XP Inc.

Good afternoon and welcome to XP Inc's first quarter 2023 earnings call. I'm André Martins, Head of Investor Relations, and with me are our CEO Thiago Mafra and our CFO Bruno Constantino, who will be available for the Q&A section. I kindly ask you to refer to the legal disclaimer section on the beginning of our presentation about forward-looking statements. Additional information on forward-looking statements can be found on the SEC filing section of our website. It's important to remind that this call has a translation option to Portuguese, and the participants who want to ask questions may raise their hands on the Zoom tool. Now, I'll pass over to Thiago Mafra, who will deliver the opening remarks.

Good afternoon and thank you all for joining us today. I want to begin today's call with a few comments about the first quarter, our outlook for 2023, and our longer-term positioning. Then I will turn it over to our CFO, Bruno, who will present Q1 results in more detail. So let's start with our quarterly performance. As you all know, the macroeconomy outlook remains challenging. In Brazil, we continue to face a high interest rate environment similar to other economies around the world. In addition, a large Brazilian corporate filed for bankruptcy in the quarter, causing important loss for its investors, creditors, and bondholders. As a result, capital markets and corporate credit remain under pressure, which has impacted the financial advisor activity, since many investors are keeping their savings in liquid, low-risk products while they wait for the scenario to improve. While this headwind is still impacted our core business in the first quarter, we keep advancing in our long-term journey and getting closer to the $1 trillion client assets milestone, having ended Q1 with $954 billion. Additionally, our ecosystem continues to grow with the net addition of 89,000 clients and 680 financial advisors. On the financials, excluding the one-time loss, our gross revenue expanded 7% year-over-year, while EBT and net income grew 14% and 8% year-over-year. While these adjusted numbers look better, these are still not the growth rates that we are used to and which we believe we will see again when the macroenvironment improves. However, when we look at our first quarter performance, I see positive signs of strength and resilience in our business model, as well as efficiencies from our cost structure improvements. For example, in Q1, our new verticals revenues, which are less cyclical, were strong. Revenue from retirement plans, cards, credit, and insurance together grew 64% year-over-year, reaching $405 million. Because of our focus on execution, our EBT margin increased nearly 300 basis points quarter over quarter to 26%. This was in line with the near-term expectations included in our guidance range of 26 to 32 through 2025. So I was pleased with our execution on the bottom line. XP remained the top of mind brand investment and was ranked as the 12th most valuable overall brand in Brazil in the annual Interbrand Survey. We also remain committed to returning excess cash to our shareholders. Over 2022, we have returned roughly $1.8 billion through share buybacks, which was about 50% of our net income. I believe we will have a similar payout ratio in 2023 and reinforce that we have repurchased $916 million worth of shares year-to-date. As a result, we should be able to maintain a conservative balance sheet with a strong liquid position and carry excess capital of around $5 billion. positioning XP to navigate through any cycle. As I look ahead to the rest of 2023, our guidance outlook remains unchanged. Despite the macro environment, XP remains a leading investing platform in Brazil, and we are getting stronger relative to our competitors. We are working closely with our advisor channels to improve core revenues and net inflow opportunities, gaining share of wallet in more investment products and reinforcing our high-quality value proposition to clients. As I look beyond 2023, I see our competitive position getting stronger. First, we will continue to leverage the advantages of our platform and ecosystem to expand our leadership investments. This is our core focus and where we excel the most. We have gained almost 400 basis points of market share since the beginning of 2020, including 80 basis points in 2022, despite a very challenging market environment. We currently have 11% market shares of individuals' investments and 8% if we include companies. With our top-of-mind brand, best-in-class product platform, and technology advantage, I believe 2022.5 is achievable. On the product side, we have the most complete and advanced platform in the market, and we continue to build upon this competitive advantage. I could go through many examples, but just a few to remind us. We are not only the leaders in the traditional products with 42% market share in the distribution of bonds and 50% on equity trading, but keep constantly innovating, being the first player to offer private equity funds for retail investors and having also quickly built an offshore platform where clients can easily invest in the U.S., On the distribution side, we have the largest and most well-prepared financial advisor network in Brazil. We were elected the best advisor platform in Brazil for 2022, according to Folha newspaper. And this is the 50th consecutive year in a row that we have been voted number one. I think our place as the leading player in the market is well-established and this helps us attract the very best partners and clients. Another relevant pillar of our strategy is to cross-sell