Cielo S.A.

Good morning, everyone. Thank you for taking part in this conference.

It's a pleasure to be here sharing the fourth quarter 2020 results with you. 2020 was a challenging and remarkable year for Cielo, mostly in two fronts.

Cielo has consolidated its strategy for improving customer experience, ensuring profitability and potentialize and accelerate the digital transformation, which will enable us to be strengthening even more our leadership in this segment. Despite being a tough year, the fourth quarter 2020 figures confirmed that Cielo achieved substantial outcomes as follows.

15% transactions volume increase versus the prior quarter. In retail segment, one of the main focus in our strategy, the growth was 13% versus fourth quarter ‘19.

As I mentioned previously, our target is to balance the corporate and retail levels to the end of this year. So far we have reached 37%, an all-time high 33% in prepayment, which means a , which indicates we are on the right track.

The commercial team productivity doubled along 2020, achieving 52% at the end of the year. The net promoter score, NPS, remains growing steadily.

It's worth pointing out that from June ‘18 to November ‘20, it grow 7.5 times. Our financial and operational KPI, such as net operational revenue, EBITDA, EBITDA margin, net profit to controllers and net margin show an uplift versus fourth quarter ‘19.

Further on Gustavo will provide you more details about this. ZBB efficiency yielded R$170 million saving mainly due to the structural adaptation related to negotiation and teams dimensioning for improving and adjusting the operation to the new competitive scenario.

As a result, the quality of our services went up to a better level. Cielo sold its stake in Orizon at R$129 million.

It was the first, but not the last, non-core business asset to be sold.

Thank you, Caffarelli. Good morning, everyone.

And we will start our presentation on slide 4. Our net income reached R$298 million, 35% higher than the same period in 2019.

Cielo’s TPV reached R$191 billion, 15% higher than the third quarter ’20. Our SMB and long tail TPV increased 13% year-over-year.

And we also presented a new record in terms of prepayment penetration on SMB and long tail, reaching 33%. We showed a strong growth in the productivity of the commercial team.

Our own channels, Cielo’s commercial team represented 52% of fourth quarter 2020 activations. In terms of customer focus, we showed continuous improvement.

NPS increased by 7.5 times from the middle of 2018 to November 2020. We will talk about a new service model at the end of this presentation.

And in January of this year, we announced the closing of the sale of Cielo’s stake in Orizon, receiving the amount of R$129 million. Now moving to page 5.

On this page, we see three charts. Throughout the year, we use these charts to demonstrate how COVID impacted volumes in the Brazilian economy and also in Cielo and Cateno.

On the upper chart, we see the ICVA. As we can see, in the first and second quarter, we had strong impacts of the crisis, but we saw a normalization of that on the fourth quarter.

On the chart in the middle we have the TPV from Cielo, also severely impacted mainly on the first and second quarters and with strong recovery on the fourth quarter. The same pattern is seen on the chart on the bottom and that is Cateno’s TPV.

Now moving to Slide 6. On this slide, we have the main financial metrics from Cielo.

Our net operating revenue totaled R$3.023 billion in this quarter. Our EBITDA totaled R$768 million in this quarter, and that's a 16% year-over-year growth.

Our EBITDA margin totaled 25.4%. And our net income totaled $298 million.

And that's up 34.7% growth year-over-year. Our net margin totaled 9.9%.

On Page 7, we can see the gradual recovery in all of Cielo's business units. We have a breakdown of Cielo into Cielo Brazil, Cateno and that Cielo's 70% stake in Cateno and other subsidiaries, mainly Cielo USA, that is represented by our investment in MerchantE.

We can see improvements in these three segments inside Cielo. On Page 8, starting on the chart on the left, we have Cielo's TPV.

We saw a 15% increase over the last quarter, over the third quarter of 2020 and a TPV that totaled R$190 billion. In the chart in the middle, we have our active merchant base.

We totaled 1.4 million. We have a 1.4% reduction, given the 7.6% contraction in our long tail client base.

And that's because Cielo has been very conservative in terms of granting subsidies for equipment sales for this segment. We also highlight the 4.6% increase on the SMB portfolio.

Good morning, everybody. Congratulations on the results.

I have two questions, Gustavo. First one is on the penetration of your prepayment product in the retail segment.

As you showed, it increased from 26% to 33%. But it is still below what some of the new entrants are doing.

So I wanted to get from you first, how were you able to increase this penetration? Is this just being more aggressive on prices or just being more aggressive in offering the product?

