XP Inc.

Good evening, everyone. I'm Antonio Guimarães, Investor Relations in XP, Inc. On behalf of the company, I'd like to thank you all for the interest and welcome you to our 2023 second quarter earnings call. Today, we have here with us our CFO, Bruno Constantino, and our CEO, Thiago Mafra. We will all be available for the Q&A session right after the presentation. And whoever wants to ask a question can please raise your hand on the Zoom tool and we will attend you on a first-come, first-served basis. We also have the option of simultaneous translations to Portuguese. So there's a button 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 2, on which we clarify forward-looking statements. Additional information and forward-looking statements can also be found on the SEC filing sections on the IIR website. So now, I'll pass the word to Thiago Mafra. Good evening, Mafra.

Good evening, everyone. Thank you for joining us today on our 2023 second quarter earnings call. It's a pleasure to be here with you tonight. I would like to start with a brief introduction to this quarter's operational and financial highlights, and also give you a bit of context of where we are in terms of our long-term strategy we talked about in the last quarter. In the second quarter of 2023, we achieved a key milestone, surpassing 1 trillion in client assets. Client assets have grown at a 30% CAGR since the IPO. coupled with this historic milestone we estimate we have gained approximately 30 bps in market share in investments for individuals year to date and approximately 60 bps in the last 12 months despite a very tough macro environment condition for the second quarter Earnings before tax was R$ 968 million, up 12% year-over-year, where our continued efforts to improve operation leverage resulted in 198 BIPs of additional margin expansion. Net income was R$ 977 million, up 7% year-over-year, driving our net income margins up 91 bps year over year. Annualized retail take rate was 1.3% up 9 bps quarter over quarter. Return on average equity, a key profitability measure for XP, rose 334 bps sequentially to 22% and our diluted earnings per share of 1.83 reais increased 24% over the first quarter. Moving to page 6, we were happy to see the market trends and our profitability improving the second quarter. Following a challenging first quarter, we have started to see a recovery in capital markets activity. We are pleased with the recovery in GCM volumes and we have started to see some activity in the equity capital market as well. Specifically, we saw the follow-on offerings window open in late June and continued to see positive trends into the third quarter. On August 2nd, the central bank started its monetary easing cycle, cutting the SELIC rate by 50 bps, the first cut in three years. When we look to the second half of 2023, we are encouraged by a more positive market environment. We believe stronger capital markets activity and lower SELIC by the end of the year should favor our core investments business. However, the recovery may take some time as well as it will depend on further interest rate cuts and also retail investors shifting back to riskier assets. On the profitability front, EBT and net margin improvements in the second quarter reflect better market trends combined with strict cost controls. This operating leverage resulted in margin improvement in both EBT, a quarter-over-quarter increase of 123 basis points, and net margin, a quarter-over-quarter increase of 213 basis points. These improvements are in line with our focus to drive ROE growth over the next years, both through earnings growth and capital distributions to shareholders. Let's move to slide 7. We are very pleased with the positive momentum in our operating trends, such as client assets, active clients and total IFAs. In June, we hit the historical mark of 1 trillion in client assets. With less than 12% market share in investments for individuals, I believe we are still early in our growth trajectory. IFA net additions were over 1,000 in the quarter, reaching more than 14,000 in total. This comes from several factors such as new educational partnerships, helping to hire and train new investment advisors, lower churn in the IFA network, and overall improvements in our onboarding methodology for new IFAs, reducing onboarding time from nearly one month to less than a week. With the potential market upswing in the coming quarters, we will keep focus on the quality and expansion of our sales force, both internally and externally. Next to slide eight, this positive momentum in operating trends, coupled with our cost control discipline, drives the recovery in our financial results for the quarter. As I mentioned earlier, our gross revenue has improved 3% year-over-year, totaling 3.7 billion. Our EBT has improved 12% year-over-year, totaling 968 million. And net income has improved 7% year-over-year, to 977 million. Moving on to slide 9. we kept making progress across our strategic initiatives. New verticals continue to grow rapidly, accounting for 11% of total revenue. We are pleased with this progress enhancing our relationships with our clients and diversifying our revenue streams. Additionally, we had the closing of Banco modal acquisition on July 1st and it will already impact our results in the third quarter, but we do not foresee any material impact. We are very excited to have the Modal team join us, and integration is happening as I speak. Since day one, our teams are working together to explore XP and Modal best practice and enhance our service level and efficiency for better serving our clients. One of our main goals is to have everything integrated, including Modal's client base, using XP's backbone and capabilities by the end of this year. We believe this will provide us revenue synergies since XP's ecosystem has a strong cross-sell capability and cost avoidance over time. We will provide on our progress in the coming quarters. On slide 10, let me highlight where we are in terms of long-term strategy we have discussed on previous calls. You might recall that we discussed three key areas of focus. First, leadership investments. We have continued to gain market share in investments throughout 2023, despite the tough macro environment reaching 1 trillion inclined assets. We also had the strongest net new IFA signings since the IPO, further expanding and strengthening our sales force. Second, superior product offerings. Melhores Cartões named XP as the best credit card in Brazil. Considering we only launched the product in May 2021, we are especially proud of this recognition and the success we have seen in the market. Also, we launched Travel Platform into our Cards Experience, where clients receive extra invest back from in-app purchases. And third, Client Focus. We always put our clients' interests first. This is reflected on our NPS score that was 76 this quarter, one of the highest in the industry. We continue to differentiate ourselves in the market, offering premium quality and service levels throughout our ecosystem. I believe this is one of our main competitive advantages over our peers, and we are 100% focused on maintaining and even extending this advantage in the future. Now, I will hand it over to Bruno to discuss this quarter's financials. Thank you.

Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again. Moving on to slide 12. Starting with gross revenue, on the left part of the slide, this quarter we reached 3.7 billion reais, 12% growth quarter over quarter and 3% growth year over year. The sequential growth in gross revenue was mainly led by retail, especially fixed income, which we will discuss in further detail on the next slide. In terms of revenue mix between segments, retail has continued to gain relevance and represented 78% of total revenue, benefiting from our long-term strategy to become a full financial service platform, especially through our new verticals. Institutional and corporate and issuer services remain at 10% and 8% respectively. Other revenue has been stable over time, representing around 4% to 5% of total revenues. On the next couple of slides, we are going deeper into retail revenue. Starting with slide 13, when we look at our core, we can see we had an improvement in fixed income to R$ 578 million, a growth of 74% quarter over quarter, due to higher volumes in both. primary and secondary markets, and narrowing in corporate bonds credit spreads. After a tough first quarter, we had some relevant corporate credit events negatively impacting DCM activity. We saw a more normalized capital market in second quarter. As expected, we also had a sequential seasonal improvement of 9% quarter-over-quarter in the fund's platform, reaching R$ 341 million. due to the recognition of performance fees, which tend to be recognized at the end of every semester. Also, we had a stabilization in equities revenue in R$ 1.1 billion, flat quarter over quarter, with lower daily average trades for equities and futures, but higher volumes in structured notes. Moving to slide 14, all of our new vertical products continue to grow well, reaching a total of R$ 398 million in second quarter, plus 54% year-over-year and 9% quarter-over-quarter, representing 14% of retail revenue. The main highlight of the quarter has been cards revenue. which has grown in line with TPV to R$ 232 million, a growth of 14% quarter over quarter and 100% year over year. Cards penetration in total active clients has also increased 288 basis points this quarter to approximately 24%. Coming back to total retail revenue, we've updated this slide to include second quarter results. Two key messages. One, XP is a cyclical grower company. Core retail revenue, which is R$ 1 billion behind the peak in 2021, has potential for upside as the market recovers. And two, new verticals have a decisive role in diversifying our business. If we compare the last 12 months revenue with 2021 revenue, new verticals have increased approximately 156%, while our core has decreased 12%. In summary, potential for growth as the market recovers, plus a more resilient and diversified business model. Moving on to slide 16, Total SG&A, excluding revenues from incentives, has remained under control, reinforcing the annual guidance of 5 to 5.5 billion reais, leaning towards the mid to the bottom of the range. People expenses represented 72% of total SG&A in second quarter and 70% in the last 12 months. keeping the ratio between people and non-people expenses stable over time, 70-30%. We expect higher SG&A in the second semester compared to the first semester due to seasonality and one-time low expenses in the first quarter, but keeping our efficiency ratios improving as we are going to show in the next slide. Cost discipline is key to improve our competitive advantage and the C-level of XP is aligned to achieve that goal in a sustainable way. The two main KPIs we monitor are last 12 months efficiency ratio defined as SG&A X revenue from incentives divided by net revenue and two, compensation ratio defined as people SG&A divided by net revenue. We rather use last 12 months than quarterly numbers to avoid seasonal impacts. Both ratios have continued its positive trend this quarter. Efficiency ratio decreasing from 40.4% to 38.3% and compensation ratio decreasing from 28.5% to 26.8%. This cost control discipline has played an important role in our operating margins, which we are going to talk on next slide. Moving on to EBT, a good proxy for earnings power. This quarter reached 968 million reais, a 12% growth year over year and a 19% growth quarter over quarter. Our EBT margin has also improved in the quarter, increasing 198 base points year over year and 123 base points quarter over quarter. This was driven by improving operating leverage, and is in line with our annual guidance between 26% and 32%. On the next slide, our net income has also increased to R$ 977 million this quarter, up 23% quarter over quarter and 7% year over year, while our net margin has improved 213 base points quarter over quarter and 91 base points year over year to 27.5%. This has been a result of both top line growth and the increase in operating leverage we talked about in the past few slides. Lastly, I would also like to highlight our return on average equity that has increased 334 base points sequentially to 22%. As Mafra stated in the beginning of the call, we are determined to gradually increase our ROE over the next few years, both through consistent earnings growth and capital distributions to shareholders. Now, both Mafra and I would be happy to take your questions.