additional products into our current base. We have a massive potential opportunity here to unlock value, and it's already starting to work. As I already mentioned, our new verticals are advancing at a fast pace. While this is still in the early stages of our plan, we can already see that cross-selling new products such as our cards, digital accounts, and insurance have helped us gain more share of wallet from our clients in investments and also improve our NPS. We will continue to focus on serving an increasing portion of our clients' financial lives and meet all of their financial needs. And finally, our third pillar is to continue to differentiate ourselves in the market with premium quality and service levels in everything we do. We are the main platform in the market and we want to make sure that we are always providing our clients with superior experience when they engage with XP. I believe this is the glue that we use to bring everything together to deliver the best value proposition in the market. This doesn't just mean delivering a good app or web experience. It means that we are always focusing on improving every aspect of our service levels. As an example, we are continuously improving the training we provide our advisors and innovating the tools we give them so they can perform and serve clients better. Our unique customer service level ensures that our advisors and clients always get fast and efficient support that makes them feel great about XP. As most of you know, XP is a red ahead of the traditional banks in terms of the investment experience we offer. This is well known in the market and we can see it in our NPS, including a recent third-party study that reinforced XP's edge. we remain focused on maintaining this competitive advantage and distancing ourselves from the banks. So as I look at the near term and the long term, I saw progress in Q1 on our execution performance and cost management, which has enabled us to improve our profitability despite the difficult macro environment. We remain on plan for 2023. I see us getting better and stronger as a company, enabling us to fortify our position and continue returning cash to our shareholders. and our long-term strategy is working. We are making progress in all of our areas of focus, and I think we are going to come out of this cycle even better positioned to keep winning market share. So now I will hand it over to Bruno, who will discuss the numbers of the quarter, and we will be available for Q&A. Thank you. Bruno, over to you.

Thank you, Mafra, and good evening, everyone. I will walk through our financials in more detail and provide some additional commentary and perspectives on our revenue, expenses, and earnings. But before I continue, I want to remind everyone that we are showing some adjusted metrics this quarter, which exclude the one-time impact of a non-recurring loss related to the bonds of a large corporate issuer that filed for bankruptcy in January. We held some of these bonds in our inventory for our clients to be able to trade and some of these bonds in our own investment portfolio. The value of these bonds dropped significantly when the corporate issuer filed for bankruptcy. As a result, we incurred a one-time loss of R$164 million, impacting our total gross revenue. with 95 million reais allocated in retail fixed income and 69 million reais in other revenue. This event also had a negative impact to overall capital market activity in Brazil. This is not excluded in our numbers, obviously, but important to note that the event hurt overall DCM volumes and revenues in retail fixed income and issuer services. Now let's move to slide 12. As you can see, we have created a column highlighting the one-time loss I just mentioned. So our gross revenue. Our total gross revenue in the quarter was 3.3 billion reais, flat quarter over quarter and plus 2% year over year. If we exclude the one-time loss, our total gross revenue was closer to 3.5 billion reais. 5% growth quarter over quarter, and 7% year over year. As Mafra mentioned, our total revenue growth is not where we would like it to be. But considering the weak macro and capital markets environment, we believe our top line numbers show the resilience of our business model and the benefits of the diversification that we have been building over the last few years. In terms of revenue mix, there was no major change at the beginning of this year compared to last quarter. Retail revenue represented 76% of total revenue, the same as for quarter 22. Institutional revenue, 10%. Corporate and issuer service, 8%. And our other revenue line was 6% of total revenue. Now let's double click on our retail revenue for a little more detail on slide 13. Our core retail investments, meaning equities fixed income and funds platform, total revenue grew 6% quarter over quarter and 1% year over year, despite the weaker trading environment and capital markets activities. In equities, Revenues grew 7% quarter over quarter and declined 3% year over year, as overall trading in the market decreased more than 10% versus the fourth quarter. One bright spot to mention in equities was our financial structure products, which link derivatives with stocks. Sales of these products are driven by human interaction, which suffered in the fourth quarter due to the elections in the World Cup, but began to rebound in first quarter this year. In fixed income, adjusted revenue grew 9% quarter over quarter and was flat year over year. As I mentioned earlier, we believe this revenue line was also impacted by an overall decline in capital markets activity in Q1 and