XP Inc.

good evening everyone i am andrea martins head of investor relations of xp inc on behalf of the company i'd like to thank you for your interest in our earnings call so welcome to the fourth quarter and full year of 22 earnings call today we have with us our cfo bruno constantino we will both be available for the q a session right after uh the presentation and whoever wants to ask a question can raise your hand on the Zoom tool and we will attend you on a first come first serve basis. We have the option of simultaneous translation to Portuguese. So you have a button as well on the Zoom if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on page two, on which we clarify forward-looking statements, their definition. And we have on the SEC filings section of the IR website, the definitions as well regarding those legal disclaimers. So now I'll pass the word to Bruno. Good evening, Bruno.

Good evening. Thank you, Andrea. Good evening to all of you and thank you for attending our 13th earnings call presentation. As a full year presentation, I will take longer than usual in the introduction part, giving more context about how XP business model works in different macroeconomic cycles. I will also mention the important achievements and lessons learned in 2022. On slide five, we highlight how XP benefits from a positive market environment. The recent bull market that went on until 2021 attracted many Brazilians to the capital market, as you know. From 2018 to 2021, we had an increase of more than 4 million individuals coming to the market. Still nothing compared to the size of the Brazilian population, as you know, but a lot compared to less than 1 million we had in 2018. And as the main investment platform in Brazil, and having the biggest specialized distribution network, XP, benefited a lot from this scenario with our disruptive and scalable business model. From 18 to 21, we grew our client assets by a CAGR of 59%, our revenue by a CAGR of 58%, and our net income by a CAGR of 98%, basically doubling our net income for three consecutive years, way above market and our own expectation at IPO. And then comes 2022, a very challenging year, especially for the investment advisory business. With the SELIC rate rising from 2% to 13.75%, there was a meaningful change on investors' willingness and sense of urgency to diversify investments from low-risk fixed income options. This movement, which also was seen in other asset classes, is clearly shown by the almost 30% reduction in individuals' equities average daily trading volume in full year 22 compared to 21. Other external factors contributed to the standby mode and lower client activity we saw in 2022. I will name five of them. Number one, the global inflation and restrictive monetary policy all over the world. Number two, rebound of COVID in early 2022. Number three, war in Eastern Europe. Number four, uncertainty pre and post elections in Brazil. And number five, the World Cup fever in November, December, which led to a reduction on actual business days. I know everything I'm saying here is well known by each of you, but it is important to contextualize so everyone can better understand the impact of those events, not only in the full year 22, but on a quarterly basis as well. I will talk more about it in our results section. Going back to the list, except for global inflation and restrictive monetary policy, which happened throughout the whole year, COVID rebound and war happened in the first quarter of 2022. And elections in Brazil and World Cup happened in the fourth quarter of 2022. Not by coincidence, the two weakest quarters of XP last year. This is important to understand. Last year was unusual when looked on a quarterly basis. So in our view, it's better to look the full year instead. We had a lot of volatility between segments on a quarterly basis. It will become clear when we get to the results part. We have some slides to share with you. Going back to the advisory business. So the financial advisory business is based in human interaction. Circumstances which make these interactions less frequent as we had in the fourth quarter, for example, does have a negative effect in the investment business. Going back in time on the bar graph in the right of the slide will allow us to verify the evolution of our business. I know that in 2014, XP was a different business, much smaller, but the point to make here is to show how resilient our ecosystem became over time. The last monetary tightening cycle in Brazil began in 2013 and took the Selic rate close to the current level of 13.75%. It took Brazilian central bank two years and four months to complete the tightening cycle. And the total magnitude of it was 700 base points. In 2014, XP net income fell 40% relative to 2013, as 80% of our revenues at that time came from equity. With the market worsening, our main metrics, net inflow, new clients, and IFAs were strongly affected as well. We were much more, I'll say, a better play at that time. Now, fast forward to 2022. The recent monetary tightening cycle has been faster and more severe than the last one. It took the central bank only one year and five months to complete the tightening cycle. And the total magnitude of it was 1,175 base points. It went from 2% to 13.75% really fast. But in 2022, different than 2020, what happened in the last cycle in 2014, our revenue grew 10% year over year, and our net income remained flat year over year. The recent investments we have done in the new verticals help to mitigate this challenging