XP Inc.

Everyone, thanks for waiting. We're just... giving some seconds for everyone to join. I'm André Martins, Head of Investor Relations. And on behalf of the company, I'd like to thank you all for your interest in our quarterly earnings call. Today we have with us Bruno Constantino, our CFO. We will both be available for the Q&A session right after the presentation. Remember that you can raise your hand in the Zoom tool. I see that... As usual, we have some raised hands and we will answer them after the presentation. Please refer to our legal disclaimer on page two. There we have we clarify actually the four looking statements, their definition and on our website. you can find additional documents for looking statements and why they might differ from actual results. So without further ado, I'll pass the word to Bruno Constantino. We have a lot to talk about today. And it's later in Sao Paulo, right, Bruno, than usual. So let's get going with the presentation. Thank you so much, every one of you, for the interest.

Yeah, sure. Thank you, Andrea. Good evening, everyone. A pleasure to be here with all of you one more time in our 12 earnings call. This call might take a little longer than usual, but I promise I'll try to be as brief as possible so we can jump into Q&A. So we can move to the highlights. So here on slide five, the highlights, We have selected four main highlights for third quarter 22. First is the improvement in our disclosure. Always considering feedbacks from investors and thinking about how to enhance our transparency over time, we have changed three points in our managerial disclosure. We have incorporated digital content into retail. As you know, digital content is an enabler, much more than our relevant contributor to our revenue. So it doesn't make sense to disclose it on a standalone basis anymore. Number two, we separated corporate clients, companies with annual revenues above 700 million BRL annually, from retail clients. This change was motivated by one, growth of the corporate business, which was irrelevant until the end of 2021, last year, and has been gaining traction throughout this year, as you're going to see throughout the presentation as well. And number two, different profile of clients as well. And third, We have opened the retail revenue base on its main product classes. I think this is the main change in terms of disclosure that we are making from now on. What are the main product classes? One, equities. Two, fixed income. And three, funds platform. I hope that will help All of you understanding the dynamics of each business line, depending on what the macro environment is. The second highlight is about expenses. We are still absorbing the impact of headcount growth in 2021, as you know. But we do believe that our ongoing transformation should result in efficiency gains and better margins in 2023 onwards. Our total SG&A, as you're going to see, already showed this quarter signs of stabilization. I will talk more about that as well. Third highlight, we are discontinuing the adjusted net margin guidance. And as of today, we introduce, in exchange of the adjusted net margin guidance, a new earnings before tax margin that will take into account the expenses related to share-based compensation. And finally, the last point is just an announcement that we have just released a 6K informing about the increase in our actual share buyback program, moving it from a total of 1 billion BRL to 2 billion BRL and keeping the same timeframe, which is until May next year. So moving to the next slide, Starting with client assets. So all time high client assets, 925 billion BRL, helped by higher interest rates that tends to increase, as you know, the total client assets. Net new money has been accelerating. from an average of 14 billion BRL per month in fourth quarter last year to 11 billion in third quarter this year. But it's still between the soft guidance of 10 to 15 billion net new money per month. There is, as I've said, When you have two facts added together, it makes the scenario poses a very strong headwind for net new money growth, which is not only higher interest rates, but higher interest rates coupled with uncertainty, investors tend to choose daily liquid fixed income instruments instead of allocating their capital in anything else, especially in the third quarter. We also had an inversion in the interest rates curve. And that makes, you know, even harder to make investors extending their duration. So there is a scenario that poses a headwind. It's not new. It's been with us throughout this year. But we are able to keep the low end of our soft guidance despite all of that. And then we have on the right side, the breakdown of retail client assets per products. As we have done in terms of retail revenue, we also are going to disclose the total retail client assets breakdown by the same buckets. And here, it's pretty much clear from a year-over-year view a mixed shift in terms of investment allocation. We had in the third quarter last year, 42% of total client, retail client assets in equities. And that number decreased to 34% third quarter this year. When we look at fixed income, it's the opposite. It was 22%. Last year, it increased to 30% this year. So everything that we already have been talking and you know, but now putting figures on it. So moving to the next slide here is just to show what we have done. So the old segmentation was retail, including corporate, institutional, insured services, digital content, and other. And now We have many more and the segments, retail, institutional, corporate is not with retail anymore. It's together with insurance service. There is a lot of cross-selling there, corporate clients and investment banking activity. So we believe it makes sense to put it together. And in retail, we have, as I said, opened the three main sectors, revenue streams of retail revenue, equities, funds, platform, and fixed income, and all the others are part of the new vertical. Digital content is included in other retail. Now talking about gross revenue. So our total gross revenue went from 3.5 4 billion reais third quarter last year to 3.8 billion reais this year, a 13% increase. This risk-off scenario has mainly impacted our retail revenue. That represents, as you can see on the right side of the chart, close to 70% of our total gross revenue. So retail in the third quarter represented six, nine, nine months, 71% of total gross revenue is the main component of our revenue and is the part of the revenue that has been impacted the most because of the bear market. A natural consequence, Consequence of that is a deceleration of our growth pace, but it's still a growth. 13%, as I said, year over year, 5.4% quarter over quarter. But as we also have been saying, thanks to a more diversified ecosystem, parts of retail revenue especially the new verticals we're going to show, and also outside with retail revenue, institutional revenue and corporate issuer services revenue have a different dynamic in such a tough scenario, helping the overall results of the company. That is why we believe XP has been building over time, even more resilient business model. And that's what make us believe as Mafra mentioned in his letter to stakeholders, that our strategy is in the right path, going beyond investments and in investments, adding more products and services so we can keep diversifying our revenue stream, increase the loyalty of our clients, and also the LTV of our clients. Imagine if XP nowadays in this scenario that we are living were XP back 10, 15 years ago when we were a monoproduct equities and monoclient retail. And move to Retail break now. Yeah, this slide will take a little longer, if you allow me, because that's new. All the numbers here, it's completely new, and we are going to share with you every quarter from now on. I will explain a little bit the dynamics of each block. It's pretty much straightforward, the impact of