would have been stronger in a more normalized environment. In our funds platform, revenues grew 1% quarter over quarter and 17% year over year. But comparing apples to apples, excluding performance fees, our quarter over quarter growth was 12%. Moving down to our new verticals, our revenues continue to grow at a strong pace with an overall increase of 60% year over year. As Mafra noted, our performance here remains strong, and I believe we remain on track to deliver annual growth of 50% to 60% in 2023, as stated in our last earnings call. When we look at this on a quarter-over-quarter basis, I would note that the comparison is a little more difficult because of seasonal and one-time benefits in the fourth quarter of 2022. For example, in addition to Black Friday and the holidays, we had a change in the revenue recognition method of our cards business, which created a one-time benefit of 53 million reais in the fourth quarter revenue. Despite this, our cards business remained strong with a 400 million increase in TPV quarter over quarter to reach 8.6 billion reais in first quarter 23. And finally, our other retail revenues grew 10% quarter over quarter and 70% year over year. These revenues were driven by several positive trends, such as the float in our broker-dealer business, which benefits from high interest rates, and good growth in our international investment platform and effects. Moving to slide 14. On slide 14, we show our retail revenues in 2020, 2021, and for the last 12 months as of 2020. first quarter 2023. I think this helps illustrate the negative impact of the macro environment in our revenues, but also the benefit we are getting from our diversification into new verticals. As you can see, our core retail investments revenue grew significantly in 2021 with an increase of nearly 3 billion reais. but have decreased nearly 1 billion reais since then due to the macro environment, not our competitive positioning. Despite this, our total retail revenue has increased 64% over the same time period, given our more diversified revenue stream and XPS ability to scale new products really fast in its ecosystem. As you can see, revenue from our new verticals increased over 2X in 15 months, up 750 million reais since 2021. This has helped our business to become more resilient and helped absorb some of the negative macro impact from the more cyclical parts of our business. And when the micro cycle turns, which will at some point in time, this diversification could provide an incremental tailwind for us. Now let's shift to the expense side of our P&L, where we had some strong performance in first quarter. On the slide 15, you can begin to see some of the benefits of our cost structure adjustments starting to catalyze. In first quarter 23, SG&A excluding incentives decreased 24% quarter over quarter and 17% year over year to just over 1 billion reais. Our headcount management plan resulted in a net reduction of 782 employees in the quarter to 6,143. This impacted share-based compensation to reach 53 million reais in this quarter, but we expect to return to normalized levels in the following quarter, similar to what we had in fourth quarter 22 share-based compensation expenses. All efficiency ratios improved this quarter, breaking the pattern of past years and bringing the company structure where we want it to be. For example, on the left side of the page under the bar charts, you can see that our last 12 month efficiency ratio, which is SG&A excluding incentives divided by net revenues, decreased 161 basis points quarter over quarter to reach 40.4%, our lowest level since first quarter 22. On the right side of the slide, you can see that our last 12-month comp ratio, which is people, SG&A, salaries, bonuses, and share-based compensation expenses divided by net revenues, decreased 107 base points quarter over quarter to reach 28.5%, our lowest level since fourth quarter 21. We expect to keep improving our efficiency ratios going forward. I believe we remain on plan to meet our annual 2023 guidance for SG&E, excluding incentives of 5 billion reais to 5.5 billion reais, and we will remain very focused here. Now, moving to slide 16, EBT and net income. As a result of our strong cost management, our earnings before tax and net income margins were positively impacted, as you can see in this slide. During the quarter, we generated 870 million reais of EBT with a 26% margin, or R$ 977 million excluding the one-time loss with a 29.6% EBT margin. I think the quality of EBT in the first quarter of 2023 compared to the fourth quarter of 2022 has also improved significantly and is sustainable. Recall that in the fourth quarter of 2022, seasonal incentives benefited our SG&A by 242 million reais. Excluding this, our fourth quarter EBT would have been closer to 500 million reais. In the first quarter, we had only 3 million reais of this benefit. I believe The operating leverage that we are realizing in the business is an important achievement and gives us a stronger position to face any macro headwinds going forward. As a result, we remain on plan to meet our EBT margin guidance range of 26% in the near term to 32% by 2025. And finally, on the right side of the page, you can see that our net income in first quarter 23 was 796 million reais or 927 million reais, excluding the one-time non-recurring loss of 131 million reais net of taxes. As Mafra already mentioned, our annual guidance for net income between 3.8 and 4.4 billion reais stands. And now we will move to the Q&A session in which both Mafra and I will be available to answer your questions. Thank you very much.