XP Inc.

Hello, good evening. Good afternoon, everyone. Thank you for participating in another earnings call of XP Inc. Now for the second quarter of 2022. I am Andrea Martins. I am the head of investor relations, and I'm joined here today by our CEO, Thiago Mafra, and our CFO, Bruno Constantino, as well as the investor relations team, Marina and Antonio. I hope everyone is safe and well. The materials from these results are already on the Investor Relations website. There you can find the SEC filings of XP Inc and the definitions of forward-looking statements and how forward-looking statements of this call can differ from actual results. It's important to highlight as well that this call is being translated to Portuguese, so you can use the tool in Zoom to change to Portuguese. And also important to highlight that for any questions at the end of the session, you can raise your hand and we will call you on a first in first serve basis. I can see that we have already seven raised hands here. So thank you for participating already. Now I'll move to Bruno to kick off our earnings call. Hi, Bruno.

Hi. Thanks, Andrea. Hi, Mafra. And hi, everyone. Good evening. It's a pleasure to be here with you. for I believe the 11th time in terms of quarterly results. As usual, I'm gonna be brief in the presentation so we can go to the Q&A as we have already many raise the hands, right? Before I start the presentation, we would like to share a video with you. We are still in a little bit hangover here from the experts that we had last week. So let's go for the video and then I come back really soon.

Let me just first say how glad I am to be here. I think this is a really important event. I think what you do at XP is very very important.

This is my first time in Brazil, and I am here because of this incredibly amazing company, XP Investments, that I really do think is really thinking about the futures.

This is my first expert, very glad to be here, and I hope it won't be the last. Yeah, I hope you...