macro. When we have a bull market, equities benefit the most from it. Funds platform also benefits from it. Fixed income is hard to tell depending on which moment of the bull market you are. When we have a bear market, it's the opposite. Equities, they get hurt. Funds platform also get hit by the bear market and fixed income benefits, mostly because of higher interest rates. But here is interesting to look at the relevance of those three blocks that we are showing right now. Equities, fixed income, and funds added together In third quarter last year, they represented 86% of total retail revenue. In third quarter this year, 22, their relevance decreased from 86 to 72% of total. A very relevant decrease in relevance. But it's still the most relevant block of retail revenue by far. compared to all the other components. What explains that decrease? The bear market scenario. And this headwind has taken away more than 1.5 billion reais in revenue from our results in 2022. How do we get to that math? You just add together equities and funds platform, for example, in the third quarter this year, it will give you roughly 1.4 billion reais. And you compare to funds and platform in the third quarter last year to keep the same seasonality, that will reach 1.8 billion reais. So these 400 million reais per quarter, if you annualize that, you would reach almost 1.5 billion reais in annual revenue for FED. Now, another way to see this impact that had been mentioned about this headwind, including fixed income, you can include a fixed income just to get the three main blocks of our retail revenue, and fixed income is a positive number comparing year over year, okay? But let's add it together. You're going to see that those three blocks added together, even with fixed income, they decreased year over year 15%. So here we can do all the math you want to, but it's gonna be pretty much clear why retail is suffering in terms of revenue and revenue mix. Despite all of that, retail has been able to deliver strong revenue numbers. That has to do with all other components of the retail revenue, fixed income helping, Other that mainly it has other things there, but as there is in the note, floats, digital content, effects, and among others, everything that is not embedded in any of those blocks goes into other. But float is more than 80% of that revenue. So fixed income, float, and all the new verticals, retirement plans, cards, credits, insurance, they all have been helping retail revenue to keep a very healthy number and still growing year over year, despite this headwind that I've been talking about. Another interesting thing data that we can extract from this chart is a comparison quarter over quarter. When we look, third quarter 22 compared to second quarter this year is a different real. Basically, equities, for example, it's growing 5%. Similar to our debts number, the daily average trading number, that grew 3%, quarter over quarter. Funds platform here decreased 29%, but if you take out, because then when you compare quarter over quarter, there is a seasonality, okay? So second quarter, we have performance fees. When you take out performance fees, third quarter increased 15%. close 10% quarter over quarter. So the two main blocks that have been hit the most year over year, quarter over quarter, they show sign of stabilization, which is a good thing in my view. So looking at the other components that I mentioned, new verticals, the growth, it goes from 45% year over year up to 170% with CARS. CARS has been growing a lot, 26% growth quarter over quarter. So this is, I think, the main slide of the presentation where you can drive many different conclusions, but it shows hopefully the impact of this macro environment in our retail revenue as a total. So we can move to the next one. Take rates. So take rate is that retail revenue divided by average AUC, as you know. Now, what is the difference? Now, the stake rate is taken into account retail revenue, ex-corporate revenue that went together with issuer services. And the client assets, the total client assets, we are only doing the take rate for retail revenue. using retail client assets for sure. So the take rate 1.33, it was 1.40 in the second quarter, but in the second quarter, we had the performance fees. As I said, you take out approximately eight basis points of performance fee. We have 1.32 with 1.33, again, a signal of stabilization. On the right side, we highlighted funds platform and retirement plans. Why have we done that? Because we believe when we think about take rate as a price, so relating to the client assets and then as a price, those two components of the retail revenue are the components that makes more sense relating to client assets, funds platform and retirement plans. Because all the others, equities, fixed income, and the other verticals, especially equities and fixed incomes, they have a lot of revenues that are transactional based instead of plant asset based. But going back to funds platform and retirement plans, we are not considering in the funds platform performance fees here. What we see is the same movement, a shift away from equity and multi-market funds that have higher management fees into fixed income funds. So the take rate went from 71 base points last year to 55 base points this year, 16 base points contraction. But again, quarter over quarter, a slightly increase of one base point. So basically flat quarter over quarter, same signal. Now going to issuer corporate and issuer service and institutional. On the left, institutional. On the right, corporate plus issuer services. Here, both revenues, both segments, they performed really well in the third quarter. It's a fact. The numbers speak for themselves. Institutional, more than double year over year. Corporate, and issuer services increased 34% year over year, and quarter over quarter, both of them grew more than 30% quarter over quarter. So third quarter, no doubt, was a very strong quarter for institutional and corporate plus issuer services. We believe there is a relation with the elections in Brazil, a lot of anticipation, the positive impact in the OTC derivatives trading that we do with our clients, either corporate or institutional clients. So this shows the impact benefit of the diversification. It's very positive. Anticipating myself that I expect a question in the Q&A in the fourth quarter. We do not expect those two segments to perform as they did in the third quarter. It's natural to think that if there is an anticipation in the third quarter because of elections, you need like a transitional period, like a hangover to absorb everything that has been anticipated. It's hard to estimate how much, but the concept behind the fundamentals, I believe the third quarter should be the, the record quarter for 2022 in those two segments. And one more thing that I forgot to mention about issuer service. It's interesting to note that in our, we had this quarter, an all-time high quarterly securities placement revenue of R$525 million. You can see that in our earnings release. That number is as per our accounting income statement. Out of the R$525 million, we have R$202 million. $28 million in the third quarter here in issuer services, but everything is kind of related. The other part of the revenue goes into retail. It's mainly distribution fees, and they go into retail in different segments. So it was an all-time high of securities prices. Placement revenue in a quarter that we still are in a bear market. Not equities playing a role because ECM is really weak, but VCM and also alternative funds playing an important role in this quarter. SG&A and earnings before tax margin. So total SG&A has been flat quarter over quarter. I believe that's a good thing. The apparent growth in known people, you have the breakdown here on the left of people and known people growth. that are included in total SG&A. So the apparent growth in known people expands quarter over