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.