Where do you think we can see this level of penetration in five years’ time, especially considering whether we're going to have this receivables marketplace operational in Brazil later this year? Then my second question is related to all of the other products beyond acquiring and how should we think about the opportunity in terms of revenues?

And here I'm trying to focus a little bit more on your credit product and on the monetization of this data that you talked about. How should we think what is the addressable market for you here?

Thank you.

Hi, Mario, thank you for your question. On your first question about the penetration of our receivables product, we have grown from 26% to 32.7% from the -- over the last year.

And most of this growth came from new clients that joined Cielo. So we are faster in generating new clients that have a high adoption of the automatic prepayment product, Receba Rápido than in penetrating in old legacy accounts.

That's just a function of the preferences of the client base. So we have been very effective in the conversion of new clients to the Receba Rápido.

In terms of pricing, our price in different segments on the retail is completely in line with the competition. So it's more of a function of prioritizing this offering on our commercial team and reaching clients that adopt our product.

It's hard to talk about where it will be in five years, Mario, but this growth that you saw in terms of percentage points gain in penetrations that you saw in 2020, we want at least twice that in 2021, okay. So I believe that by the time we reach the end of 2021 and throughout 2022, we will be very close to where the competition is today in terms of penetration on the retail.

Mario, I believe it's easier for the market to keep projecting growth in penetration, to keep projecting efficiency gains for Cielo, then right now to quantify the initiatives in terms of new revenues. So what we have right now are internal projects, in terms of the credit product, we have recently created areas dedicated to that.

We are right now initiating a project of data monetization. So it's hard for me to give you specific targets related to these new sources of revenue.

So even though we know that in the future, we need to generate revenue, they are not in the traditional revenues of the acquiring business. Right now, it is a lot easier to project any improvement of the core business from Cielo but as soon as we have visibility on these new sources of revenue we will communicate that to the market.

Okay, that's clear. So but just a little bit more color then on your credit product.

Exactly what are you aiming to do and how you plan on funding the business? And hereon, what are you planning to do, is it like working capital loans for SMEs, is that the idea?

The idea, Mario, at least -- let me repeat it, because I think I got cut off here. So exactly that's the idea.

The starting point for the credit offering is working capital for small businesses. And we'll see, after we implement this project, where we'll go from there.

But initially is working capital lines. And what we are seeing in the market right now in terms of funding instruments is a market that is open to many types and formats of the FIZIC .

So we have seen FIZIC in that prepayment, FIZIC in that credit. So we know that conditions are favorable right now.

So I think those are the most likely funding instruments that we will use.

Okay. Gustavo, thank you very much.

Thanks for your question, Mario.

Hi. Good morning, everyone, and congrats on the numbers.

My first question is on market share. Where are you in stabilizing market share for the business?

You evidently lost a lot of market share in the past few years. You've done a lot of rework on the way you run the business.

And where do you think that leads you for 2021, if the industry according to ABECS is going to grow somewhere around 18% in terms of TPV? How close can you be to that growth rate or not?

Where are you with those market shares stabilization? Do you think it's fair that you can probably maybe grow half of the industry?

That's my first question. The second question is on operating expenses, which was very surprising to see the fourth quarter numbers down 19% sequentially, down 12% year-on-year.

For the first nine months of the year, your operating expenses were up 15%. So what is the right level to think about for 2021?

You talked a lot about -- a lot of expansion of the commercial department, head count additions et cetera. How much do you think operating expenses should grow in 2021 altogether?

Thank you.

Thank you for your question on market share. I'm going to give you a broad answer here.

Because the TPV from Cielo, if we think of very big numbers, we're talking about still a reduction of TPV in large accounts, as we have been communicating to the market. We are renegotiating prices in some of the larger accounts.

In some of them, we are successful and we are able to reprice and retain the client. In some of them, we end up losing the business.

So a continuation of that will likely lead to a reduction of TPV on the large accounts segment. Given it's close to 60% representation participation of Cielo’s total TPV, it's likely that Cielo as a whole will lose market share.

But when we look specifically at the SMB portfolio, and that's where we are concentrating even more energy and investments in expanding the sales force, providing them with new tools, we intend to grow faster than the competition. So in our proxy here of market share for SMBs over the last two years, we were able to stabilize our market share in this segment.

We lost a lot of ground and the market is very aware of that, in 2016 and 2017 and 2018. Starting in 2019, we started to stabilize that.