quarter from 374 million to 405 million is lower than it shows. Why is that? I talked about a reclassification from depreciation and amortization into SG&A. You can see that also in our earnings release. Depreciation quarter over quarter decreased approximately 12 million reais, and that's most of it a reclassification between lines, okay? So discounting this effect, non-people would have grown 5% quarter over quarter. And remember that in the third quarter, we also have our annual event expert. that the expense is embedded in there. We also can see an EBIT earnings before tax margin on the right part of the slide recovering. So we had our lowest EBT margin in the second quarter, 25.3%, coming from 28.6 in the first quarter. And third quarter already shows a recovery going to 27.2%. We are giving this new guidance of EBT margin from 26% to 32%. We tend to be always conservative in our guidance. As you know, we had 25.3% EBT margin the second quarter this year, but it's our expectation that as I mentioned, the ongoing transformation in the company, no matter what the macro environment is looking at the signals that I also mentioned of stabilization in those revenue lines that get hit the most by a bear market compared to a bull market, we believe we are gonna scale up our EBT margin from 23 to 25 in the next three years. So next year, you could expect our margins closer to what it is nowadays and increasing a little bit, moving towards the 32%, the top of the range in 2025. That's what we are going to fight for here in the company. And also in terms of expense growth, For next year, when we look at total SG&A and also people expenses, we for sure are going to have a lower growth than we had this year compared to 2021. No question about it. Net income and net margin, here it's a record net income helped by the earnings before tax quarterly that we have in the third quarter. It was the third higher EBT in our history, only behind the fourth quarter of last year and second quarter of last year. But remember that second and fourth quarter, usually they can have seasonal revenues that the third quarter doesn't have, performance fees, and also helped by a positive account tax expenses. So record net income ever. We also kept a health margin here, 28.5% in the third quarter. Our basic unimpaired shares is growing a little bit more than our net income. That's related to the buyback in place. And our adjusted net income, although we are not using anymore the adjusted net margin as a guidance, we're going to keep our adjusted net income in our spreadsheets, in our investor relations site in the internet. Finally, we have two more slides. to share with you. This one is about the net asset value. We've had several doubts in the last, mainly in the last two quarters about our cashflow conversion, cashflow generation and capital location. So we thought in a way to bring here and share with all of you some slides that hopefully they will help to understand better those issues. So first, it is a complicated issue, especially considering that XP is a platform, but also is a financial institution. So we hold several types of financial instruments with different characteristics in our balance sheets. I've said that before, so when you go into our cash flow statement that follows an accounting rule, it's not business sense to analyze that. We are working on a managerial, a better managerial cash flow statement to help you to understand exactly what our cash flow generation, if you may say, is. But the way we look internally here is to our net asset value. That could be an analogy to our net cash value. What is it? It's basically the adjusted gross financial assets that you have on the left part of this slide, and that we have been sharing with you through our earnings release, minus our debt instruments that are not embedded in the adjusted gross financial assets. Because the adjusted gross financial assets take all the financial liability. So anything that goes into our results as NII, net interest income, is because there is a financial liability associated to it. It's already embedded in the adjusted gross financial assets. But we also have corporate debt that is not embedded in there, like the bond that we have issued, like the debenture that we have issued. So like the IFC debt that we still have in our balance sheet. So all of the borrowings, the corporate debt that we have is what we are calling here the gross debt on the right part of the slide. we discounted from the adjusted gross financial asset reaching the net asset value, which at the end of this quarter was 9.8 billion reais. In the last slide, we want to present a bridge, a bridge that explains a little bit the way we look at it internally, and the assets allocation. So what do we have here? Starting with December 19 until September 22, we're talking about two years and nine months after the year of our IPO. On December 19, our NAV was 6.4 billion reais, already considering here the proceeds from the IPO. Then we have a total net income of 8.5 billion plus 1.4 billion of a follow-on that we did on December 20. If you add 8.5, 1.4 to the 6.4 of NAV at the beginning of the period, we should have, if net income conversion rates to NAV was 100%, R$16.3 billion of NAV. But we have a little bit less than R$10 billion. Where did the money go? What happened with the company throughout those 2.9 years, roughly? So you have the bridge here showing what happened. Most of the money, if you take out the share by back, that is 0.5 billion and 0.3 billion is basically working capital. And that's also tricky because I mean, 0.3 billion in a period of 2.9 is nothing, but we always are going to have some variation between quarters because between quarters, NAV can fluctuate a lot in terms of the working capital for, for example, tax reasons, for share-based compensation reasons, and other reasons that might have these fluctuation. But when you extend the period, this effect gets, of course, diluted. But the main thing here to highlight is the 4.2 billion in investment in our IFA network and the almost 1.5 billion in M&A. So here we add together 5.6 billion reais of investments that we have made. And those investments, they are not financial assets per se in the sense that we use in our adjusted gross financial assets. So they get, they are not included there. And that's why they reduce the NAV, right? And we, as Mafra also stated in his letter, we We believe that the investment that we decided to do in our distribution network was important. That's a competitive advantage that we have. We were able to sign long-term contracts with our IFAs. And of course, all of the transactions, including M&As, we always look to several metrics. But the two main metrics are, you know, payback and return on equity. And we consider all of that in our decisions years. And also M&As is small. I have said already that we are not planning to do M&As. any relevant M&A going forward. We already have the deal with Modal waiting for approval of the central bank in Brazil. So the message here is these 5.6 billion reais should be much lower going forward. That's exactly one of the additional reasons that we decided to increase our share by back program in place, because we are gonna have more investments as we have had throughout these years, especially in the IFA network, but nothing compared to the size of what we have done in the past, except for a little bit more than 1 billion reais that we already have committed, but we have not done yet with our IFA network in terms of the broker dealers that we're going to be minority shareholders of IFA. So except for that, the other is more of the same. It's basically, you know, investments that we do on an annual basis, considering that we have a distribution network that is the biggest one in Brazil. So with that, I will stop here, open for Q&A, and then we can answer doubts that you might have. Thank you very much.

