XP Inc.

Good evening, everyone. I'm António Guimarães, Investor Relations and XP. It is a pleasure to be here with you today. On behalf of the company, I'd like to thank you all for the interest and welcome you to the 2023 Sturdy Quarters earnings call. This quarter, we had a strong set of results, which will be presented by our CEO, Thiago Mafra, and our CFO, Bruno Constantino, who will also be both available for the Q&A session right after the presentation. If you want to ask a question, you can 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 translation 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 two, on which we clarify forward-looking statements. Additional information on forward-looking statements can be found on the SCC filing section of the IR website. So now I'll turn it over to Thiago Mafra. Good evening, Mafra.

Thanks, Antonio. Good evening, everyone. Thank you for joining us today on our 2023 third quarter earnings call. It's a pleasure to be here with you tonight. I will start with a brief introduction to this quarter's highlights and key updates. In the third quarter of 2023, we had a strong quarter with increased top line growth and profitability across different metrics. This quarter, despite the tough macroeconomic conditions that led to weaker organic net new money, we ended the quarter with 1.1 trillion in client assets, reaching all-time high records in most of our investment KPIs. For this quarter, as a result of our continuous focus in executing our strategy, we achieved the highest net income in our history at 1.1 billion up 11% quarter-over-quarter and 5% year-over-year. Our discipline in cost control has reflected in the best efficiency ratio in the last three years, at 37.3%, down more than 400 bps year-over-year and 100 bps quarter-over-quarter. As a result of our efforts, ROE rose 58 bps quarter over quarter, reaching 22.6%, the highest during the year. At last, but not least, our diluted earnings per share increased 7% quarter over quarter to 1.96 reais, also the highest in our history. Moving to the next slide, I want to reinforce our three focus points. first, leadership investments by protecting and expanding our core business. In this quarter, we have incorporated Modals Financials and Operations, which should be fully integrated in 2024. At the same time, we have reached an all-time high in different investment KPIs, enhancing our capacity to reap the benefits of our leadership position hand-in-hand with more positive market conditions. Second, superior product offering. translated into the continuous improvement of our new verticals performance. New verticals revenue grew three times in the last two years and now represents 11% of our total last 12 months revenue. We are certain that expanding the product offering into new verticals was the right decision, enabling us to diversify our revenues and deliver growth even in a tough environment for the investment market. This evolution confirms our initial thesis of the importance of having clients' investments first. For example, in credit cards, we estimate we have 50% of principality out of our total cardholders base. This is a clear example of many opportunities we will explore ahead in the proper time. Lastly, client focus. High quality and excellence in everything we deliver is a key pillar to achieve our long-term goals. We remain focused on that, maintaining the NPS above 70 at the top of the industry once again this quarter. High NPS directly translates into high share of wallet and we see this consistently in our client base. High NPS directly translates into high share of wallet and we see this consistently in our client base our strategy is centered on providing advisors with the best tools technology and products so they can better serve our clients in this direction we have evolved our incentive plans to advisors providing them with more intelligent models and systems in order to improve clients asset allocation resulting in superior experience for retail investors moving to the next slide as i mentioned earlier we are happy to see improved profitability in our financial results for the quarter while we have made progress on models integration Following an initial recovery in capital markets activity in the second quarter, GCM volumes have continued to increase in the third quarter, with all-time high revenue in corporate and issuer services. As we said in the last quarter, a faster recovery in retail revenue and net inflows may take more time as it depends on better performance in riskier assets, which is tougher due to high interest rates. On the profitability front, we have increased three key metrics for XP. 74 bps in ebt margin quarter over quarter with higher operating leverage plus 58 bps on roe quarter over quarter one of the main metrics we look going forward plus 13 cents in diluted eps despite the issuance of 18.7 million shares related to modal succession in the quarter Talking about Modal, we already have fully consolidated Modal's financials into our third quarter results. In this first quarter of integration, Modal has accounted for $161 million in top line and $111 million in SG&A. Lastly, in accordance to what we have been saying about returning more capital to shareholders, we just announced an additional dividend of $0.73 per share to be paid in December 22nd, contributing to the optimization of our capital structure. Now, I will hand it over to Bruno so he can discuss this quarter's financials.

