XP Inc.

earnings call for the first quarter of 2022. I am Andrea Martins, the head of investor relations. And on behalf of the company, I would like to thank you all for your interest in this call. Today we have with us Thiago Mafra, our CEO, Bruno Constantino, our CFO, and the investor relations team, myself, António Guimarães, and Marina Montemur. We will be all available for the Q&A session, which is going to happen right after the presentation. And you can raise your hand on the Zoom tool to ask your questions. We already have seven raised hands already. We have the option of simultaneous translation to Portuguese. You just have to click on the glow button on the Zoom. Before we begin our presentation, please refer to our legal disclaimer on page two of our earnings presentation on which we clarify the forward-looking statements and their definition. The documents which explain why forward-looking statements might differ from actual results can be found on the SEC filings session of our website. Now I'll pass the word to our CFO, Bruno Constantino, who will deliver our initial remarks. Thank you all.

Thank you. Thank you very much, Andrea. Good evening, everyone. Are we going to have the presentation on? So I can get it started. I will be brief. We have already seven hands raised. So I will be brief so we can go to the Q&A. So we have basically two sessions here, the highlights and then the financials and KPIs of the first quarter. Going to the highlights, we have segregated here those five topics that we would like to share with all of you. Number one, I will not spend our time talking about the macro environment, everything that happened in the first quarter. All of you are pretty much familiar with it. So jumping directly into the results, I believe the first quarter shows the resilience of our business model. Gross revenue grew 17% year over year, and we kept our just net margin above It's worth mentioning in this first highlight that a quarter, of course, is made of three months, and we had very different months in the beginning of the year. Just to give you one data point, if we compare the gross revenue of March with an average of January, and February, March was more than 45% greater than the average of the first two months of the quarter. So very different months that resulted in the 17% growth year over year in the quarter of 22. The second point that we always reinforce as well is this portfolio effects. two segments that did not perform well in the first quarter because of the macro conditions, everything related to capital markets and also equities and futures. On the other hand, we had some records, for example, in the institutional revenue that beats the previous record in the second quarter last year by 46%, mainly driven by the war, a lot of hedge protection and derivatives being used by our clients in our trading desks. And also the retail fixed income platform that on fourth quarter last year, had hit a record in terms of volumes being traded. And the first quarter of this year was even greater than the fourth quarter, considering that in this year, we didn't have the tailwind of primary offers coming to the market because of very weak capital markets activity. Number three, it's our distribution network. As you know, we have a unique distribution network, especially when you look at the IFA network and we keep growing. We have grown by when you add the IFAs plus the B2C more than 5% quarter over quarter. We always like to remember that when we think about the IFA network, we have almost 11,000 IFAs, entrepreneurs working 24-7 to succeed in their profession. Of course, we are helping them as we can. But when we compare to the world of bank managers, more than 50,000, we believe there is still a lot of room to keep growing here. Number four, of course, the new verticals. We decided last year to share with investors those new verticals. They are what we call internally expands the core, being the core investments, and they will reinforce the core. But when we look at them standing alone by themselves, they can become really big, important. And when we look at where we are in each of those verticals, I will talk a little bit more about it. We are at very early stage. So the growth exponential year over year, threefold, and they represented 7.6% of total gross revenue this quarter. Just to give you a comparison here, first quarter 21, they represented less than 3%. And finally, but not less important, we received the reward of the best advisory for the fourth consecutive year, something in investments. So being investment at our core, this kind of reward is something that we are very honored to receive. It's an indication that we are going in the right direction. And especially when we look at the first reward that was given in 2019, we had five points in advance compared to our closest competitor. You fast forward four years, 2022, now we have eight points of distance to our closest competitor, which is a very good indicative. But on the other hand, when we think about investments, we are not number one in custody and revenues. So we still have a very long journey ahead of us in investments. Now we're gonna share some freebies. We never talk too much about developments in the investment world. We've been talking about the new verticals and developments. So we brought here some examples of what we have delivered in the first quarter in investments, the automated equity portfolio. It's really simple to navigate and push buttons and decide. for the clients to decide which portfolio the client wants to follow on a monthly basis, more than 20 portfolios available. And it was something that our IFA network demanded a lot in our ecosystem. A good thing about having 11,000 IFAs, we get input on a daily basis and of course we have a roadmap and we are always focusing to serve the IFAs better and more than 70% of the IFAs office already using this tool in the first month. On the bottom we have the alternative fund secondary trading that we launched this year is just an example of innovation. We are very positive about the alternative asset class, especially in Brazil, where the penetration is too low. And we are believer that for any secured or asset class to perform well, it's important to have liquidity in the secondary market, as we have done with bond market with REITs and with all tax exempt fixed income instruments in the secondary trading. We also plan to bring liquidity with a platform with a tool for alternative funds to be traded in the secondary market as well. On the right hand, on the top, XP Future is just our DNA. We launched XP Future. What is it? It's