Thank you, Bruno. So let's go to the Q&A. Our first question comes from Tito Labarta from Goldman Sachs. Hey, Tito.

Hi. Yep. Can you hear me? Good evening, Bruno, Andre. Thanks for the call. Thanks for all the additional information that's very helpful and useful. to think about and help us model the business. So appreciate that, the color. A couple of questions, I guess. One, just looking at the retail revenue breakdown, right? You show there that other line has increased a lot. I think, you know, is that, should that be just mostly a function of the higher interest rates that we're in right now? And as rates come down, you know, that should come down. And a second question on the inflows, and I used to have the guidance, the 10 to 15. Have you seen any, you know, we saw the equities picked up a little bit in TQ, you know, I would expect, you know, in a lower interest rate environment should be positive for that. But, you know, with markets doing a little bit better, any visibility there in terms of inflows, either like by segment, are you seeing more interest in equities is still more like fixed income, just to try to get a sense of when there can be an inflection point on those inflows kind of longer term.

Yeah, the other retail, most of it is flows revenue. That is the retail revenue and goes into other. That's the most relevant one, okay? Regarding your second question about inflation, the client assets inflow, net client, net inflow. It's what I said, Tito. It's when you have uncertainty, I think as an individual investors, a fluent client with a lot of uncertainty in the market, where if you're gonna, if you're gonna buy a, a longer duration secured, fixed income secured, you're gonna get a nominal remuneration that is less than the one that you can have with daily liquidated. And then it makes hard, it's a headwind. And even in that scenario, and net new money that it's above 10 billion reais per month. In a scenario like that, usually people, they freeze, they wait, they don't have to, they have an instrument that is daily liquid based on a nominal terms more than, you know, extending the duration. So it's not easy. You need to do a lot of explanations. And that's why advisories are so important in a scenario like that. But it's not an easy sell. And that's what explains, in my view, the weaker net inflow. We have seen stabilization across all signals, but not a reversal yet. We still have a lot of uncertainty upon us. You have global inflation, you have... global recession, you have higher interest rates where Fed funds are going to stop. You have a war still going on. You have a lockdown in China. So many things happening. Brazil has a new government that needs to tell about what the fiscal policy is going to be and so on. So too much uncertainty.