Great, thanks Bruno. So moving on to the Q&A session, we have many hands raised. So as usual, we will attend you on a first-come, first-served basis. The first one is Mr. Jeffrey Elliott from Autonomous.

Hello, thanks very much for taking the question. The inflows, clearly they're better this quarter than in the first quarter, but they're still quite a bit below what we were used to seeing previously. Can you give us a sense? Are you seeing inflows continuing to recover? And then can you point us to a normal rate of monthly inflows that you'd expect going forward?

Hi, Jeff. This is Bruno. First, when we think about the inflows, I rather think about total client assets. And why is that? Is total client assets surpassing the mark of one trillion reais is more relevant for revenues than inflows. So that's a point important to bear in mind. Second, inflows, as I have also mentioned in previous calls, it's a component of total inflows minus outflows. And total inflows, they have been good. We had like all-time high in the last quarter, this second quarter. But so the outflows have also grown as well, bringing the net inflow to a better number than the first quarter, but it's still short compared to the bull market years. We believe that individuals, they are lagging in the process of bringing money into riskier assets. We are not there yet. We don't know when we are going to get there, but it's a cyclical part of the business. So yeah, we in the future expect inflows to grow. But in the short term, we don't have a guidance and my statement is look at total client assets more than to inflows.

Good evening, this is Thiago. Just to compliment Bruno here, one way I like to think about it is we are at the very beginning of the easing cycle in Brazil. And if you think about the next, let's say, one, two, three years, in our opinion, we'll have another good cycle for investments, a good macro environment in the next years. And for us, it's more important when you look at the scenario than quarter by quarter, okay? What I'm trying to say here is we believe we are very well positioned with the company, very organized to to. to capture this good momentum that we have ahead. So it's hard to say if the net inflow will change this quarter, next quarter, in three quarters, but we believe that at some point with this macro scenario ahead of us, at some point we'll have a good environment for investments again.

Great. Thanks very much.

Next one in line. Thanks, Jeff. Next one in line is Eduardo Rosman from BTG.

Hi. Can you hear me?

Yes, we can.

Yes, we can.

So congrats on the numbers. I have two questions. The first one is regarding your market share growth. The company has expressed the goal of doubling its AUC. But when we look to your market share in the core high income segment, you have almost 20%. So can you provide more details about your plans for expansion in this segment, as well as in the high net worth and also the lower income segment? This would be the number one question. And the second question relates to your ambitions beyond investments. What's the company plan? How aggressive you are willing to expand in loans, for instance, at the bank? Anything here would be appreciated, right? So thanks a lot and again, congrats on the numbers.