an educational program using all our knowledge to help new professions to get the qualification and the training to become new advisors. Those are not bank managers that decide to leave and become entrepreneurs. Our new people come into this new profession and we train them, we qualify them to make sure their probability of success is even greater. And finally, last week, it was on the local news, we launched our first flagship store. It's basically, it's in Manaus, Amazonas, in Brazil, in the north of Brazil. It's to create a new experience with our clients. A hub to have a sense of the digital world together with the traditional world. Too early to tell, but so far the feedbacks that we have gotten are very good and we're going to have more of those flagship concept stores around Brazil. Now moving to the new verticals update before I jump in into the financials, I'm gonna just touch point in the four new verticals that we have. So the credit business, we had a revenue growth of year over year more than 200%. So growing a lot. You've seen the KPIs, 11.5 billion of credit portfolio. But here is just an announcement of our partnership with Direto. It's in pilot phase, but it's going to be a marketplace for the mortgage and real estate business. Direto is a joint venture between XP and Direcional, a listed company in B3 that has decades of performance in the real estate world in Brazil. So this marketplace is something that can provide a good experience without carrying the balance sheet to provide the credit. Also, we have developed the collateralized credits end-to-end, 100% digital. It was something that was in our backlog and now it's up and running, improving the client journey. In terms of the credit card, we have announced our KPIs of more than 300 active cards. Here is interesting because we only have credit card in part of our XP clients. So we do not have that Ricoh or Clear brand. But when we look at the 3.5 million active clients that we have in the group as a total, we have less than 10% penetration. So there is a huge potential for cross-selling. And of course, this will happen over time. But we already have some interesting data points about the credit card. One of them is all the cohorts, they look pretty much the same so far. And as time goes by, the usage of our card until it becomes the primary card is happening with all the cohorts. And we have already more than 50% of our active cards as a primary card. Number two is that for those clients that really use the banking parts, the credit cards specifically, and then the digital accounts, the churn is four times lower, which is also a good indicative of the strategy of developing new services products for our investor clients so we can increase the loyalty, the stickiness with the platform, reduce the churn, increase the LTV, and then you create this positive loop that reinforces itself. And then the roadmap, it's on track. Until the end of this year, we are gonna have all of that, digital accounts, debit card, cash withdrawal, credit card for Ricoh clients as well. Remember that we have everything as a service with one foundation to be 100% scalable. And we plan to have Ricoh clients at the end of this year. Now moving to the last two new verticals, private pension and insurance. Private pension. I like this chart very much because it shows that the growth of the business is doing just fine. What is in this chart is the net new money of the private pension world for the first quarter. So XP. Vida and Previdencia, we are talking only about our insurance company, not the third-party insurance companies that distribute beyond our broker insurance. So our insurance company got 3.2 billion reais of net new money in the first quarter. And when you look at the incumbent because those top five players, they belong to the same top five commercial banks in Brazil. They lost more than 4 billion reais. And here we have a portability as the case. We do not take into account recurrence. So it's basically portability. So we are getting 50% of the market share of net new money. But when you look at the market share that we have, as AUM in our insurance company is less than 3.5%. There is a huge space here. It's more of the same. We just need to keep improving, bringing more products, the experience better, cross-sell internally, and then this market share, it's our expectation, will keep growing over time. Now, insurance. Mainly, we are focused on life insurance for now. We have launched our digital life insurance experience at XP. The growth is 69% in terms of revenue year over year. But there is a lot to come. When we think about the insurance world, for example, we have a small revenue of health insurance using insurance. our balcony, our platform. But there, just health insurance, there is a huge opportunity to grow. We have other types of insurance as well that are really small. As I said, the focus right now is life insurance, but we are going to keep scaling to other insurance products. And when we look at the insurance market as a whole, the revenue that we get is less than 0.1% of the market share. So it's nothing. So now we can move to our KPIs. I talked already about the new verticals. The new verticals added together, they had a revenue growth of 205% year over year. Our highlights of the KPIs, 3.3 billion gross revenue, a 17% growth year over year, already talked about it. Gross profit being greater, a 25% growth year over year, 2.2 billion, so an increase in gross margin. much to do with product mix. As you migrate away from products that have a higher commission to products that have a lower commission, this has an impact in the COGS and increases the gross margin. And also, of course, the floating parts as well has a role in the increase of gross margin. The adjusted EBITDA growing 14%, 1.2 billion reais, so lower than the gross revenue growth, mainly impacted by the growth of SG&A year over year. We have another slide, I'm gonna talk about the headcounts, but basically year over year, our headcounts, our main, expense line grew around 60% in terms of personnel. And of course, this has an impact in SG&A, but we're going to see that quarter over quarter the personnel expense at the end of the day has decreased, but year over year, it has this impact of margin compression in the adjusted EBITDA. And then when we go to the adjusted net income, the lower effective tax rate plays a role and then goes back to the same growth as we had in the gross revenue, 17%, keeping a margin of 31.6% in the first quarter. The KPIs, The investment AUC, $873 billion, all-time high. This also has an impact in the take rate