scenario, improving the resilience of our business model. Let's talk a little bit more about those investments and also about some lessons learned in 2022 in the next slide. Since the IPO, we have been investing in new verticals, as you know, and according to our strategy to go beyond investments to become dominant in investments. We are confident that our strategy is in the right track. And by going beyond investments, we achieved three main things. we increase the LTV of our existing client. Number two, we enhance the mode of our ecosystem. And number three, we increase our total addressable market. Basically in three years since the IPO, we have built our own insurance company, XP Vida Previdencia, starting with the retirement plans and recently moving into life insurance. We have created a bank from scratch starting with collateralized credit, moving into credit cards, debit cards, and recently digital accounts. We have developed an international investment business, also from scratch, instead of doing it inorganically. We have created Xstage, our digital assets platform, organically as well, allowing our clients to buy crypto assets in the same app they use to invest. We have invested in corporate business, basically non-existent in 2019, year of our IPO, which made a revenue of 600 million reais last year. And finally, we have the expansion of the internal advisory team, our B2C, improving our total specialized sales force, which we expect to reap the full benefit of it when the macro cycle reverts. These projects demanded an initial allocation of financial and human resources that is decreasing as they mature. And honestly, I don't remember in our history a period where we have done so much and so fast. And maybe here is a lesson learned in 2022. We, as a company and as entrepreneurs, we are disruptors. We always want more. And it's always good to remember that Brazil is one of the most concentrated financial industry in the world still. You take that in a very benign scenario of recent years, where we double our net income for three consecutive years, and we must recognize this environment has influenced the pace of our expansion. As I said, we have executed our plan too fast. And as you can see, we heavily expanded the headcount base almost three times in three years. And people is 70% of our SG&E. We added 1.2 thousand employees in 2020 and 2.5 thousand in 2021. And we have done it right before a market downturn. Again, We have no doubt that each of these initiatives will add value in the long term and are 100% connected with our strategy. But we must be humble and recognize that we have entered 2022 with the wrong cost structure. It's a fact. Now, it is time to operate on a much leaner cost structure going forward. And the ongoing transformation process that XP is going through and I've talked about it in previous quarters, will be key to help us execute this expense reduction without jeopardizing our service quality or ability to advance with our strategy. Just to connect the movements, it's important to remind that this transformation process has started through our tech team, at the time led by Mafra, when he was our CTO. and expanded to the whole company when he became our CEO at the end of second semester 21. With the linear cost structure, a greater addressable market, and advancing in our core business, which we are going to show in the next slide, we believe XP is well positioned for tough times ahead. Tough scenario. as we all know, 1,175 base points in just one year and a half. And still, our main KPIs for the investment business kept expanding at a lower pace, of course, but expanding. Last year, more than 2,000 independent advisors on a net basis joined XP's platform, which reinforced not only the potential of this profession, but the leadership of XP in attracting new IFAs into our X system. If we were a new broker dealer starting up in 2022, very tough time to start a business, we would be by far at the end of the year the third largest IFA network in Brazil in one year, only behind XP, the dominant player, and BTG. Net inflow totaled 155 billion reais. We believe this shows the resilience of our distribution model and the premium quality of our client base. And we added 406,000 net new clients in our ecosystem. Just as a reference, it took us 16 years of existence to achieve that number of clients. And our client assets kept growing as well, reaching $946 billion at the end of the year. So in summary, despite the strong headwind that continues in 2023, XP was able to keep growing and advancing in its core business KPIs, net inflow, IFAs, and net new clients. When we have the next tailwind scenario, and it will happen, our ecosystem will is going to be much bigger and complete than when the last bull market happened. We are expanding our ability to grow exponentially when a reversal of the tightening monetary cycle occurs. Cross-sell. Cross-sell is one of the biggest opportunities we have beyond investment. The clients are in the house and have already trusted us with the most precious thing they have, their savings, which we are honored for the trust. The combination of our client-based growth and the maturation of new products in our platform presents the best compelling opportunity for revenue growth in 2023, considering we are going to have very high interest rates for long. If that is the scenario, then cross-selling is the most compelling opportunity for revenue growth that we have. Credit cards, insurance, credit, retirement plans, digital accounts, and