in my view to see a reversal but the good thing is it has stabilized so i think the with the worst is behind us that's the point great thanks bruno thanks just looking because you also disclose the assets sort of by by segments um so just how much of like equities was up like 30 billion but i don't know how much of that was just the market performance versus potential inflows because looking at the fixed income, it was like 28 billion last quarter down to 20 billion. So just to try to understand what drove the increase in the assets by segment.

You mean the equity... In the third quarter going to compare to the second quarter?

Yeah, if we look on the breakdown of the AUC, it was like $278 billion. It was $247 billion last quarter. So I imagine there's a market appreciation in there. Looking at the fixed income number, it was lower relative to last quarter. So just to try to see how those inflows are evolving by segment. Okay.

Okay, I got it. Yeah, I would have to get what was exactly the market appreciation of equities quarter over quarter. I think I can get back, we can get back to you later on. But at the end of the day, you know, we are not Look, we are not opening any more adjusted anything, like adjusted client assets or anything like that. So as we segregated corporate from retail, in our view, it doesn't make sense because corporate, by nature, has a different kind of volatility compared to retail. But of course, we can have some... unusual movements in one single quarter. Whenever we have something like that, we are going to explain in our earnings release, okay?

Okay. Thanks, Bruno. And thanks again for the additional disclosure.

Thank you, Tito. Next is Geoffrey from Autonomous. Hey, Geoff. Good evening.

Hi. Can you hear me okay? Hi, Geoff. Hi, can you hear me? Yeah.

Great. Thank you for taking the question and thanks for the new disclosure. There have been some articles recently talking about IFAs moving away from XP. I wondered if you could elaborate on that. why you think some of those IFA moves have happened. And can you confirm, are these IFAs where you had the long-term exclusivity in place and they decided to pay a break fee to go somewhere else?

Yeah, look, Jeff is right. competition, so a competitor comes, pays, the IFA decides to go, or we do not think it's worth retaining the IFA, whatever the case is, then it happens. It's natural. It's not the first, and it's not going to be the last time that it happens, okay? Remember that we have more than 13,000 I think we have close to 12,000. We have more than 13,000 advisors in total. But we have close to 12,000 IFAs in our network. We have approximately, if you look only at the IFA world, 70%, roughly speaking, market share. So it's something natural, okay? We look at it. as a natural thing that will happen again, and it has happened in the past. Yes, the IFAs that you referred to, they had long-term contracts. You also, I mean, you can, in this quarter, we had, if you go in our financials, you're going to be able to see the disclosure of revenue, where we have revenue from incentives, from B3 incentives, Tesoro Direto and others, part of that revenue, when we get back the fine that we have in the contracts, it goes in there. So this quarter, if I'm not mistaken, the total amount of that line was close to 40 million reais. And part of it was helped by one IFA. And we might have that going forward as well. So we got our revenue, get the cash back, and that's it.

And when they decide to leave, do they tell you that's purely a financial consideration for them or are there elements of your competitors' offerings that they're choosing because they think the competitor offers something that XP doesn't? Money. Got it.

Thanks very much. Thank you, Jeff. Thank you, Jeff. Have a good one. Thank you.

Next is Tiago from UBS. Good evening, Tiago. How are you? Yes.

Are you guys hearing me? Yeah. Yeah, Tiago. Okay. Thanks for the new disclosure. Very good. The new format. I have one question about the excess cash that you mentioned in the press release. You mentioned 5 billion reais. Only to make sure if I understood the concept of this excess cash. So in the case of no relevant acquisition or M&A, do XP will be able to distribute this 5 billion reais in the coming years? or part of this 5 billion should be used in your organic expansion. So with CapEx, with IT investments. So only to make sure if this 5 billion should be distributed in the near future, if you don't have any big M&As.