you like the video. As I said, we are still recovering from expert. It's three very intense days. And I'd like to take the opportunity and thanks for all It seems easy, but it's not. People are already working on the 2023 expert event. So it takes a long time to plan everything. And it was really amazing after three years without any in-presence event we did in 2020 virtual, only virtual, and also in 2020 because of the COVID. And finally this year, we came back. So it was really, really great. And as Mafra mentioned during the expert, this one was special because as you already know in our numbers and everything that we have disclosed in terms of the growth in our headcounts and a lot of new initiatives that we have been investing in, We asked at Expert how many people to raise their hands that was their first contact with the Expert. Only internal employees. And more than 60% their first time in an event like that. So the energy was really good. Just sharing that before we go to the presentation. So Andrea, I don't know. Let's move quickly here. So the first, the main highlights, I don't know if I have a lagging effect. Okay. We have selected five main points here. The first one is the business model resilience. Nothing new here. We have been repeating that every quarter. We know we are in a tough macro environment. with a bear market, and that has an impact in the investment business, especially. But despite this tough macro environment, we were able to deliver our all-time high and record quarterly revenues, 3.6 billion in the second quarter this year, with also an all-time high retail revenues, a growth of 15% quarter over quarter. I'm going to talk more about that in a while. Number two, we've been diversifying our revenue stream. We highlighted the new verticals to give more disclosure about those new verticals that are in very early stage and they do not get the same impact of the macro environment as investments. And by the new verticals, I mean the credit card, credit, the retirement funds and insurance. And those new verticals added together, they grew 113% year over year. Very strong growth, quarter over quarter, also a strong growth, 7%. The cost discipline, as entrepreneurs, we are paranoid about keeping our costs under control. We've been investing a lot. As I mentioned, we highlight here the first semester this year, first quarter plus second quarter, we have approximately 500 million reais invested in what we call early stage initiatives. And by early stage initiatives, we mean banking from scratch, the direct international investment platform that also we built from scratch, XStage, our digital asset platform, that I'm gonna talk more about it, also built from scratch, and the internal advisors investments, as we believe there is a huge opportunity together with the IFAs plus internal advisors to keep growing and disrupting the concentration in the investment and financial landscape in Brazil. We've been doing all these investments and we get hits upfront and the revenue is not there yet. But even considering that everything's expensed upfront, we kept our margins in a very healthy numbers. Adjusted EBITDA margin above 35% and adjusted net margin even higher. above the top range of 24 to 30%, so above 30%. And we expect to keep like that going forward. Number four, The second quarter, we have delivered a lot of new products. We are very proud of it. And of course, those products, we need to keep evolving and getting better, getting the feedback from our clients. But we delivered the debit card, the digital bank account, as I mentioned, the direct international investment platform, and the crypto, the exchange, the digital asset platform. And finally, we got rewarded as the most innovative financial service company by Valor Economico. We are very proud of that. We know we have not conquered anything yet. We still have a lot to accomplish, but it's always good to this type of recognition. Moving to the next slide, I'm going to just recent developments. I'm going to talk about the direct investment, international investment platform and X-Stage, only those two. Here, we believe this can be the beginning of our internationalization of our business. We are going to start as always from the low-hanging fruit. So taking our Brazilian clients that want to invest outside Brazil and the experience is something that we really care about. And here, for those that are XP client, you're going to see that is frictionless. And why is that? Because everything's already embedded in the app that you're using to use. And with two clicks, you can open your account. You can move your money. do your FX transaction, and then you are ready to buy more than 10,000 equities in U.S., ETFs, ADRs, REITs, etc. We are still in another stage, so we are going to move forward with mutual funds, bonds, banking service, and much more. But the product's ready. So it's something that we are really optimistic about when we look for the following years to come. And Xstage, it's another venture that we started from scratch. We did a lot of survey with our clients. 59% of our clients already invest in crypto assets. 58% they invest directly. And when we ask those clients that have crypto assets, almost 90% of them told us that they would have the intention to invest through XP. So that's the reason we decided to move forward with this venture. But it's important to mention that this is just the beginning. We start with Bitcoin and Ethereum. But when we think about XTAGE, it's much more than that. It's a digital asset platform that starts with a very powerful technology behind. We have NASDAQ as the service provider. We did a lot of research. We used our previous experience through XDAX. to choose what we believe to be the best solution in terms of scalability for X stage. And as we scale the business, we are ready in terms of latency and in terms of velocity and everything that needs to provide a very good UX to help our clients navigate through this digital asset platform. Now we can move directly to the KPIs and finance. The KPIs you have seen already. So I'm gonna focus on the financials. I mentioned already 3.6 billion gross revenue, gross profit 2.5 billion. We kept our gross margin At a very high level in the second quarter, as we had already in the first quarter. First quarter was 71.5. Second quarter, 72% gross margin. Basically, the main reason, mix of products. More fixed income, less equities. It has an impact in terms of commissions and helps the gross margin. When we look at our adjusted EBITDA, 1.2 billion, 2% decrease year over year, and 1% increase in the adjusted net income, more than 1 billion. And I'm going to talk about the adjusted EBITDA and the adjusted net income. But the main impact there is because of the new, the early stage initiative that we have been investing a lot. That, as I said, we expense the whole thing and the revenue is not there yet. So there is an impact. We are always investing to have the growth in the future. with sustainability in our perpetuity. And we expect those businesses to scale as we move forward. But the highlight here is the margins. They are at very healthy pace, despite all those investments, which shows the resilience of the business. Now we can move to the next slide. Total revenues, 13% growth year over year, 17 the first quarter. When we look at the first half of this year, 15% growth in the first semester of 2022 compared to 2021. Let me pause here just to mention a few highlights that I think it's worth sharing. When we think about the product mix and the difference between a bear market to the bull market. And of course, there is a difference. We have said that to many investors that you should not expect the growth of XP to be the same in the bear market compared to the bull market. What happens in terms of product mix? In a bull market, we have equities and futures going up. We have capital market activity going up. We have listed funds, secondary trading and follow-ons of listed funds, REITs going up. They are all connected and related. When we have a bear market, all those three together, they get hit. On the other hand, fixed income, floating, and the interest on our adjusted gross cash, they benefit from the bear market because of higher interest rates. When I look at the mix, the product mix, just to give you some numbers here, equities, capital market and listed funds all together as a percentage, of our total revenue in the first semester last year was close to 35% of total revenue. So very important revenue stream. When we moved to 2022 in a bear market, all those components of our revenue, they represented less than 22% of our total revenue. So a big hit when we add all of them together, the decrease year over year is close to 30%. So it's as if the main revenue lines in terms of products, you know, get hit by 30% year over year because of the macro environment. And still we delivered our all time high gross revenue in this quarter. That's why we have that first highlights as the business model resilience, because that's what we believe XP is considering the ecosystem we have built. On the other hand, when we look at fixed income, floating and the remuneration over our adjusted gross cash, and we add all of that together, In the first semester last year in a bull market, they represented less than 20% of the total revenue. In the first semester this year, they represented together more than 30%. So this is just to give you the magnitude of the shifts that we have in terms of the product mix. The top line, the total is what you see in our numbers. On the right side of the slide, we have the breakdown. And of course, retail keeps being the most relevant segment in our business. But I'm going to talk about institution as well in a while. It's still growing at a very health pace as well. So going to the retail revenues. All time high, in the first quarter this year, we had a lot of questions from investors about the take rates of the first quarter. When you annualize the take rates, it was 1.15 in the first quarter. And we mentioned that we had a very weak start of the year, that March was already a better month in terms of take rate for retail business. And we didn't know what the second quarter would be, but we expected to be better than the first quarter in terms of the take rate. And the take rate in the second quarter, 1.3%. So much better than the 1.15%. The way I like to look at the take rate is the last 12 months. And why is that? Because the take rate is not only a function of the revenue, the retail revenue. also a function of the denominator, the AUC, the average AUC. And when you look at the last 12 months, you have five data points in the denominator that makes softer in terms of changed quarter over quarter. So here we have the take rate in the last 12 months. You can see that there is volatility, but it's really small volatility. over quarters, despite the macro environment. So we had 1.30, 1.32, and 1.27 in this quarter, a little bit better than the first quarter, which was 1.26. Moving to the adjusted EBITDA. Before we go to the adjusted EBITDA, let me just mention the institutional. I think it's on on the annex of the presentation, but institutional revenue, oh, there we go, thank you. Institutional revenue, 436 was really strong, 16% year over year growth. And in 2021, the second quarter, institutional revenue was 375 million. That's the highest quarter we had last year for institutional revenue. So a very strong pace of growth, but lower than the first quarter as we have already anticipated because we had a very astonishing volume in terms of derivative demands because of the war in February in our institutional desks. Now, and also issuer services, there is related, that's not 100% of the investment bank in revenue. There is part of it that goes into retail and institutional by distribution channels fees, but it's a prox. And as you can see, there is a strong recovery compared to the first quarter, as expected. First quarter was really weak in terms of capital market activity. Second quarter, much better. But when we look at 2021, still a drag in terms of capital market activity. Going back to the adjusted EBITDA and adjusted net income, here, the main impact, as I mentioned, is the early stage initiatives. We have, we could have done for example, the international direct international investments for retail clients or a digital asset platform. We could have a digital asset platform done M&A's we decided to do organically we think it's much better in terms of costs is much less money, but we need to recognize all the expenses upfront. We expect those business to scale over time. And we know this is an issue because of the reduction in the margins. And that's why we decided to highlight here so you can have a sense of how much we have been investing for our growth in perpetuity and the impact that those investments they have in our margins. In the first semester, approximately 500 million reais invested and the revenue is at very, very early stage and we expect the revenue growing from in the following years. And I think with that, I stop here and let's go directly to the Q&A so we can answer all doubts and questions you might have. Thank you very much. And oh, before we go to the Q&A, I didn't mention that, but we would love to have our investors and all of you in our expert next year because it's an event that I believe it's worth. It's the largest investment event in the world. We are very proud of that when I remember what used to be when I joined XP more than 10 years ago. It's really a huge event and would be an honor to have all of you visiting us in Brazil next year for the event. We are going to send invitations when the time comes. So, André, you're going to be the one responsible for the Q&A, right?

