in which you feel that there's more work to do compared to the newer players like PagSeguro and Stone, compared to them, what are the few areas that you can point out that Cielo still needs to do a lot of work on?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [21]

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First of all, I'm going to comment on areas of improvement, but based on our assessment of Cielo. Cielo has its own business model that -- and we don't think that's directly comparable to most of the competition.

So specifically, on the current business, the current products and activities from Cielo, we mentioned throughout this presentation improvements in quality of service, in maintenance period, in the time it takes to solve our matters, problems are raised at the call center and an improvement in NPS.

So -- but what we highlight is we have shown improvement, but we are not satisfied yet. So we need to have, in these areas that I mentioned, the best quality of service. So that's the area that needs to keep improving. We are in a positive momentum. We are showing progress there. We need to keep showing that. Our NPS has to be the best amongst our class of companies.

And another area, and then -- and that's more looking for tomorrow, is the development of new products, is the expansion of features in a digital account, is the expansion of features in e-commerce, the usage of QR codes, the integration of our smart terminal with the functionalities that our clients require. So with an eye on today, we need to keep improving. And with an eye on tomorrow, we need to build the new avenues of revenue growth.

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Operator [22]

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Our next question comes from Mohammed Ahmad from FGP.

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Mohammed Ahmad, Foyston, Gordon & Payne Inc. - VP of Foreign Equities and Foreign Equities Co-Portfolio Manager [23]

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Just a couple of questions on -- one on Cateno. Could you just give us a little color on what's causing the cost increases both in COGS and OpEx in Cateno this year versus last year?

And the second question I have is on your installed base of merchants. What percentage of your installed base has now been repriced to the new pricing level? Or asked another way, I'm just trying to get a sense of how far does your take rate still have to drop to reflect your current pricing scheme.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [24]

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Thank you, Mohammed, for your question. So on Cateno, Cateno presented a quarterly volume growth of 11% compared to second quarter this year versus second quarter of the last year. If you were to look at the cost components, you have a growth that is below these metrics. So in that sense, Cateno is becoming more efficient.

But if you look at operating expenses, over there, you have an increase higher than the increase that we saw in volume. And that's driven mainly by the fact that Cateno is also structuring new projects, they're also investing resources in the creation of new products, in some items related to increase of provisions for legal contingencies and so on. But the main driver of operating expenses growth of Cateno is the attempt, the effort to develop new features and new products for Cateno.

Your second question on client base and portfolio, so what percentage of the portfolio is now at new prices? So roughly 50% of the portfolio is now running with prices that were negotiated whether it's a new client or an old client that renegotiated prices. So 50% with prices that were negotiated since January this year.

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Mohammed Ahmad, Foyston, Gordon & Payne Inc. - VP of Foreign Equities and Foreign Equities Co-Portfolio Manager [25]

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I'm sorry, that applies only to the Retail segment, correct? Because my assumption is on the large client segment, pricing was already fairly competitive?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [26]

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Correct. We're talking about clients with a yearly revenue below BRL 15 million, that's the SMBs plus Entrepreneurs.

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Mohammed Ahmad, Foyston, Gordon & Payne Inc. - VP of Foreign Equities and Foreign Equities Co-Portfolio Manager [27]

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And just on merchants, you have changed the methodology. I was wondering, are you able to provide us a number based on the old methodology for this quarter? Or that's no longer possible?

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [28]

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Referring to active client base?

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Mohammed Ahmad, Foyston, Gordon & Payne Inc. - VP of Foreign Equities and Foreign Equities Co-Portfolio Manager [29]

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Yes. Active number of merchants.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [30]

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Yes. Represented a year-over-year growth of 14% of active client base, and that's clients that had at least one transaction over the last 90 days. And also a good number, if you were to look at the old methodology, which would be 11% growth, and that's for clients that had at least one transaction over the last 30 days. Let me explain the reason for the change in criteria.

When we look at how we manage the client base, we understood that it's more appropriate to show the 90 days number because in our internal procedures and routines, when we see that a client hasn't been active for the first 30 days, we still have attempts and measures to reconvert or reactivate these clients before they leave Cielo.

So we believe that the most stable metric in order to account for our retention efforts is 90 days. But with -- again, just to demonstrate that we're not doing this because of a convenience of numbers. Okay, it's a 14% growth in the 90 days metric, but also a healthy number, 11% growth on the 30 days metric.

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Operator [31]

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And our next question comes Julie Chariell from Bloomberg Intelligence.

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Julie Chariell, Bloomberg Intelligence - Senior Analyst [32]

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Wanted to ask a little bit more about the digital accounts and just some background there. How long has this offering been in place? How big is the install base? Whether Receba Mais fits into this directly or into the broader SMB group, target customers, those kinds of things around the digital accounts?

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Thiago Stanger, Cielo S.A. - IR Senior Manager [33]

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Here's Thiago. We started off in the digital accounts in September last year. So basically from September last year, September '18 to -- up to June this year, we were able to add more than 100,000 customers in our digital account.