Look, the 5 billion in the near future, I don't think so. In the future, yes. But in the near future, I don't think so. Why is that? Number one, we are conservative. The way we approach our financials and we always think about the long term. Number two, we still have a lot of uncertainty upon us. I just talked about it. So we think it's, you know, we are here for the long term. It's wise to to keep a higher, let's say, margin of safety in moments like that. And what I can tell you, Tiago, is we keep generating cash. Our company does generate a lot of cash on an annual basis. And yes, we are going to keep evaluating the excess cash because we are distributing. We think $5 billion is enough for now to keep as excess capital in our balance sheet. We can change our mind in the future and decide to work with... less than that or a little bit more, but for now, $5 billion seems more than enough. And the excess above the $5 billion, yeah, we can keep distributing to shareholders. Remember that XP is a disruptor. We are in the financial industry, mostly in Brazil, and we have less than 2% of the financial industry revenue pool. So we are at very early stage of the potential that the financial industry in Brazil offers as a disruptor. And opportunities might arise, but right now, where we are in our strategy, what we have done, I think that XP has already invested a lot. Our expense numbers, they show it. So we have invested a lot in new verticals. We have put in place our digital accounts. We have cards. We have launched cards at Ricoh Brand. We have our offshore account. We have our digital asset platform. We have the insurance business running, up and running, and developments happening as we speak. So We have done all those investments. Now it's time to consolidate the investments that we've done to increase the share of wallet of our existing clients. That's part of the strategy why we decided to go beyond the investments and consolidate all of that. and look for more efficiency in our company, because of course we can be more efficient than we are right now. It's natural in a company like XP that more than double its headcount base during the pandemic. since the pandemic to today, doing so many things together that we now believe is the right time to put our energy into consolidating everything that we have invested in, plus searching for more and more efficiency in our company. And then If that is the strategy for the near term, and we are concentrated in that, the additional excess capital above the 5 billion reais, we start to distribute that. We don't need that right now. We don't want also to keep distributing capital. And then remember that we have less than 2% of the revenue. One year later, we think now we want to do this or that. So we go back to shareholders and do a follow-on every six months. That's not what we want to do. So we are conservative the way we make these decisions. But when we do it, we go forward. Very clear, Bruno. Thanks.

Thank you, Thiago.

Next question from Morgan Stanley. Hi, Jorge.

Hi, Bruno. Andre, how are you? Congrats on the numbers. And again, I know it's been said before, but really, thank you very much for the additional disclosure. I think it's going to go a long way in helping the market understand your business. So thanks for that. My question is kind of around what you've been discussing, Bruno, so sorry for that. But when you think about your retail business, is it, you think, the direction of interest rates that would potentially improve the inflows Or is it actually the level of interest rates? And I'm thinking obviously on the equities business, which is a big part of irrevenience. And I'm saying this because hopefully we've seen the peak of rates, right? I mean, the central bank has been on pause now and the next move hopefully is down. So the fact that rates are going to start to come down, do you think that's the trigger? Or is the trigger actually the absolute level of rates? And what do you think that absolute level is for us to get, for you to get more influence into the equities business?

Yeah. I think it's more the direction than the level. But Remember what I just mentioned a few minutes ago. Retail investors, they look to nominal terms. So if interest rates is still going down, but the long-term rates are lower than normal, the spot rate, that's a headwind. Because you need to convince me to explain why is it, what is the premium embedded, what is the expectation of futures rates, and so on. We do that, of course we do. But it's a headwind, I would say. But at the end of the day, it's more about the direction, in my view. But we need to take out part of the uncertainty. And then when we take out part of the uncertainty, equity markets should react first, I guess, as usually, and investors will follow. It's the cycle that we've had in the past. For ourselves, the best, I would say the best, the sweet spot is when you have a bull market start forming, but level of interest rates are still high. For XP, the interest rates at 2%, it's not the best scenario. honestly would be, you know, in the middle range, I don't know, six, six to 8%, something like that. When you have a more stable environment with higher level of interest rates, but stable, that's a good environment, a very good environment. But we navigate in all kinds of scenarios. We, we have been, what changes the mix? It gets worse. And, and, but we keep growing and we grow. at a slower pace. That's what is happening exactly in 2022. But the business is resilient, no matter what the macro environment is.

Great, Bruno. Thank you. And I have a second question. Can you remind us What is the level of asset attrition a year later when you lose a IFA? I remember maybe like a year ago or so you published a press release with some of the actual numbers of specific IFAs that you lost in the past. The numbers were very, very small. Has that changed? Can you remind us what the level is today? And, you know, what was it compared to IFAs that you lost, you know, three, four years ago?

Yeah, sure. No, the 70 to 80% of the client asset stays within XP. It doesn't migrate. What we lose is basically the growth of that IFA office. If it was a good IFA office, we lose. If it was not a very good IFA office, I mean, we don't lose much. At the end of the day, that's basically it. Because when the IFA migrates, the client's hours, the client has XP accounts, has XP app, everything. And then we have... more than 13 advisors in our ecosystem that would be more than willing to serve that client. And that's what happens.

Great. Thank you. Thanks. And thanks again for the additional disclosure.

Sure. Glad that you all liked it.

Next, Mario from Bank of America.

Hi, Andrea. Hi, Bruno. Thank you for taking my question. Also, we really appreciate the improved disclosure. My question is related to what Jorge just asked you. Last year, you published this report saying that 80% of the AUC of the ISAs who left stayed with you. So when we see this slowdown in your net new money, are you able to break down for us how much is like lower inflows and how much is like due to higher outflows? Can you just give us the dynamics, right, that you're seeing between inflows and outflows? And then my second question is related to your buyback question. So you're increasing your buyback program by 1 billion reais. On your presentation, you showed that you only executed half of your previous buyback. So I'm assuming you still have 1.5 billion left to be bought back. But I wanted to understand the decision between buybacks and dividends. Why are you doing everything in buybacks and not in the form of dividends?