Yes, I will. And for sending invitations as well next year. So thank you, Bruno. So, as I said, we'll be we'll be answering the questions on our first. Whoever raised their hands first. I know that Hosman fell off, but he was, I guess, number five here. So we will start with Andrew from Morgan Stanley. And I kindly ask you to. limit to one question so we can be productive and everyone can ask their questions. So again, thank you very much for the interest. And now, Andrew, can you hear us?

Hi, it's Jorge Cury from Morgan Stanley. Hi, everyone.

I'm sorry, there's a different tag here.

No, that's fine. Thanks for taking my question and congrats on the numbers. I guess I wanted to see if you could share with us how the business is tracking in July and so far the first day of August. How much of that normalization in inflows and AUC and take rate that we saw for the full quarter, especially versus what was the beginning of the year, continues so far in August. And if you also can quantify how much back to normal you are, or if they're still sort of like at the beginning of this quarter, the second quarter, a little bit weaker than expected trends, and if we should see sort of like even further normalization to the upside for the full third quarter. Thank you.

Okay, look, if I had to answer, for example, the first quarter this year, based on January, it would be a disaster. And then we had, because January was really weak and we had a better March, much better March. And it was the 10 billion per month. net new money. Second quarter, we saw a very positive trend. We had the 14.3 billion net new money per month. Third quarter, I mean, I'd rather wait for the end of the quarter. What I can tell you, we have this soft guidance of 10 to 15 billion. I wouldn't change that, Jorge. And the reason is, I think This business investment, it's not on a quarterly basis, right? You need to keep convincing the clients to come and test our platform. And when they do, we hook them and then they become our clients for the long term and they keep bringing more money. So those that are our clients already, we have this strategy. to go beyond investments to get the other 50% of the share of wallet that we still don't have, right? And we just launched the digital bank account and all those investments that we've been doing. So this thing, it will pick up in the future as we believe, But it takes time. So until we get there, the 10 to 15 billion per month of net new money seems a reasonable soft guy. And it's considering that we do not have the tailwind that we had in the bull market. or equities and people wanting to trade, new individuals opening accounts at the stock exchange, that's not happening anymore. And despite all of that, you saw the numbers of the second quarter. So I will not give you the guidance of the third quarter because we do not do that. So I would say between 10 to 15 billion, I know it's, you know, a huge spread like 50%, but it's because we do not know. We can have a very strong month, a less strong month. So it's hard to tell.

All right. Thanks, Bruno. And on take rate, any commentary on take rate?

Yeah, I do. Sorry, I forgot the take rate question. The take rate, the only thing that I would mention is we did have a very good take rate, at least the way I see it, in the second quarter, the 1.3%. And I'm talking about now the way the analysts look at the results, not the way I look at it, but I respect that. It's the annualized a quarterly take rate, right? So the 1.3%, a very strong one. I would expect a little bit lower in the third quarter. And why is that? Because we have performance fees in the second quarter. So performance fees for the funds distributed for retail clients, it goes into retail revenue and has a positive impact on that. And if we take that out, Roughly, I can be wrong in the numbers. Roughly speaking here, we're talking about a take rate of 1.24, around 1.25. So we are talking about five to seven base points of take rate in terms of performance fees.

That was very clear. Thanks a lot and congrats again.

Thank you.

Thank you, Jorge. Nice to hear from you. Okay, Jeff from Autonomous is the next in line. Hi, Jeff.

Hi, can you hear me okay? Yes, we do. Great. Thank you. You've spoken in the past about your desire to speak to identify new investors who potentially could mop up some of this overhang, maybe somebody strategic come in and take a stake. Can you give us any updates on that? How much progress you've been able to make there?

Well, let me answer this way. I know Itaú, they had their results today as well. I couldn't hear. So I don't know what they specifically said about that because usually investors ask them what you're going to do with their XP shares.

They said they are not in a rush to sell the shares and they don't have a price target.