because, of course, especially if you, instead of looking at the last 12-month take rate, as we do, where you have five data points of AUC, when you look at only the annualized quarter and try to get the take rate, this higher AUC as a denominator will have an impact there, but a growth of 22% year over year. Pension fund, $50 billion, out of which it is worth mentioning the pension of our own insurance company. So we had the 50 billion is a 45% increase over 35 billion one year ago. But when we look at our insurance company, 36 billion out of that 50 billion belongs to our own insurance company. Out of the 35 billion first quarter last year, our insurance company represented 17 billion out of the 35. So the growth of our own insurance company in terms of assets under custody is 112% year over year. So a very strong growth. And finally, the credit card, 4.5 billion, but revenue of the credit card growing much higher than this. Around... Roozbeh Gharakhloo, Revenue brew it's better to compare quarter of a quarter, to be honest, because the first quarter last year we launched in March right so quarter of a quarter. Roozbeh Gharakhloo, The revenue of credit card increased 14% and the nps close to all time high 76 very important for us. Total revenue, so we talked about total gross revenue already, 17% increase, a decrease compared to fourth quarter 21. You have a seasonality there, performance fees and um more capital market activity but uh yeah we had a decrease and what explains that mostly is the capital market activity uh we had a in capital markets generally uh a decrease of 55 percent quarter over quarter if you look at issuer services revenue related to capital market It's a 48% decrease year over year, 55% decrease quarter over quarter. It's also important to highlight the three months of the quarter. Why am I going back to this? Because I think it's important to understand that the year, January, was really a very weak month on all metrics I can think of. And then we start to see recovery in February and March much stronger. When we look at the capital markets activity and getting all the revenues that we get from their issuer services, retail channels, REITs, and compare the revenue of March to the average revenue, again, of January and February together, March was 260% greater than the average of the first two months of the year, given a sign of recovery ahead. And that's exactly what you can see in the breakdown of the total revenue here. So retail keeps the three fourths of the total revenue, but then you have institutional, increasing the relevance basically because of the record that we had this year because of the war, the trading desk, everything that I explained already going to 17%, which is unusual. Usually it's like 11, 12%. And then we have issuer services that usually is like eight to 10%. going down to 4% because of capital markets activity. So this slide explains very well what happened in the first quarter in terms of mix, but it shows the portfolio effect at the end of the day. Revenue grew 17% year over year. Moving to retail revenue. So retail revenue year over year grew together with the total revenue close to 17, 16%. Take rates on last 12 month metric kept the pace stable at 1.3%. Again, if you go to the annualized quarterly take rate, it's lower because of what I just said, because of the Weak start of the year in January and February together. If we had the margin would be totally different. Plus, the increase that we had in the assets under custody, market appreciation that happened in the beginning of the year. helping the custody to grow as well, not necessarily contributing to the revenue, having an implication in the take rate there. But when you look at the last 12 months, pretty much stable, no matter what the interest rates are. So going 4.5 to 2%, back to 12%, and we keep our take rate pretty much stable. And that's, again, resilience and portfolio effects that I talked already about. And adding new products like the new verticals, so forth and so forth. And finally, our last slide, so we can jump into Q&A. The adjusted EBITDA growing to 14%, so there is a margin compression from 39.7 to 38.2, still a very healthy margin. You have the number of total head counts at the end of the period. So you can see that we jumped at March 21 from less than 4,000 employees to more than 6,300 employees. That's almost 60% increase. And that's what I talked about the natural pressure in our margins in SG&A because we are investing a lot in new verticals. We are building new products, new services that will more than pay off in the near future as they already have shown in the growth of the revenue of the new metrics, the new verticals. Another interesting thing to look at when you compare the adjusted EBITDA on a quarterly basis as well, that you capture on the fourth quarter part of that growth in the headcount, not 100%, because we still are growing. As you can see, we ended the year with 6.2 thousand employees and we ended the first quarter at 6.3. So we kept growing. We have a lot to deploy at, to develop, but If you take out of the EBITDA, the net other operating income that has a seasonality there, because most of it are incentives that we receive in one specific quarter related to the whole year, but you only can recognize once you receive it, mainly between incentives, visa, and et cetera. it has an impact. So if you take that, and in the fourth quarter was 233 million. If you take that out, you're going to see that you adjusted a bit that in the first quarter was pretty much flat, a little bit greater than fourth quarter without the benefit of the capital market activity that we had in the fourth quarter. When we look at the adjusted net income, It has the contribution, the additional contribution of the lower effective tax rate because of product mix. So we had a tax rate of 17.4 in the first quarter last year, and our effective tax rate was 16% in this quarter, making the growth of our adjusted net income equal to the growth of the revenue at 17%. With that, I mean, I think I don't know how many hands we have already raised, but it would be better to go to the Q&A. Mafra will be here helping me out. So we are at your disposal to answer any questions you might have. Thank you very much.

Great, Bruno. So let me just organize. We have a lot of hands raised. We are going to answer them on a first-come, first-served basis, starting with Thiago Batista from UBS. So we ask you kindly to restrict to one question so we can address the more than 10 questions that we have here. So the first one is Thiago from UBS, as I said. Hi, Thiago. Can you hear us? Yes.