We now intend to regain some of that market share that we lost specifically with this addition of sales force and the change in the commercial model to make up for lost domain. In terms of OpEx, Jorge, what we have right now, and you're very right there, is that we have a clear addition of costs, which is the increase in the sales force by 500 new Cielo employees.

We are doing our best here. It's hard to quantify, but we are doing our best here to offset that with efficiency measures.

So it is our aim to keep presenting efficiency gains and reduction in costs, even with the addition of the sales team. We have some projects related to that right now.

Projects that are related to reviewing contracts, contracts. We are still in the beginning of this activity here in the beginning of the year, but it is again our goal to offset the OpEx increase that comes with a larger sales team by continuing to provide efficiency gains.

So thanks for that. Let me -- sorry, apologies.

Let me just --

Okay, please. Go ahead.

No, no, please go ahead. Sorry.

No, if I may Gustavo, in terms of market share, now this is last year, our choice between market share and results we are focused nowadays on results because these, that we are doing the balance between corporate and retail, and also to focus to increase the performance in retail that that for us will be very important for establishing this kind of balance. We used to have 73% in terms of corporate against retail.

Nowadays we are in 63% in corporate and 37 in retail, and we intend to reach till the end of this year a half and a half. This is very important for our equation.

Thanks and let me follow-up on the expense side, and sorry to push a little bit on this, but the gap between the first nine month number of up 15% on expenses and the full year number of up 7% is quite big. And so it will drive very different results in 2021, if you're closer to 15%, then you're closer to 7%.

So when you put it all together, your initiatives plus the efficiency that you're trying to gain in order to offset some of those investment initiatives, where do you think you'll land. Is it closer to the 7% full year growth that we saw in 2020?

Is it more, just help us get a little bit better handicap around this?

Sorry, my phone keeps breaking up, I’m sorry. It is our aim and that's a challenge for us because we are quantifying that right now to provide further efficiency and not a growth in terms of our costs.

We do our – in terms of disclosure Jorge, I ask them to look back at some of the disclosures that we do in terms of one-offs that we had throughout the year. The expression that we use of normalized expenditures.

When we present that, we try to isolate effects in our cost base of variable expenses, such as variable costs, such as branch fees. Also the subsidies that we’re still amortizing, subsidies that were granted in 2019, and also another variable cost item which is related to the service rendered by the banks that we have contracts with.

When you look at that, and you also discount some of the one-offs, such as impairment losses related to BOS, I believe you arrive at the more stable number. But given all that, Jorge, the best I can tell you is that even though it's a challenge for us and we accept this challenge, we have to present further efficiency gains even with an addition of a commercial, even with an expansion of our commercial team in 2021.

And you think about efficiency gains on a margin perspective or what does that mean? Or an absolute growth of expenses, what exactly does that mean?

In total expenditures, when we look at the total costs plus expenses year-over-year.

Okay, got it. Thank you very much.

Hi, Caffarelli and Gustavo, thanks for the call. I guess two questions also following up a little bit on Jorge's question in terms of efficiency and expenses.

I guess maybe looking at more from the margin perspective, your margin background, EBITDA margin back at 25%. So a nice recovery from the lows.

And I know it's probably hard to give guidance, but even just in terms of direction, is there room to continue to increase that margin from here? Are there -- in terms of margin, is this kind of a normalized level?

I don't expect an exact number, but just direction from here, is there more improvement or can you go back to where you were just a couple of quarters ago where you were around 20% or even below that? And then second question, kind of somewhat related to that, given the reduction in the marketing expenses, does that potentially impact your ability to grow and gain some market share, even on the SMB side and maybe even kind of micro merchant side?

Just thinking about sort of the trade-off between cutting expenses and being able to grow and gain market share. How could that potentially impact you in terms of TPV and revenue growth?

Thank you.

Perfect. Thank you for your question.

On your question of margin and EBITDA margin, we're very conservative in providing even a flat guidance on that because our margin is so dependent in terms of pricing on the market that the biggest unknown for us is how price will behave throughout 2021. Just going back, just to give you some color on that.

We -- in our discussions with the market, in our quarterly calls, at the end of 2019 we expressed this very clearly. The prices had been on a declining path for quite some time, in quite steep incline.

Over 2020, especially until the third quarter, we saw a relative stabilization, very likely because the market was -- our competitors were also prioritizing, looking after their clients during the crisis than actually doing a price war to steal market share. We saw the beginning of stronger price competition at the end of last year and the very beginning of this year.