So yeah, that's, yeah. I mean, it's their decision. What I... What I can tell you, Jeff, based on the talks that we have with investors, generally speaking, is there is demand. It's not a problem of demand. And I know some investors have already talked directly to Itaú. Our position here is to tell Itaú, when we have done that, look, Itaú, if you want to sell, we are here to help, to do it in a very organized way. And by the way, we also want to buy. We have done that. As you know, we have a share buyback program. in progress for Class A shares, the listed shares. But Itaú, they also have Class B shares, not listed shares, that we can buy on top of the share buyback plan. And that's exactly what we did in June this year. We bought a little bit more than 1 million Class B shares from Itaú when they decided to sell a small part of their stake to go below the 10% total capital in XP. So they didn't get the impact in their bezel ratio. And we are ready to buy more shares if they wanna sell. We only can buy Class B shares outside the share buyback program. From other investors, I am pretty confident that It's not a demand problem, but we have to rely on Itaú, right? So it's their shares, not ours, unfortunately.

Thank you. Thank you, Jeff.

Okay, next is Mr. Otavio Tanganelli from Bradesco.

Hi André, Mafra, Bruno.

Otavio, hello Otavio.

Thank you for taking my question. I have a real quick one. It was a little puzzling to me to see EBITDA margins compressing in the quarter given that everything that you mentioned about operating leverage and cost discipline. So I understand that you're ramping up some of the products that are expected to mature in the coming quarters, but if you could just give us a little background, what's requiring such a high level of investments or what are your plans for this in the coming quarters when we expect this to actually reap the benefits of this operating leverage? Thanks.

Yeah, sure. I will start here in Mafra. Feel free to join me if you feel like. Otávio, I mentioned about the organic or inorganic decision. For example, Itaú, they acquired Avenue, right? It's our direct international investment. We built from scratch. Everything that we did to put in the app the transaction for our clients from scratch. Everything went through our costs and expenses. Another example, Xstage, same thing. I don't know, we could have tried to buy Mercado Bitcoin, for example. We didn't, we built from scratch. It costs and it goes in our P&L. And despite all of that, we kept our margins at a very health pace. And we believe those new businesses, early initiatives, they will pay off, more than pay off. And they also give us optionalities for our perpetuity growth. We are always thinking about innovation and perpetuity, always. And we need to plant the seeds at some point in time. And that's exactly what we've been doing. In terms of the 500 million reais in the first semester that I mentioned, We have two main impacts in the short term, okay? Cards, specifically cards in the COGS because we have the invest back. So as, and you know, you have analyzed Nubank and other players in the market. As you keep growing your number of cards and the growth of revenue on cards, you have a lot of expenses. uploaded at front, right? Front uploaded, better said. And that's exactly what's happening. You saw our TPV in this quarter, 5.5 billion reais, growing a lot quarter over quarter because we have a small market share. We have a lot to cross sell internally. So this will keep growing. And the costs are goes together. When we look at the cohorts, Morgan pays off, but we expect to keep rolling. We do not have, for example, the credit card at the Ricoh brand. We intend to have. It's gonna be an investment and it's gonna be in our P&L. Internal advisors, same thing. We are growing IFAs as you saw the number and internal advisors. And why is that? Because there is more than 50,000 bank managers in Brazil. We believe there is a window of opportunity for us to grow in this business, and we believe it's a human business, advisory business, in the next three years, three to four years. And we want to accelerate that. When our IFAs hire new IFAs, it does not go into our P&L straightforward, only when the revenue comes through commissions. But when we hire our internal advisors, it goes up front. And then as this advisor has the customer clients and start to build that it more than pays off. It break evens in less than 15 months. So it's an investment that goes through the P&L and brings the margin down. And we have been investing a lot in all of that. And we are going to keep investing because we believe it's what we need to do. And there is a huge opportunity and it pays off. But in the short term, it has this impact. And as I mentioned, the way we look internally, Despite all of that, the costs are under control. Let me give you one data points. So you can follow my rationale here. Year over year, we have grown our headcount base by more than 40%. Second quarter last year to second quarter this year. When we look at our personnel, expenses of people plus bonus altogether, they represented in the second semester last year, 20.4% of our net revenues, close to 25% of our net revenues. In the first semester this year, you have this statistical effect because we had less than 4,500 people in June, 2021. And we ended this quarter with more than 6,300 people in our company. And our personnel plus bonus expense is below 25% of our net revenues. So our costs, we are paranoid about that, but of course it's gonna grow. We are hiring a lot of people. We are building new businesses and the revenue is not there yet. But despite all of that, we believe the profitability of the business is healthy, which give us the comforts because we are very conservative for certain decisions. We are aggressive in some and conservative in others. We do not have the crystal ball here. We do not know what's going to happen, inflation all over the world, global recession. So the microenvironment that we do not control, we need to be prepared for the worst. But we are not going to have a short-term view. If there is a clear strategy that we believe it makes sense for XP in the long run, and the time is now because we see this window of opportunity, we are going to invest. And that's exactly what we've been doing.

This point is very important, Bruno. We will not favor a short-term result. like a long-term investment that we believe will return to our shareholders. So, credit card, it's a J curve, internal IFAs, and other many investments that we have been doing during this year. And we will keep investing because, as Bruno mentioned, the payback is very short. In some businesses, they are like 12 months, in some others, 24 months. So, we'll be investing for the whole year here.

We are not accelerating more because we need to find, for example, the advisory business, either IFA or internal. You need to find the right advisor, train, et cetera. If we had the certainty that we have found the right ones and would double, we would do it. We would. But it takes time. But we're going to keep investing.

Yeah, it's super clear.

Thank you, Otavio. Moving to Titula Barta from Goldman Sachs. Hi, Tito.