Thank you, Rosman. The way I like to think about investments, as we mentioned, we have 11% market share of individuals, okay? And 8% if you consider companies, okay? Itaú is the leader in the market with more than double that we have, okay? So, and when you look the different segments, if you look high net worth clients, we have, I would say about 5% to 6% in the middle, closer to the 20% that you mentioned. And if you go to the retail clients, we have 2%, okay? and the way of serving these clients in these different segments they are completely different okay uh one easy way to think about it if you go to high net worth clients you have an account load of 20 in the middle 100 to 200 at the bottom almost 2 000 okay so The strategy that we have for the different segments are completely different. We start at the middle of the spiral mid, the affluent clients, so that's why we have almost 20% market share, but we believe we can continue to grow here. and of course we have plans on the upper part and the lower part the lower part we have what we call digital first here basically is how you use technology CRM intelligence data to have a higher account load per banker but at the same time giving a very good service compared to the market okay in the middle is more of the same and at the top uh we we are talking about high net worth clients so here different from the other parts is more personalization more uh value added so different strategies and we believe we have uh the right path for just three different segments okay uh completely different uh financials kpis completely different ways of servicing costs and so on okay And the second part about the new business, we call the new verticals, okay? And we mentioned pension, credit, insurance, and banking, basically. But we have a lot more than that, that are new verticals inside the company, okay? Our asset management is growing very rapidly. We have the effects business. We have corporate. We have... Many other businesses that we don't give a highlight for them, but they are new, okay? So if you look at the percentage of these new verticals that didn't exist three years ago, now they represent 11%, okay? And growing 50% year over year. So we believe we can continue this pace for... a longer period of time because the penetration is still very low if you look insurance for example one percent penetration because we just launched the products if you look credit one percent if you look uh account checking accounts but looking uh the principal accounts it's close to one percent The product that's most penetrated is credit cards, 19%. So we have a cross-sell metric here that we look very close. Imagine that we have classified from 1 to 7 products. It's the way we look with the sales people, FAs, internal advisors and so on. this number is 1.55 today so still very low because these new verticals they are new okay so in our opinion here we have a lot of room like to continue to penetrate the current customers we have okay if I just may add Mafra to your point

The way we like to think, Osman, so to your question about our ambitions, we have strong ambitions for the long term. That's for sure. But we also believe a lot in execution and in focus. And as Mafra pointed, many new products and services that we have launched in the past two to three years we believe there is a lot of work to do to cross-sell and up-sell in our ecosystem with our existing clients. And just bear in mind that we also added, with modal acquisition, 500,000, given or taken, new clients into our ecosystem as of today. So we are talking about a little bit more than 4.5 million total clients with that low penetration number that Mafra just mentioned. So I think it's There is a strong ambition, but we need to go brick by brick executing.

Great. Thanks a lot, guys.

Thanks, Cosmo. Next one in line is Thiago Bacchista from UBS.

Hi, guys.

Hello, Thiago. Hello?

Thiago, can you hear us?

Are you hearing me?

Yes, now we can.

Okay, sorry guys. So I have two questions, and sorry for the issue. The first one, I'm trying to understand the dynamics for the earnings for next year for XP. And do you see room for further improvement in the efficiency ratio of the company next year? Probably next year we'll see a better top line. So my question is, we will see this operating leverage in the company. And the second one about modal, I think Mafra already mentioned that modal should be zero impact in the earnings in the short term. But do you believe that modal should be attractive for EPS in 2024? Or because of all the changes that we saw in the market, this should take a little bit longer to see a really positive impact from Odal on the XP earnings.