international investments accounted altogether for 1.3 billion reais of revenue in 2022. In the previous year, 2021, it was less than 600 million. So more than double in one year. We believe a growth of 50 to 60% this year, 2023, is pretty reasonable, considering the low penetration of these products in our existing client base, as you can see in this slide. International investments, for example, which should benefit from the current scenario for diversification purpose and risk management as well, has less than 1% penetration in our client base. Credit cards, the most mature product that we have, still has less than 20% penetration. So we will continue to have businesses inside our ecosystem with high, double, or even triple digits of growth, even in a challenging macro environment. Expenses, the lessons learned in 2022. SG&A grew alongside headcount and new verticals, as already said, reaching 5.6 billion reais ex-incentives in 2022. We went from 1.9 billion reais in 2019 to 5.6 billion in 2022. That's almost 4 billion reais in three years. We have done more with more. Our SG&A expense ratio went from 37% in 2019 to 42% in 2022. So our main priority for this year, 2023, is to regain the inherent operating leverage of our business. How? through a company-wide adjustment of expenses that already began in fourth quarter 22, planning simple execution. And as I've said already, helped by the ongoing transformation in the company. This is an important point because what we are saying here is our business, which has always had a strong operating leverage, with the ongoing transformation will increase that operating leverage through a much leaner cost structure, sustainable, and not impacting our deliverables or clients, which will show its maximum benefit in the next market upturn. Different from 2022, when costs were controlled but not reduced, the current initiatives should allow for margin expansion, even in tough scenarios for revenue growth. And it's 100% under our control. And to better align market expectations around expenses, we estimate that SG&A X incentives for this year will range between 5 billion to 5.5 billion reais. which at the bottom of this range implies a nominal reduction of 11% year over year. And that is connected to our EBT margin guidance as well, of 26% to 32% in 2023 to 2025, moving from the bottom to the top in the period. Now moving to the financials. On slide 12, we provide some context on the headwinds faced especially by our advisory channel in fourth quarter 22, which relies on human touch and availability I mentioned earlier. The post-election period coupled with World Cup and the approach of holidays added a layer of difficulty on the advisor-client interaction in the quarter. And this is important. When you analyze our business, you cannot only look at average daily trading volume, what's going on with the B3, because the advisory business, it demands a relation of advisor and client. And that's why January, for example, it's a week month because people are on vacations, clients and advisors. So this kind of interaction, whenever they have difficulties, it has an impact. In the fourth quarter, it's exactly what we lived. So because of that, and also because of lower official business days relative to third quarter, retail revenues didn't grow as expected. You can also see that on the left part of the slide, the fourth quarter seasonality usually is the strongest quarter of the year because of strong capital market activity and performance fees that happens in the fourth quarter, it didn't work last year. Last year was unusual in that sense. From 18 to 21, fourth quarter represented on average 30% of total revenue for this specific year. Last year, it represented less than 24%. Also, After a record third quarter, third quarter last year was our best quarter, when our gross revenue reached the 3.8 billion reais, helped by anticipated deals and traded volumes in institutional and corporate and issuer services that in the fourth quarter faced a lesser favorable quarter. As previous signal in our last call, earnings call. So together, just to give you a sense, institutional and corporate and issuer services represented 80% of the sequential revenue decline quarter over quarter. Looking at the full year 2022, which we believe is the best way to look at the results of XP last year because of this disparity that we had among quarters throughout the year, our gross revenue grew 10% relative to a strong 2021, the high of the bull market cycle, which reinforces what I said earlier, the resilience of our business, even tough scenarios. The retail segment, the most relevant one, and together with issuer services, were the most impacted by this challenging macro environment in 2022. But still, retail grew 4% year over year, despite the drawdown seen in the equity part, the most relevant for retail revenue, of 21% year over year. Equity in 21 represented 55% of the retail revenue. In 22, decreased to 42% of retail revenue. So what helped retail revenue in investments? Number one, fixed income plus 17% year over year. And number two, floats, that is in other retail, 70% growth year over year. Both of them benefiting from higher interest rates. Still in retail, we also saw the strong contribution from the new verticals initiatives. Retirement plans, for example, grew 47% year-over-year. Credit, 54%. Insurance, 62%. And cards, 229% year-over-year growth. Institutional and corporate both had growth in 2022, and strong growth. Institutional, 50%, and corporate, 