Hi, good evening. Thanks, Andre. Hey, Bruno, Mafra. Good to see you. Hey, Tito. My question, following up a little bit on Octavio's question on margins, but digging a little bit more into the expenses, which spiked a lot. I know you talked about personnel expenses. You have a lot more people than you did last year. Can you give some color in terms of... hiring needs going forward. I think you had mentioned you would expect that to slow down a bit, just where you have 8,000 people by the end of the year, any color you can provide on that. The other expense that increased a lot, it was also data processing of like 60% compared to last year. Is that related just to the investments in the apps or just some color on that to help us think about how to, I guess, forecast a model some of these expenses from here, just given there was a big spike in SG&A in the quarter.

Yeah, sure. Just going backwards, Tito, the data processing, there is also related to the growth of headcounts, the license, et cetera. But there is also one component that in terms of accounting measures, there is some part of it that was depreciation and became SG&A. instead of depreciation in the line. So when you look at the EBITDA that was capitalized and amortized and now it's expensed through the time of the contracts that we have. But we can discuss that offline in details with you later. Look, the number of headcounts in the second quarter, it was a little bit more than 6,300 personnel. And in the first quarter was a little bit, December was a little bit less than 6,200 personnel. So the growth of personnel headcounts in 2022 has not been that significant, right? The growth happened mostly in the second semester last year. We started all those new initiatives, the digital, the direct investment platform in US, the X stage, October, September last year, we hired personnel a lot. To look forward for the base of what we have, I would not expect the headcount growing a lot. It can grow, but it's gonna be single digit, right? What can change that is internal advisors. As I mentioned, we think there is a window of opportunity in the next three to four years And we believe investment is a business of advisory service. So IFA and internal advisors, we want to keep growing and it's much more a matter of finding the right personnel to join us in this journey than anything else. So if we do, we are going to, and we are very data driven, right? So for example, we were hiring and then We follow up the data, and then we said, look, this strategy, hiring this type of personnel, it's not the best one. Let's go back there and accelerate in another front. We have the XP future. As you know, it's... education is in our DNA. So we have built a lot of tools to help the advisor, even those that are not from the financial world, to be successful in the financial world. And those that have a commercial skill. So we've been doing a lot there. The growth of personnel there, it's going to depend on finding the right people. But if you think that there are more than 50,000 bank managers, I mean... We could grow a lot there. I know I didn't answer your question specifically because I can't. It's data driven. It's like central bank answering questions about inflation that is data dependent.

Yeah, I understand. But that's some helpful color. Thanks, Bruno. Just one quick follow up, just on the bonus, because you mentioned, I guess you get paid in 2Q and 4Q. If I look, it looks like there was a jump last year in 2Q, but I don't see as big of a jump in 4Q. But is that what we should expect, kind of similar level in 4Q in terms of bonus? Yeah.

Yeah, look, the bonus as a percentage of net revenue, look at a semester base. That's my advice. It's better than on a quarterly basis. And when you look at the first semester this year, it was 13.4% of net revenue. Second semester last year was 15%, even higher. of net revenue and first semester last year was 13.7, a little bit higher on a percentage basis compared to the first semester this year. There are parts of the bonus that they depend, they are more objective, they depend on performance fees, they depend on institutional desks, and then only In December, we will know, right? Because it's the whole year when it ends. But I would expect to, you know, keep close to those percentage as percentage of net revenue on a semester base.

Okay, that's clear. Thanks Bruno.

Sure. Thank you, Gito. Have a good one. Next is Thiago Bacisto from UBS. Oi, Thiago.

Yes. Hi, guys. Thanks for the opportunity. Are you hear me? Yeah. Yes. Okay. My question is about excess capital or excess cash of XP. I'm trying to figure out how asset-light is XP nowadays. The company is presenting, let's say, an EBITDA or earnings of 1 billion per quarter, but it's tough for us to really see this excess cash or capital. So in your view, the company has this access capital or in a different way. Is XP still an asset light company or all this cash consumption that we are seeing in XP is more a temporary event because all the investments that you already mentioned, Bruno, and in the future we'll see the company again being a kind of asset light company or no, the new business are changed the profile of the company and XP should become more requirement, more capital. So how you guys are seeing this, the capital of XP?

Yeah, no, I start, let me start answering you, Tiago, that, yeah, we believe that we are an asset-light business and we want to keep like that. We do have some capital requirements, especially because of the credit card business. And the credit business, we can mitigate a lot of capital because most of it is collateralized. But mainly... we use our cashflow and we do generate a lot of cash every month. We do use our cashflow for our market making activity. That's where most of the cash goes. So the market making activity, it's something that in the future as the Brazilian capital markets keep developing, it should require less capital from our warehouse. It works like a warehouse, buying and selling in the secondary markets. There are some products that this works much more like a brokerage fee, but the nature of the product requires a spread. You buy and you sell, like fixed income, for example. But that's where most of the capital goes, okay? But when we look at our adjusted gross cash, we have close to 10 billion reais of adjusted gross cash. But this cash is being used mostly for market-making activities in our books. In the past, in the recent past, we have used a lot of cash for... Two main lines, I would say. Number one, IFAs, as you followed since 2020, when we had a huge attack in our IFA network and we invested to have the long-term contracts with our IFAs. And you can look at that in our prepaid expenses, close to 4 billion reais. And M&As, mostly with minority stakes in assets, asset managers, and some funds that we have seeded. All that together is close to 2 billion in total. We're talking about 6 billion, roughly speaking. We do not foresee... anything close to this amount in the future, right? And we have done that with our own cash generation. So that's for me a proof of how asset-like we are in that sense. But to answer your question about the capital return, yes, the new initiatives, when they mature, they will return the capital. Capital markets activity, when the Brazilian capital markets develops, It's gonna need less capital from us and we're gonna be able to return the capital. And in the credit space, We want to grow in this business, but not using our balance sheets. Of course, we're gonna have to use something of our balance sheets as a warehouse, then recycle and securitize and have a good product to distribute for independent asset managers using our ecosystem. We want to disrupt the credit business through the asset management business and not through our own balance sheet. And it's something in our view, similar to what the hedge fund industry has done in the United States to the banks in the United States. We believe there is a win-win situation here for the Brazilian capital markets for democratizing investments for individuals and for our ecosystem to grow and penetrate in the credit world. So yeah, we are going to keep being an asset-like business model.