Thank you, Batista, for the question. So about your point on efficiency ratio, the way I like to see is, as we mentioned, we believe we have a better macro outlook for the future. Again, it will take some time because it's not a 50 bps cut that will make a total difference when you think about retail clients. Of course, if you think about capital markets, institutional clients, change faster, we start to see follow-ons in the previous month, but retail clients will take more time. But when we look at this positive cycle for the future, we believe we can have higher revenue growth rates in the future. We have the company ready to capture this growth. On the other part, we spent the last, I would say, two years, one year and a half inside the company, improving the level of governance, the way we manage the company. We have created the XP management system. So we have created a lot of tools and controls that we didn't have in the past to manage the company. So I believe we are better prepared today for this new cycle than we were like a few years back. And we have done a cost control. So when you put together like a good cycle that we probably will have ahead, combine it with cost control and better management and governance tools in the company. I believe we can have very high operational leverage in the future. So that's what we have been talking about with investors. We believe we can increase our EBT margins close to the High part of the guidance in the next years, we can increase our ROE close to, I would say, 30 in the next years. But again, it's something that will take time, one year, two years, three years. That's the time frame that we are looking here.

And about Modal, yes, we believe it's going to be accretive for our EPS on 2024. We have been executing the integration that started last month. And our goal here is to finalize all the integration until the end of this year. So we are going to give updates in the next quarters. But yeah, it's a creative and the momentum of the market getting better. Again, individuals take longer, so it's going to be a gradual improvement over time. But modal integrated with XP should benefit from that. And just to give you one example to make it tangible what Mafra explained about the operating leverage of our business, I like to use the funds platform as an example. The funds platform in the second quarter of last year had a total of R$175 billion of client assets. We all know that this year has been a tough year for the funds industry as a whole. Our funds platform has reached, at the end of second quarter 23, R$222 billion of client assets. Performance fees, so we have more client assets in the funds platform as of today than we had one year ago. But performance fees in the second quarter of last year was much higher than this quarter. We decreased the performance fees by 70%. So that's one example of the potential of the operating leverage that this business has. As the market recovers, if we get, for example, performance fees in the next semesters to come, we have more client assets and it's just deducted tax and it's straight to the bottom line. We don't have to hire one single individual to make it happen.

Great, thanks, Batista.

Next one in line is Mr. Tito Dal Barta from Goldman Sachs.

Hi, good evening. Thank you for the call and taking my question. A couple questions also. One, just first on the results, looking at the other revenue line in particular, $167 million, although up modestly compared to 1Q, but 1Q has impacted, I think, almost $70 million from Americana. So it's a little surprised that that line did not maybe improve potentially more. It was actually lower if you factor in the Americana's impact. So if you can give any color on, you know, what happened there and how that should evolve from here. And second question, you know, Bruno Maffray talked about increasing ROE from here, you know, kind of the main drivers, but also how much can you potentially increase that ROE? And what are your latest thoughts on the capital returns, whether buybacks, dividends, and curious what you're thinking there. Thank you.

Okay, I will start with the other revenue. The other revenue is everything that is not in the segments that we highlight. So we can have many different things there, Tito. And that's why when I made the presentation, I said it's stable over time between 4% and 5% of total revenue. It hasn't changed that much. Specifically in the second quarter, we did have a negative impact in revenues because of the SPAC that we had in our balance sheet. It didn't happen. And there was a negative impact, a little bit more than 40 million reais. It's a financial instrument, so it impacted other revenue because it was not related to any of the other segments. So it can happen from time to time. different types of impacts, either positive or negative. So that's what happened in the second quarter.

And about the capture, about the ROE, I believe as Bruno mentioned on the presentation before, we have a mix of two things. We already mentioned the positive cycle, the cost control, and so on, that will probably impact and increase profits in the next quarters. But we also have huge excess of capital. So today we have more than 5 billion, and we have a Basel index of, I would say, close to 24%. So it's a combination of... earnings growth and adjust in the capital structure for the future. OK, so that's that's the combination that will bring us from, let's say, the current 22 to something closer to 30.

Thanks, Marfa, that's helpful. Any color just on when you could return some of that capital and the form of returning it again through buybacks or dividends?

Second semester, we already mentioned in the first quarter that we would return shareholders either through share buyback or dividends or both at least 50% of payout ratio that we did last year. We have already returned 960 million reais in the first semester of this year, and we are going to return more in the second semester. But we have not decided yet the number, so whenever we do, we are going to announce to the market.