Depending on how this goes on 2021, this can have a big impact in our numbers. So this is why our biggest challenge, and this is something that we can control, is to deliver gains on the cost side, because on the profitability, we will gain market share on the retail that we are investing heavily on that.

But still, ultimately the price on the retail has to be competitive and that is a function of market competition. You have another question, can you repeat that?

Yeah. And the question was in terms of your -- does that hinder in any way your ability to gain market share, particularly on the retail side?

Thank you very much for that. We both think that the current marketing expenses level will be a constraint in terms of our distribution effort in reaching new clients, reaching new clients in our view, and that's what we're focusing on for 2021, will be the combination of an increased sales team, working on a new model and using better technological tools, such as an app that generates better leads and is able to provide customized offers, depending on the type of client and also better logistics.

So we believe that, that is key to reaching new clients and also building on the fact as we have presented here, that we have shown significant improvement in terms of our quality of service.

Okay, thanks Gustavo. That's helpful.

So we can assume that the current marketing expenses you have are sort of sustainable in terms of what you're doing and the investments will come in the other aspects you mentioned. Correct?

Yes, you can. Yes.

Perfect. And if I could ask this one follow-up on the pricing that you mentioned.

I understand, difficult to predict. But I guess, maybe think about it, all else equal if pricing kind of stabilizes where it is today, does that mean you have room to increase your margins?

That's a big if. But yes.

Good afternoon, Gustavo and Caffarelli. It would be really nice if you could talk a little bit more about your use of FIZIC to fund the credit, the credit segments.

Do you think it's effective to scale up credit using only this source of funding or do you envision using a more robust deposit base in order to have a credit portfolio larger and larger every year? Thank you very much.

Thank you, Sofia. We've announced that the primary funding instrument for the credit activity will be FIZIC .

We're seeing a market for that, favorable conditions. You know that we already use FIZIC for the receivables activity, not credit, but we already use it for receivables.

And as we expand our activity into credit, I believe that FIZIC will be the primary instrument. We are not talking about taking deposits or any other related instruments.

Okay?

Okay. Thank you very much, Gustavo.

Hi. I hope you're all doing well.

And thanks for taking my question. Nice results here as well, it's good to see that the cost controls are becoming more advanced here.

I wanted to follow-up on the questions you're getting asked. And this is in reference to slide 8 of the presentation.

So when we focus on your active merchant base, you have roughly 1.4 million merchants now. And it looks like 2Q was the bottom, and you've been rebounding since then.

And we've seen all the good strategic moves you're making to turn this around, you're talking about increasing your focus on SMBs, lowering churn, et cetera. So I'm just curious, what are your thoughts on Cielo's ability to increase the total number of merchants from here?

In other words, do you think '21 -- 2021 is a year where the merchant base expands? And do you think you'd get back to that pre-COVID merchant base closer to about 1.6 million merchants that we see on the slide there, which is where you were in the fourth quarter of last year?

So just any color or any thoughts or any help for us on that would be greatly appreciated. Thanks.

Thank you, Jeff. I would kindly ask everyone to go to our page 8 of the presentation, because this illustrates exactly what Jeff's talking about here.

So when we look at our client base, and what we saw from the third to the fourth quarter was a decrease on the entrepreneurs, on the long tail client base, a decrease of 7.6%. This decrease came from a change in strategic orientation from Cielo.

Throughout 2020, we subsidized the equipment sales way less, way less than we have some subsidized in 2019. As a result of that, we are not adding clients on to the loan payer portfolio on the same pace that we were in 2019.

So if everybody is looking at this specific page, that I am referring to, this dark blue column is likely to keep going down. However, on SMB and that’s our clear target, our clear priority here, we are likely to increase because of a change in magnitude of the two columns it’s more likely that the reduction of long tail will be in a greater magnitude than the increase on SMB.

But bear in mind, that in terms of TPV, the movement is completely the opposite. The clients in SMB have a larger average ticket, a larger average TPV, and that's why we forecast a gain of market share on the SMB based on our change of commercial model, and addition of 500 new employees to the sales force.

Okay, that's great color. Thanks very much and congrats again on the results.

Thank you.

Hi, thank you for taking my questions and apologies if I make you repeat any of the answers as I missed the first half of the call. My first question is on the take rate.