Very clear, Bruno. Thanks for the answer.

Thank you, Thiago. Have a good one. So I'll pass the word here to Eduardo Rosman from BTG Pactual because he was first in line and then he fell off the call. Rosman, can you hear us? Yes.

Yes. Can you hear me? Yes. Hi, Bruno. Hi, Mafra and André. My question is a follow-up on Thiago's one. I think it's an important theme because XP, you have been growing earnings quite fast over the last few years. But when we look to ROE and ROA, they have been trending down, right? So I know that recently, if I'm not mistaken, you raised also 1.8 billion reais in debentures to run day-to-day operations. So I was trying to understand here, if ROE and ROA, if this is a metric that you follow internally or not, because I know you talk about net margin and EBITDA margin, but like just trying to understand here if you have any sort of a long-term ROE or if just trying to understand here what could be, you know, your returns longer term. Thanks.

Sure, sure, Rosman. Yeah, we do follow all the metrics, Rosman. That's one of the metrics that we follow. But basically, what you mentioned about the ROI or ROI decreasing, it's more, in our view, more a consequence of the macro environment than anything else. Look, our credit portfolio, it's not big. It's 12.9 billion reais in the second quarter. It was nothing in the past. The best way, at least for me, now we have entered in the banking world with our own bank. But the reason we have a bank is different than our competitors, the incumbent banks, right? We have a bank now because we realized we need to go beyond investments to serve our clients. And by that digital bank accounts, other products, other services, and you need a bank license for that. So we are an investment platform that acquired a bank. If you look at our organizational charge is the only one in Brazil that has a broker dealer with a 100% subsidiary that is a bank. As we speak today, all the other players in the market, they are the opposite way around. So the leverage of the bank is something that we do not use at full speed as we speak right now, okay? Because of this logical sequence that led us to have a bank. The impact in return on equity and et cetera has much more to do in my view With the macro environment, we lost billions of revenues year over year because of the macro environment. If you look at equities and futures, for example, used to be our main line. I mentioned the mix of equities and futures plus capital markets plus listed funds. It used to be more than one third of our total revenue. Now it's close to 20%. That's a lot going down and that's not market share being lost. On the contrary, we still have 50% of market sharing equities and features in the secondary market in Brazil. It's a macro impact. Of course, that hits the operating leverage of the business. We more than compensated that with other business, new verticals, et cetera, fixed income floating and so on. But, for example, credit card has a lower margin because of the investment. So it's a portfolio mix that has an impact, plus the 500 million reais that I mentioned. So when the macro environment is different, I expect the metrics that you mentioned to scale back the way I see it.

Okay. Thanks a lot, Bruno. Sure.

Thank you, Rosman. Next is Credit Suisse. Hello.

Hello, André. It's Teles here. How are you, guys? How are you, Bruno, Thiago? I'm watching your time. Congratulations on the result. I'd like to talk a little bit more about the cash generation. I know Tiago and Rosman have asked this question. When we look at your liquid cash, according to my accounts, it was about R$ 9.5 billion in the quarter, you were a little above R$ 9 billion in the first quarter, so that means that you have a cash generation of about R$ 450 million in the quarter, which would indicate a free cash flow conversion of EBITDA, close to 37%, which is a low number, if we consider that in the first quarter you actually had the use of cash, it's as if you, in this quarter, in this semester, you didn't generate cash. So I wanted to understand a little bit, what do you imagine your cash generation run rate is? And still on this question, look, the investment And I remember from previous conversations with you, I think the idea... was to have this number there, more or less close to 400 million per year, right? So, and we are 200 there, only in this tri, right? So, I wanted to have a little bit of you, how are you seeing also these payments of loans, what is the sustainable level, right? Just so we can also get here in the correct cash flow for you. Thank you very much.