250%. Institutional, that is a more mature revenue line, benefited last year from mostly FICC revenues, fixed income, currency, and commodities. And corporate benefited from the natural growth of a new business that had a very positive year in 2022. On the other hand, issuer services decreased 33% versus a very strong 2021, basically due to a weaker capital market activity, especially in ECM comparing year over year. When we look at our gross margin, despite on an annual basis being virtually flat, in 2022 compared to 2021, gross margin fell 7.1% in fourth quarter versus third quarter 22. This margin compression was mainly related to number one, revenue mix. There was a change among quarters. Remember that institutional and issuer services, they have almost 100% gross margin. because commission, which is the most relevant line in COGS, is mostly related to retail investment revenues. Prepaid expenses write-offs. We had this one-off in the fourth quarter regarding ended contracts with IFAs. Remember that we have a prepaid expenses related to a long-term contract with the IFAs. If one IFA leaves, we write off everything that is prepaid. On the other hand, we receive the fine of whatever we have paid in double, and that goes in other income in SG&A. And third, we have a change in interchange fee recognition criteria aligned with other players in the industry. So as of fourth quarter 22, interchange fee is recognized upon transaction. So it talks directly to the TPV that we release. Looking at this year, 2023, we expect gross margin to remain stable relative to 22 and 2021 on an annual basis, despite volatility between quarters. So it's good to remind that between quarters, we can have volatility as we had last year. Moving to expenses. When analyzing SG&A expenses, we prefer to exclude revenue from incentives, from Tesoro Direto, B3, and others within other operating income. You have that in our financial statements. Because despite being a recurring line, its magnitude is volatile by nature. As a reference, this line was 200, a positive number, 285 million in 2022, a positive 366 million in 2021, and 353 million in 2020. So when you look at the last three years, we always had a positive reduction in SG&A coming from revenues that are not recognized in the top line, but inside operating income in SG&A. So we are going to have something in 2023. I have no doubt about it. The magnitude of it is hard to forecast. So that's why when we look at expenses, we exclude this revenue and then the SG&A is higher. So SG&A expenses, excluding the incentives, grew 18% in 2022, reaching the 5.6 billion reais. People expenses, as I said, represent 70% of total. Wayanong people, 30%. And as previously mentioned, for 2023 expenses, we are estimating a range of 5 to 5.5 billion. What's going to drive this range is mostly the revenue growth and the performance of the business. So for instance, if we think that 2023 is going to be more of the same in like 2022 and our revenue would grow the same thing, the 10%, for example, we would be in terms of SG&A at the bottom, five billion reais. To get to the top, our revenue should grow at high double digits. So that's why we have this range because there is a component of our SG&A based on performance, which is the bonus, that can vary depending on the results. In fourth quarter, looking at the right, SG&A was flat relative to fourth quarter 21. And on an annualized basis, it was $5.5 billion already within the guidance range. So over the next quarters, we expect further reductions in SG&E. Net income. Net income is basically a result of everything that I've just said. So 2022 net income, flat year over year, $3.6 billion, with a slightly higher earnings per share growth due to the buyback program that we've been fulfilling. So during 2022, we have bought back 1.8 billion reais, of which 1.3 billion only in the fourth quarter. On the quarter, our net income was 783 million, which fell 21% year-over-year and 24% quarter-over-quarter due to the impacts that I already explained in the previous slides. Revenue outlook and the gross margin compression is what explains this drop. Factoring in our expectations for the business and the SG&A guidance, we estimate 2023 net income to be between $3.8 billion and $4.4 billion. Usually we do not give that kind of estimation on an annual basis, but we understand that in such tough macro environment and being harder for many investors to understand the impact in our company and in our business, it would be important to give this kind of guidance for the year so you can follow in the next quarters to come. And finally, before we go to the Q&A, just wrapping up the main message here. Expenses, already talked a lot about it. So linear cost structure, that's the main priority. And the transformation will allow us to expand margin on a sustainable way. Number two, Procell, already talked a lot about it. We have businesses with exponential growth. Number three, we keep evolving our strategic roadmap And our business keeps getting better the way we look at it, especially when we compare to previous cycles. And number four about the 2023 expectations are the guidance. Net income between 3.8 and 4.4 billion. SG&A excluding incentives between 5 to 5.5 billion. With that, I think we should go to Q&A now, André.

Okay, Bruno, thank you. So again, we have a lot of analysts on the line here, so I'll ask you to be patient. We will go one by one answering the questions. First one, Rosman, Eduardo Rosman from BTG. Can you hear us, Rosman? Yes.