It appears that the take rate will likely be under pressure in 2021, given the price competition that you just mentioned. Which products or which parts of the business are you seeing most competition in terms of pricing?

My second question is on the SMB segment. You're showing the chart on page eight that you are gaining clients in the SMB segment.

What are the drivers for that? Is it better service that you’re providing, better pricing or is it something else?

And are you mostly gaining customers from incumbents on newer players? Any color on that would be very helpful.

And lastly, what are your plans for the credit business? How is the model going to be, if a client comes from the bank branches?

Is the bank going to be -- the parent bank going to be extending credit or is it going to come from Cielo? And how -- is it in the pilot phase or are you going to launch a formal product?

Any update on that would be very helpful. Thank you.

Neha, thank you so much for your questions. I'm just taking note here so that I don't forget.

I'm sorry. Okay, on SMB -- I’m sorry, on take rates, so take rates for 2021, what we are awaiting to see, and it's very hard to project that, is again, the behavior from the competition.

We saw through -- during most of 2020, the relative stability in terms of price competition. But in the end of the year and the beginning of this year, we saw a little bit of an increase of competition.

And of course, that translates into a little bit of lower prices. When we talk about our focus, Neha, which is SMB, and when I talk about the take rate of SMB, the basic product offering is a combination of a few components.

Naturally, MDR, the prepaid automatic prepayment product, Cielo’s Receba Rápido and also rental. So Cielo in the competition as well as try to combine these elements in a single offering that will be attractive for the client.

So competition in take rate trends, they come from how everybody is pricing all of these three together. What we intend to do in 2021, and some of this depends on competition, relative pricing will depend on competition.

But what we intend to do in our take rate is to add the component of the prepayment product, because again, that's our clear priority and we are increasing the penetration of prepayment products in our client base. And now moving to your question about SMB growth and what are the drivers related to that?

Basically, the combination of a new commercial model with the addition of 500 new employees and a new commercial model that is based in technological improvements, basically an app that will assist seeking new clients, providing a customized offering for that given client and also better logistics. We are running a pilot where we will be able to deliver the equipment as we obtain that new client.

This pilot so far has been successful and we plan to fully roll that out in 2021. I want to mention one thing in the new commercial model, which is the fact that with this addition in the sales team, we are reducing the geographical focus of the business consultants and we are also reducing the number of clients per portfolio, so that each sales force member from Cielo can dedicate better attention and quality of service to our clients.

And speaking of quality of service, we hope that we were able to demonstrate some of the improvements that we have made over the past two years in terms of improving NPS, level of complaints and so on. And finally, to your question of credit, where client is coming from?

It is, as we are finalizing the creation of a credit offering, the target client base will be Cielo’s client base. So there is no segregation inside Cielo’s client base of who we offer that to.

We will do a broad offering. This client can have a banking relationship with the bank, that is partner from Cielo on the commercial side or a bank that is not a partner from Cielo.

The fact is that the credit product will be offered to Cielo’s client base as a whole, okay.

Okay. So it doesn't matter if the client comes through, say the Bradesco branch.

You can still run the credit business on your own book, it doesn't necessarily have to go to Bradesco?

It doesn't matter where the client comes from, but of course, clients can choose who they do credit with. They may work with a working capital line from a bank that is a partner from Cielo, or they may choose to have a working capital line from Cielo.

What we cannot do is to segregate the product offering according to where the client has their banking relationship with. But of course, ultimately, if the acquiring entity provides a credit offering that is similar to the banking entity, it's up for the client to choose what is best, which one is best.

Perfect. And Cielo would be doing the underwriting for these loans, the credit risk analysis will be run by Cielo?

That's something that we're still working on, Neha, whether -- what we are debating here as we create this credit offering is whether, does it makes sense as a first step to have the risk in some other entity, some other partner or for Cielo to hold some of that risk. That is still under discussion right now.

I believe this will evolve gradually. So probably the likely scenario is that we will start by distributing a credit product where a third party holds the risk.

And as we see that our models are working properly, we can then have Cielo as an entity that holds risk. But again, this is still in the works.

And when can we expect this product to be rolled out?

That's -- we don't have a target date for that yet, Neha. I'm sorry for that.

All right. Thank you so much for the answers, very clear.

Thank you.

Thank you very much.

Once again, thank you for taking part of this conference. Please feel free, if you have some doubts, please do not hesitate to contact our IR department.

Thank you so much. Have a good afternoon.

Bye-bye.