Okay, Telish, I answer in Portuguese or English? It's better to go back to English. Okay, thank you, Telish. Now, look, in terms of the cash flow, it's more than the 500 million per quarter you've mentioned. It's close to the adjusted EBITDA, if we do not have M&As and incentives for the IFA, as you mentioned. And we did have a small M&A in the second quarter, probably 100 million, roughly speaking. And the IFA was less than the 300 that you've mentioned, okay? A little bit more than 200 million. It's hard to forecast that number going forward. We analyze case by case. As we said in the past, we do have the benefit of knowing very well all the IFAs in our network. And we decide based on... the math that makes sense for ourselves. If it doesn't make sense, we are not going to spend money in a long-term contract with IFAs. If it does make sense, we are ready to do so. And that's exactly what we've been doing. We have done a lot already, so that's why we do not expect the same pace going forward, nothing close to that. But on a quarterly basis, you can have fluctuations. Last quarter, for example, it was Close to nothing. This quarter was a little bit higher than the 200 million reais. Look, the cash flow, and I just, I remember now that I didn't answer the second question of Rosman about the 1.8 billion debentures. So this is, just going back, Rosman, this is something we want to leave an open relationship with the local bond market. And in May, we repaid the last bond. We have 800 million reais of bond issued by our holding company in Brazil. And then 800 in the past is close to 3 to 4 billion nowadays considering the size of XP. And we did 1.8 billion. That's not much considering the size and the relationship We had a very strong demand for debt issuance in the market, close to 3 billion reais. We were going to do 1.5 and we decided to have more idle cash considering the scenario. As I said, we are aggressive for some things, conservative for others. In a bear market, we like to have more cash than we need. Now, going back, Thales, to... to your question looking forward, I would expect something close to the adjusted EBITDA. So the 1.2 billion per quarter, when we have, there is a volatility when we pay bonus, we pay on a semester base. So there is a drag in the cash. We're going to have that in August this month. We're going to have in February next year. But despite that, it's basically the adjusted EBITDA Close to that, our cash conversion. The working capital, it's really small. In the second quarter, we have a small, more than 100 million of working capital that is impacted by performance fees. But it's really short term. It was paid in July, okay? But in June, when you close the balance sheet, there is a revenue recognized in June from performance fees was close to 150 million reais that it's paid. Giuseppe Prettico JRC- days right. Giuseppe Prettico JRC- So that's basically the main fluctuations that we have M&A's, IFAs, outside the P&L, performance fees, a payment of bonus on a semester base, the rest is pretty much close to the adjusted EBITDA.

Thank you. Thanks, Bruno. Thanks, Tiago and Andre. Appreciate it.

Thank you, Thaddeus. Bye-bye. Next question comes from Niha from HSBC. Hi, Niha.

Hi, Andre, Tiago, Bruno. Congratulations on the results.

Hi, Niha.

I have two questions, quick ones. First one on the credit revenues, which looked a bit softer this quarter. So could you shed some light on that? And the second question is on the tax rate. I mean, the tax rate has been pretty volatile over the past few quarters. So how should we think about this in the coming quarters, if you could give us some sense on how to forecast? Thank you.

Yeah, sure, Neha. I didn't hear well your first question.

Credit revenues.

The what, sorry? Credit.

Credit revenues. They're a bit softer, this quarter.

Yeah, yeah, yeah. Credit revenues on a quarterly basis is tough. We have sometimes some bigger one-time transactions in terms of credit that you have like a fee up front that can create a distortion. In the first quarter, we had something similar to that that made the first quarter like a tough one. The credit part, we are going to keep growing, but again, Here, our decision process is about the risk than to hit any target, whatever, right? We are owners of the company. We think for the long term. So if we are risk averse in terms of the credit and we do not want to grow the credit business, we are not. If we feel comfortable about it, as you can see in our NPL ratios, we're going to keep doing if we're comfortable about it. Regarding the tax rate is The way I like to think about the effective tax rate, that's the best way to look at it, because remember, you know, all the market making activity that goes from specific funds, it has a 15 to 20% tax brackets that is not recognized in our. So the revenue goes net from that tax, but the tax does exist and we pay that tax. When we add that back, we have a tax, effective tax rate normalized of close to 15% in the first semester this year. That's low. We expect in the future to have higher effective tax rate, but that talks to the capital market activity as well, right? When we have, for example, a strong capital market activity, most of the revenue goes into the broker dealer level with a 40% tax bracket. And then the effective tax rate goes up. have that we have more costs than revenue at the broker dealer level we have the tax benefits of the credit of the expenses at 40 percent and this lowers the effective tax rate so going forward i would expect as the capital market activity specifically keeps rising um the tax rates should increase compared to what we had in the first semester this year.

Yeah, the point here, Niha, is if we have a different revenue mix for the future as the capital markets comes back, we will have... a higher tax rate but we will have higher revenues in absolute numbers so if you see tax higher tax rate you see much higher revenues okay

that's correct and oh um i i'm not i i said at the beginning of the call that i'm still with a hangover of expert right i forgot talis uh on your previous question i forgot to mention the buyback we we have been buying back shares as well so that's also part of the cash flow that we have been doing. We have done approximately one-fourth, a little bit more, of one-fourth of the whole buyback program we have announced back in May. All right. Sorry. Let's move forward.

Thank you, Niha. Next is Mario Pie from Bank of America.

Mario. Hey, guys. Good afternoon. Thank you for taking my question. Just two quick questions. First one is a follow-up on the revenue yield that you talked about on the retail revenue yield that you had about five to seven basis points benefit from performance fees. Can you just remind me how often are these performance fees recognized and if there were any performance fees one year ago. And then the second question is related to the integration of Modal, right? If you can provide us an update of the timeline, when do you expect this transaction to close? I know Modal reported earnings last night seems like the earnings are coming below what the market was expecting at the beginning of the year. So I was wondering also, and I don't remember if the price that you're paying for Modal that was fixed, right? I think you were issuing like 13 million shares. But I was just wondering, you know, how are you seeing the performance of Modal? When do you think this transaction is going to close and any potential synergies from the transaction?

