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.