StoneCo Ltd.

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo second quarter 2021 earnings conference call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with the call. All material can be found at www.stone.co in the investor relations section. Throughout this conference, the company will be presenting non-IFRS financial information, including adjusted net income and cash flow. These are important financial measures for the company, but are not financial measures as defined by IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information appear in today's press release. Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward-looking statement's disclosure in the company's earnings forecast piece. In addition, many of the risks regarding the business are disclosed in the company's Form 20F filed with the Securities and Exchange Commission, which is available at www.sec.gov. Please note, this event is being recorded. I would now like to turn the conference over to your host, Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please go ahead.

Thank you, Operator, and good evening, everyone. Joining us here today, we have Tiago Piau, our CEO, Lia Matos, our COO and Chief Strategy Officer, and Marcelo Baldin, our CFO. Today, we will present our second quarter 2021 operational and financial results, as well as discuss some recent trends that we are observing. I'll pass it over to Tiago so he can share the main highlights of our performance. Tiago?

Thank you, Rafa, and good evening, everyone. Thank you for participating in our second quarter earnings call. The second quarter of 2021 was marked by an acceleration of our core SMB business, an evolution in our strategic roadmap, balanced by a challenging short-term scenario in our credit products. Our SMB fundamentals are very strong, with accelerating TPV growth and record net addition of clients. The high growth in our SMB segments led us to be the fastest-growing player in the payments industry this quarter, largely driven by over 1 million SMB clients and over 100% SMB TPV growth. This accelerating growth was achieved with healthy unit economics, with TPV per client and revenue per client excluding credit both increasing quarter over quarter. We have been looking more at revenue per client than take rates, because we believe this is a metric that better demonstrates our ability to monetize the relationship with our clients. Nevertheless, TakeRate in SMB's ex-credit was a stable quarter of a quarter at 1.79% compared to 1.8% in the first quarter of 2021. Our Tone product has moved from being an experiment in optionality to becoming a proven and high-growth solution that added over 140,000 new clients. 83% more than the previous quarter, and over 60% of net addition of clients of the leading player in the micro merchant space. Our Pagar.me SMB product, which enables clients to accept payments online, is proving the strength of the online opportunity in Brazil, with 93% year-over-year TPV growth in second quarter 21, and a 63% two-year CAGR, while present take rates above 3%. Also, the engagement of our SMB clients with our financial platform showed a significant improvement in the quarter, with prepaid card TPV, banking money in and money out volumes, and total banking accounts balance all grew between 4 and 5.5 times. Besides, the number of Stone SMB clients settling in our digital accounts increased 45% quarter-over-quarter to 273,000 clients. The traction we are seeing in our banking transactional volumes, together with the strong growth in number of active accounts, give us confidence to make sizable investments in our digital account infrastructure, as we believe this will be key to improve engagement and the level of satisfaction of our clients. Our total revenue excluding credit grew by 68% year over year, and the acceleration of our SMB business was the main driver behind such growth. Encouraged by this growth, we have continued to invest in our business to drive further growth in areas such as technology, distribution, and customer service operations. Our consolidated results were significantly impacted by short-term challenges in credit products, with higher levels of NPLs and decreasing expectations of recovery of non-performing clients than we previously expected. Although we recognize that our underwriting risk capabilities and collection processes still have to evolve, Given the early stage of our credit solution, we are facing an expected deterioration of credit collaterals, given the problems associated with the registry of receivable systems. For further details about these short-term challenges, you can refer to our recent release teaching on August 25. As a result of a more uncertain scenario regarding the enforcement of guarantees, we decided to take a cautious approach and stop disbursement while our team rebuilds our product given the new environment and we follow the registry of receivables evolution. We have also increased coverage for potential losses, and as a result, our credit project contributed negatively to our reported revenues by 397 million in the quarter. Despite the short-term challenges, I want to highlight that our opportunities regarding credit are huge. In the short term, we will continue to serve the working capital needs of our clients through prepayments, which is running smoothly while we focus on a turnaround of our credit operation, as Leo will double-click shortly. In software, our business continues to show great organic traction. As the deal with Lynx closed on July 1st and we started managing the company, we reinforced our beliefs about how valuable the asset is, despite investments needed to enhance the business in the future. Lynx is a scarce asset built over decades, in which clients are sticky and switching costs are high. The company has an unparalleled level of data for retailers in a very granular way for each one of the verticals, which will enable a more assertive and differentiated offering of financial products in the future. We are pleased to welcome aboard the Lynx team this quarter that has an incredible knowledge about retail, and we are excited to work together on this journey onwards. As a reminder, Lynx will start being consolidated into our financial results in the third quarter of 2021. Before I pass it over to Lia, I would like to close with some thoughts regarding how the quarter has helped us to reinforce our long-term vision. We recognize that we made mistakes in our execution in credit, especially not foreseeing how the malfunctioning of the registration system could harm our business. However, this situation has also brought an impressive amount of learnings that we will use as fuel to boost the construction of what we envision as being a much better credit solution aimed at serving good merchants better. We are building our capabilities for the long term, and therefore we will continue to expand and enhance our core SMB operations, opening new hubs and improving our execution. We will make significant investments behind our financial platform, which is a huge opportunity, and keep working hard to provide more financial solutions and workflow tools to our clients. We expect to further advance in our partnership with Inter, with the ambition of creating more and better buying experience between inter-consumers and strong sellers. Lastly, and more important, we keep our devotion to make our clients happy and to the evolution of our team. We believe that incredible learnings from this quarter will take us to a new phase of our business and we are even more convinced of the opportunities ahead. When we look backwards, it is incredible to see the evolution of our team and our business, and it makes us confident and eager for the years ahead. We are in the early stages of our journey to become the partner of choice of SMBs in Brazil, and we will continue to work hard to make sure they can rely on us for the most important financial and technology needs.