Great. Thank you, Bruno. Thanks, Mafra.

Thanks, Ciro. So now we have Daniel Vaz from Credit Suisse.

Hi, guys. Can you hear me? Yes, we can. Yes. Thank you. So first, congrats on the results. I would like to go on the revenues or the results part. We talked to some IFA's last month, which pointed to strong recoveries in revenues in June. So I'm trying to do a quarter breakdown in months. So how strong could June be compared to April? So it could help us to understand how results could have reached already in the second quarter, considering like a full potential from June results. Or any details you could share with us in relative terms, it would be good as well. And second question, SBC expenses came in 30 to 40 million below Q4 or Q3, right? So should this 130 million reais from Q2 be a more normalized levels considering the right size, right sizing you did in people or it had some still cancellation effects from Q1. Thank you.

Yeah. Regarding your question about the months, we don't think it's the best way to analyze our business. There is a lot of volatility between months, even between quarters. So to take June compared to May or May compared to April and extrapolate that, it can be misleading. So I would not recommend that. To your question about the share-based compensation, we don't have a guidance, but I would say that the pattern around 130 to 150 per quarter, in other words, 500 to 600 million per year, it sounds reasonable. It depends on the price action as well, because there is a component of the share-based compensation that is related to the price actions. The other part is hedged. So it's hard to state an exact number. But yeah, second quarter was a more normalized level than first quarter, which we announced that it had like one-off positive effects reducing the share-based compensation and should not be extrapolated for the rest of the year.

Okay, thank you.

Thank you, Daniel. And now we have the last question from Niha from HSBC. Hi, Niha.

Hi, thank you for taking my question. Very quickly on the impact from lower rates, should we expect any negative impacts as policy rates go down, especially on the financial income part of the revenues? And second question is on competition. Any change in competitive dynamics, either more aggressive or competition softening, any trends that you could highlight? Thank you so much.

Regarding NIRHA, the lower rates, we more than welcome. It's a good macro environment and it probably will generate a positive tailwind. in our core business. Reminding that it's a gradual effect because individual investors, they tend to be lagging in that process. But it's positive. I don't see financial revenues being jeopardized by lower interest rates because market activity probably will enhance, so we're going to have a very good environment, as we had in the last positive cycle.

Hello, Niha. And about the second part of your question, competition. As we like to mention, in Brazil the concentration is still very high. 80% of the investments are still inside the same five big banks. And when you look at the macro environment that we had in the past 12 to 24 months, They were very positive for these banks because they can offer some products that we don't have here as LCIs, LCAs, free of tax and paying 13.75%. So it's a very, very good macro environment for this kind of products. The banks, they issued more than a trillion in the last 12 months. But this money, most of them is with a very high liquidity, most of them daily liquidity. So once the interest rates start to go down, but again, there's not 50 bps that will make a difference. At some point, the individual investors, they will realize that they are not making 1% a month anymore with a very low risk with daily liquidity, and they will... Change the products, change the portfolio, reallocate the money. So it happens in all the other cycles and will happen again. We have today more than 2 trillion reais on these banks, CDs, LCIs, LCAs and so on. And we believe we can benefit once the interest rates are lower. So that's for me the biggest point about competition in the last 12 to 14 months. The level of interest rates and the bank products.

Perfect. If I can ask, at what level of rates do you see money moving back into equities or new inflows coming in? maybe at around eight, 9%, or even 10 would be sufficient to see the move in your view.

It's hard to say. It's hard to say, Niha. But again, today, imagine that you are a Brazilian investor. You can invest at 13.25 with very low risk, daily liquidity. So you can make 1.something percent a month, okay, doing nothing. So it will take some time, okay, for people to say, okay, I cannot do... I don't have this... level of interest rate anymore so I have to take some more risk I have to buy longer products I have to buy a lower credit quality okay but we have products in Brazil with FIGC guarantee this kind of stuff so at some point they will move perfect thank you so much Thiago Bruno

Thanks, Neha. Thank you for your question. It was the last one, so we would like to thank you all for participating in the call. We will be available, the IR team, to discuss the results with you later. And have a good night, everyone.