Okay, Mario. Your first question, it It hasn't changed. It's not the slower pace of net client assets. It's not because of migration of IFAs. Of course, there is a component, but it's small. Okay, it's small. So it's basically the macroenvironment. posing a headwind in terms of bringing more money into the platform. We are still bringing, but not with the size or amount that we would like to and think we can do it. So it's not related to IFA leaving the platform. Your second question about buyback is, You're right in what you said. It's approximately $1.5 billion, considering the additional $1 billion we announced today that we have to buy back shares until May next year. And the reason we decided for buyback is basically because we think it's a more attractive option nowadays. That's basically the reason. but it could be dividends, but we decided to buy back shares.

And Bruno, any updates on the Itaú and Itaú's decision to continue to sell down their stakes? Are you talking to them? Could you use your buyback then to negotiate directly with them?

No news about that. Itaú or Itaúsa, they They have our direct contact for sure. They know we are here to help them to sell whatever they want. We have said that. But as far as I know, it's not in their intention. So I don't know. You would have to ask them, Mario.

Okay. Thank you. Thank you, Mario.

Thank you, Mario. Marcel Teres from Credit Suisse. Hi, Teres. Good evening.

Hi, Andrea. Hi, Bruno. Thanks for the time and sorry to sound like a broken record here, but I'm very happy to see the disclosure you guys did. So, you know, great initiative. You know, I think this definitely helped people understand, you know, the story. So well done. I have a couple of questions, actually three questions. The first one, with regards to investment in IFAs, as you mentioned in your presentation, you had about 4.2 billion reais of investments plus some M&A. as well. And I remember, I think until recently, I think kind of like a soft guidance for, you know, investments in IFAs on a yearly basis would be to be something similar to, you know, the amortization, right, of this of the investments in IFA, which I think was about 400 million reais a year. So how should we think about that going forward? I mean, is that still a reasonable assumption? So that's my first question. The second question is more of a housekeeping item. I was looking at your adjusted gross cash flow And for the second quarter, it's a bit different versus the number that you guys published. I think there's almost like a 600 million reais difference. I just want to understand what was the change there. I think you guys had about 9.8 billion in gross cash flow. And I think now is around like 9.2 billion reais. So I understand the difference. And my last question is more of a strategic question, you know, thinking of your business, you know, going forward, you know, of course, you're very successful in investment platform, you know, you've been adding, uh, you know, new businesses, uh, to, you know, uh, uh, you know, to your, to your core, uh, business, uh, you know, cards, you know, the bank and so on. Uh, when you think of your business today, including this new, uh, you know, products, what, what are the areas that you think you are not in yet that you'd like to be? Uh, I don't know. I'm thinking, you know, uh, uh, acquiring maybe be more like, you know, a digital bank. So how should I think about, you know, your business, you know, five years down the road would still look different, you know, very different from what we're having today with these new products or maybe more of the same. Thank you.

Thank you, Thales. Regarding your first question about the IFA amount of annual investment, it's hard to tell. You mentioned about a soft guidance. Probably when we get that kind of question, we answer a number. I don't know if we should, but at the end of the day, it depends because we analyze case by case. That's how we do it. And as I mentioned, in terms of the capital allocated in the IFA distribution network. We analyzed all the deals that we have done using several different metrics, using the data that we have for so many years with those IFAs, considering payback, return on equity, and so on. So it's hard to tell how much it's going to be. What I can tell you is We do have part of our long-term contracts with our IFA distribution network. There is a component that is upon certain performance, okay? So that part of the investments, if the IFA reaches the performance that we have established in contract, then we have to pay X amount million additional. And when we do that, because it's embedded into the same contract, it goes into that line, the prepaid expense. So that's one part of the explanation. And we keep doing our network keeps growing you can see by our number of ifas and so on and we keep doing uh some incentives and and contracts uh with uh our ifas when we think it's a good opportunity it's a win-win situation for xp and the ifa of course we this year we probably are around putting all together 500 million reais, so greater than the 400 million. If you look at the prepaid expense, it has increased a little bit this year, but it's not relevant if you go to the notes. So I don't have a specific number to tell you. It could be higher than what you mentioned, the soft guidance of the 400 million, but it's not going to be anything close to the amount that we have disbursed in the past, as I said. Your second question about the cash flow, you're right. You remind me of something I should have said. We included in our earnings release, we included the energy, for example, and compulsory in the asset part. Energy, we have, oh, there you go. Thank you. Yeah, so energy, that's probably what you're talking about, Thales, the 619 million reais in the third quarter and 540 million reais in the second quarter. In the second quarter, we had the liability part. but we didn't have the asset part of the energy because the way the accounting recognizing this is a credit business, prepaid energy for corporate clients that we have this business here, but the accounting recognizing This measure goes into a line that is not considered a financial asset, but at the end of the day it is. So that's the adjustment that we have made there. And the other adjustment that we have made is the commitment subject to possible redemption that you can see in the liability part. that is a reduction is about the, the SPAC that we have in our, in our balance sheet from our asset management arm. And as you know, SPAC stays in secured T-bills, which is a financial asset. So it goes into the asset line and the liability is not a financial asset. So it was not included. And we, included there. So those are the main adjustments that we have made. And your third question about the strategy, what we can think about XP five years from now. Look, we are now focused on consolidating all the investments we have done. I think that's the wise thing to do. First, because we believe the strategy of those investments, they are in the right track. And we believe we can really benefit From those investments and all of the investments, they are at very early stage. So we need folks there and put traction on that. And that's going to take a while. It's not going to happen in one quarter, two quarters, not even in one year. So that's where I believe most of our energy is going to be. Besides, of course, the efficiency part that I also talked about. Five years from now, we have many ideas here in XP. We are a bunch of entrepreneurs that don't believe anything is impossible. That's one of our core values. So we have many, many ideas. If you had asked me the same question five years ago, I would get totally wrong. I would not say that we would have the businesses that we have right now and the way the company would be. So it's hard to tell. We like to go step by step. That's how we got here. We like to keep our profitability when we are not satisfied with our margins. We understand our margins. They are a consequence of decisions we have made that we believe they are in the right track, as I said, and they have a clear strategy backing them. But we always think we could have been doing better. That's how we are. We like profitability. We like to go step by step. We like to feel that we can move to the next step. But we think of many, many ideas. And we have a very small part of the financial industry. But I don't have... Oh, we're going to go into acquiring business, as you mentioned, or no, I don't have a clue to give you as of today, Marcela.