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Julie Chariell, Bloomberg Intelligence - Senior Analyst [34]

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Great. And so right now, the primary users of this are the microentrepreneurs or SMBs or a combination of both?

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Thiago Stanger, Cielo S.A. - IR Senior Manager [35]

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Let's say, roughly 100% is in the microentrepreneur segment. Because in the other segments, they need more features, they need more products. And then a digital banking account, it's a good product for this type of merchant. So for the microentrepreneur segment, the digital solutions that we are offering today are basically matching their needs.

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Julie Chariell, Bloomberg Intelligence - Senior Analyst [36]

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And so where do you think you are in that trajectory of getting the digital accounts sort of fully built out to be more competitive, say, with what PagSeguro is doing for the micromerchants? How many more features do you need to add and by when?

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Thiago Stanger, Cielo S.A. - IR Senior Manager [37]

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According to us here, I don't want to compare all of the companies we have. But according to us, we understand that we are offering the same products, the same solutions, the same type of services that the other players can offer.

So we have the prepaid cards. We have also -- the customers can transfer their money to other banks. The customers can make shopping. The customers can withdraw the cash, pay their bills. So I don't see at this point that we have any disadvantage compared to other players.

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Operator [38]

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(Operator Instructions) Our next question comes from Jeff Cantwell from Guggenheim Securities.

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Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [39]

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I just want to ask for a little bit more color on your earlier commentary about the financial outlook. Can you talk a little bit about your expectations for the back half of this year in terms of how fast you might be able to grow net revenue? Obviously, there's going to be some seasonality in the numbers.

But I'm -- it does seem like you're lapping some fairly easy comps on -- plus now you're talking about a second consecutive quarter of increasing your active merchant base. I just wanted to ask if you could talk about your confidence in that volume and revenue growth could be better in the back half of this year than you've had in the front half of this year.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [40]

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Jeff, I have to be very careful in the way I answer this question because for one thing -- and that I believe is the backdrop that we said for the first, second quarters and that we'll likely see in the upcoming quarters, which is an environment of tough competition. So with that -- and it's very hard to project that conditions will remain as is, we're projecting a continuation of the growth trend that we saw in the first 2 quarters.

But again, over the past 3 months, we saw significant movements from the competition. Some of them were matched by Cielo, some were not. So it's very hard to project a volume/revenue trajectory for the remaining of the year. So I am very cautious when I talk about this.

What you can expect to see, and it's a more subjective comment, is Cielo persisting with the strategy to maintain its client base, to regain market share and to be competitive in terms of prices. If there is one player that has the ability and financial room to face an environment of increased competition, we're talking about Cielo because of its scale.

And throughout this call, we also talked about some efforts that were done -- that were made in terms of cost and efficiency, and so on. But I'm sorry not to provide you with a number for revenue growth and volume growth, but again because it's very hard to project that.

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Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [41]

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Okay. Understood. I do -- if you don't mind, I have a related question on margins, which -- EBITDA margins were below what we were thinking this quarter, it's been that way for several quarters now.

And I guess, my question is, is I'm kind of thinking through your sales and marketing and then what you're talking about with new hires, but we're also seeing the -- sort of the active merchant base expand and things like that. So I guess, the crux of it is, and just back of the napkin, I'm thinking we might eventually see some stabilization in EBITDA margins. I'm just curious if you can comment at all on that as well.

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Gustavo Henrique Santos de Sousa, Cielo S.A. - Executive VP of Finance & IR Officer [42]

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We'll comment, but without providing numbers and frankly because it's tough to project numbers and scenarios at this point because of competition. So we don't have on our radar, at least for the next coming quarters, a view of stabilization of competition.

What we have been seeing is an increase of competition. New players join this industry, I believe Caffarelli mentioned the point here that the acquiring industry in Brazil is now the ambition of banks, fintechs, large technology companies, large retailers and so on. So with that in mind, we don't project a stabilization of competition over the next quarters. So we actually are preparing ourselves in terms of efficiency and other measures to be able to fight this battle.

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Operator [43]

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And ladies and gentlemen, we've reached the end of today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

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Paulo Rogério Caffarelli, Cielo S.A. - CEO [44]

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Okay. Thank you all for to take -- to taking part -- for taking part of this meeting. I think that we were good to explain to you that our strategy, our [increasement] that you -- our growth that you could have in our figures and our performance.

I hope that -- I need to assure to you that Cielo's completed involvement in this competition as much as necessary. Our main strategy nowadays is to remain the leader of this competition. And by the customers, by the market share, we can have more competitiveness by pricing and other things.

Thank you so much. If you have any doubt, please do not hesitate to visit us and to contact us in IR department. Thank you so much.

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Operator [45]

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Ladies and gentlemen, that concludes Cielo's conference call for today. We thank you very much for your participation. Have a nice day. You may now disconnect your lines.