Sure, Mario. About the take rate and the positive impact of performance fees on the take rate, last year we did have performance fees on the second quarter, but it was much lower than the 150 rough numbers that we had this year. I believe it was something around 50 million, something like that. I can follow up with the right number here. I don't have in front of me, but it's close to that. So usually performance fees, we have strong numbers, second quarter, fourth quarter. those two quarters. And it depends on each fund. We have, as you know, a lot of funds in our platform and ecosystem. We do have, for example, we have a small part of performance fees in the first quarter, but really small because of certain funds. So second quarter and fourth quarter, that's what is really relevant. And the five to seven base points, that's the impact in this quarter. of the take rate, okay? So the take rate would be 1.23 to 1.25 without the performance fee, but they do exist if the market had a positive equity effect. It's basically multi-market funds, macro funds performing well that got the performance fees. You're gonna say something, Mafra, or no? No. Okay. About Modal, we expect to have the deal closed by the end of this year, but we do not control the process. We are still waiting on mainly to... two events, central bank approval and SEC approval because there is equity issuance that we're going to do to merge Modal or have Modal as 100% subsidiary of XP Inc. conglomerate. The number of shares maximum is 19.5 million and that's is done, right? Regarding modal performance, I mean, again, we have a lot of synergy there. Modals, they do not have the diversification that we have in XP. So their business get hit It's stronger because of the macro environment. It's XP like, I don't know, 10 years ago. If we were like 10 years ago, our numbers, we would not have had all-time high retail revenue, a record of our quarterly revenue. we would not have that kind of result. But it doesn't change anything. We believe it's a very creative acquisition. We know exactly what Modal does. We do it internally as well. We are thinking about the synergies, but we need to wait for the author's approval. CAGI has approved already, but the central bank is still pending. As you know, central bank, they had a strike this year that delayed a lot of process, but they have resumed already. So We'll see.

And we have mentioned in the past, as you know, we have done several acquisitions in the past and historically what we have is 30 to 50% synergies on SG&A and another 30 to 50 synergies on revenue. So that's the way to think and to model the synergies on Modal.

That's very helpful. Thank you. Thank you, Mário.

Thank you, Mário. So... Last but not least, Domingos from JP Morgan. Good evening, Domingos.

Good evening, guys. Thanks also for the questions. And I'm circling back a little bit to the cash flow. Batista started and several other analysts, I guess, are asking similar questions in a different way. I'll add one more way to ask the same question. So I'll give you some sort of a base case, right? Let's assume your asset center custody or IUC grows mid-teens. And market activity doesn't accelerate a lot. And by that sentence, I am hoping you understand that basically your capital needs, your cash needs don't grow a lot. By when can you pay dividends? And what kind of payout do you think you could have? Is it a 23, 24? And now what? The beauty of being a technology-enabled platform to a lot of investors is being an asset-light business model. And a lot of people compare it to B3, which pays 90 plus percent. So this is sort of the message we're trying to get here when this cash starts, you know, Flowing back to investors. The second really quick one is, you know, it came out in the newspapers. I guess Villa, the campus you guys were building would be on hold and you guys would be searching for the floors back in Faria Lima. So my question is, is that a cost savings? You know, do you guys give up on that or not? What's the latest?

Yeah. So your first question, Domingos, to be honest, we are a growth-driven company, right? So we are always thinking about the next innovation, the next product. And as we have a very low market share, Investment is a little bit higher, but still we are not number one yet, despite being recognized as the best investment platform by clients and prospects getting the awards, but we are not number one. So our mindset for the short and midterm is driven to conquer all of that. And as we have been investing in new initiatives, I don't have a number to say to you, neither a time horizon that we're going to have our cash returning and paying dividends because we have so much to do. For example, think about going international. As I mentioned, the direct investment for retail clients in the U.S. can be a small seed to really go international because we start with equities. We're going to have banking there as well. We're going to have other products. And then we can think beyond Brazil and even in the U.S. Just to give you one example. So this mindset... It doesn't allow us to think about, you know, return the money because we always want to do more to grow in perpetuity. That's the mindset. So I don't have a number to tell you about dividend payout, et cetera, right now. I don't know, Mafra, if you have something in your mind to add there.

Okay. So about the second part of the question about villa and other floors at Faria Lima, the way we going backwards, it's not a cost decision, okay? So it's not based on costs. At the beginning of the pandemic, we had 3,500 employees and we used to have... 12 floors, if I'm not mistaken, 12, 13 floors between Jotaka and Faria Lima. And now we have four floors, and we have more than double during the pandemic. So yes, we are looking for one or two floors at the same building because we have more than double, okay, during the pandemic. And it's mostly for commercial people, investment banking, asset management, private, corporate, commercial people, and because we need these people, they need to be close to where the customers are, and they need to be based in Sao Paulo. So that's the reason, okay? And about the villa, we had many problems with the construction company, license, and so many other problems, but that's it.

Thank you, guys. Congrats on the quarter, and good evening.

Thank you, Domingos.

Thank you, Domingos. the last one. So once again, I would like to thank you so much for your interest in our call. We are available for any follow-ups as usual. Bruno, I think you could invite everyone again for next year's event just to finalize.

And thank you so much. We are going to think about something that, especially for our investors outside Brazil, that makes your trip to Brazil worthwhile. And we include experts in that agenda. So we would be more than honored and happy to receive all of you in our event next year. But thank you. Thank you a lot for the call. And that's it.

Thank you, guys.

Bye, everyone. Thank you.

Bye-bye.