No, Bruno, that's very clear. Thank you so much. If you'll allow me just to follow up on one of the previous questions from the other analysts. I think regarding the – I think Tiago asked that question about the $5 billion excess capital that you mentioned in your earnings release, which, by the way, thanks for putting that there. I think that's very helpful indeed. Yes. This $5 billion, does that include the amount of money you need to have, let's say, to do warehousing or to participate in a syndicate? How should you think about that? Or this is in addition to what you already have, let's say, allocated, let's call it your, let's say, minimum operating cash, right?

Yes. No, it does. I mean, you need separate capital from cash. The way we use to get to the 5 billion, we use metrics to adjust all our assets, you know, beyond the prudential conglomerates. for the whole group, okay? That's what we do here. And we adjust all our assets by risk and compare that with our available capital. also for the whole group. And we use our internal target that is pretty much similar to what we have in our prudential conglomerates. That's how we get to the excess capital that we have. Cash. Cash is not an issue for us in the sense that we are We have an NAV, a net asset value. We could leverage our balance sheet if we wanted to, but that's a different discussion. So I would answer your question. Yes, everything's taken into account. to consider the $5 billion. But just bear in mind that cash and excess capital, they are not the same thing. Because in a financial institution like ourselves, those things, they get confused sometimes. It's one of the reasons that I talked about the cash flow from operations, for example. that we have to disclose from the accounting perspective. It's tricky. You cannot, you cannot, you cannot look at a company like XP, cashflow from operation, operations, you know, operate. Oh, and you're not, your operations are not making or generating cashflow in this quarter, that quarter. It doesn't make any sense to make these analysis because for example, if we take a financial analysis, a financial asset that we have bought in our asset liability part, for example, like a government bond that is longer than 90 days. And we just decide to sell and invest in something shorter term, like 60 days. it will not be there anymore in this cash flow account because it will go directly into cash and the equivalent. And it doesn't change anything. It's, you know, the same thing with, if you go there, there is financial instruments payable. Basically, the banking business CDs that we issue, et cetera. If we have... other financial or we are issuing CDs there. It's going to be a financing part of our... It's going to be in our cash from operations. The increase of that source of funding, because at the end of the day, it's a financing. What matters is what you do with that money. If we buy... short-term, again, matured, secured, it's going to be in the cash and equivalent. So at the end of the day, you're going to look at the cash flow from operation. You're going to say, oh, your cash flow from operation is increasing. It's not because we had a financing part that we are investing in cash and equivalents. So we are working on a better managerial cash flow that makes sense. The one that we present is accounting reasons, but it is tricky to look at it. and get to any conclusion. So capital and cash is true. But yeah, I gave a long answer, but 5 billion take everything into account.

Thanks a lot, Bruno and André.

Thank you, Therese. Nice to hear from you. Okay, that was the last question. Thank you all for sticking with us. It's a busy earnings season, right, Bruno? Everyone is looking at the results. You guys are busy there, I know. Yeah, everyone's busy. So we will be happy to connect with you guys over the next few weeks to discuss the results and anything you might have interest in. And I don't know, Bruno, if you want to say anything.

No, just thank you. Thank you, y'all. And probably you're going to have doubts. And I mean, we released a lot of new numbers. So count on us to help you understand anything you need. So thank you. Thank you very much.

Thank you all. Have a great night.

Bye-bye.