Thank you. Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again. Starting with our gross revenue on the left part of the slide. This quarter, we reached record quarterly revenue in our history, 4.4 billion reais, a 17% growth quarter over quarter, and 14% growth year over year. After discounting Modal's revenue contribution of R$ 161 million, XPX Modal revenue would be R$ 4.2 billion, 10% higher than our previous record of R$ 3.8 billion reached on Q3 2022. The sequential growth in gross revenue was mainly led by retail, which was responsible for 45% of the growth quarter over quarter, and corporate and issuer services, representing 37% of the growth quarter over quarter. Both retail and corporate and issuer services benefited from capital markets activity, especially in DCM, which we will explore in detail on the next few slides. On the right, in terms of revenue mix between segments, the highlight is corporate and issuer services with the strongest growth quarter over quarter, increasing its relevance by 57% from 7.6% in second quarter to 11.9% in third quarter. On the next couple of slides, we are going deeper into retail revenue. First, focus on retail core. and then on new verticals. Moving to the next slide. When we look at our core equities fixed income and funds platform, the main highlight for the quarter is fixed income. We had a strong sequential improvement to 718 million reais, all time high fixed income quarterly revenue, representing a growth of 24% quarter over quarter. Our previous record was in second quarter 22 when fixed income revenue reached 580 million reais. As you know, fixed income revenue has two main components, secondary trading and distribution of primary offerings. The later had a growth of 100% quarter over quarter and was five times the revenue of first quarter. when we experienced a dysfunctional corporate bond market due to the impact of Americanas. We underwrote some offerings during this turbulent moment, aiming to distribute them whenever conditions returned to normal. This had an important contribution to the record quarter. We continue to see a healthy DCM pipeline, but we expect the third quarter fixed income revenue to be the best quarter for the year. Funds platform had a slightly decrease of 5% quarter over quarter, reaching 323 million reais as expected, considering the second quarter had performance fees, which is seasonal and recognized at the end of every semester. Excluding revenue from performance fees from second quarter results, third quarter was 8% higher quarter over quarter. And lastly, equities revenue increased 6% sequentially to 1.1 billion reais, positively impacted by modal, approximately half of the growth, and a continuous gradual improvement over time in equities. Moving to slide nine, Our new verticals continue to grow well, reaching a total of R$442 million in third quarter. plus 52% year-over-year and 11% quarter-over-quarter, enhancing our diversification and cross-sell opportunities. The main highlight of the quarter has continued to be cards revenue, reaching R$ 259 million, a growth of 12% quarter-over-quarter and 77% year-over-year. When we compare our quarterly growth in TPV with the market, based on recent data released by ABEX, XP grew 11% quarter over quarter compared to 7% from the market. We expect cards to remain outperforming the other new verticals in the following quarters. Moving to slide 10, coming back to total retail revenue. We have updated this slide to include third quarter results. The two key messages we delivered last quarter still stand. Number one, XP is a cyclical grower company. Corn retail revenue is the best demonstration of this cyclicality. The peak of 8.3 billion reais in revenues in 2021 has not been reached yet again. Third quarter 23 last 12 months core retail revenue improved from last quarter to 7.6 billion reais, reducing this gap that was 1 billion last quarter to 740 million reais this quarter. It is worth remembering that in 2021 our clients' assets were 815 billion reais, our active clients were 3.4 million and our IFAs were 10.3 thousand. As of third quarter this year, the same KPIs are 1.1 trillion reais of clients' assets, 4.4 million active clients and 14.3 thousand IFAs. The development of the main KPIs in investments fostered a way for potential upside as the market recovers. And number two, new verticals continue to help offset macro headwinds, diversifying our business and increasing the resilience of our model. If we compare the last 12 months revenue with 2021 revenue, new verticals have increased approximately 182%. In summary, there is potential for growth as the market recovers, although we expect a more gradual recovery considering the pace of interest rate cuts, the terminal interest rate debate, and the impacts for riskier assets. And we keep increasing the resilience and diversification of our business model. Moving to slide 11, corporate and issuer services together with retail fixed income were the highlights of third quarter 23 results. This shows the importance of our strategy to keep diversifying our revenue stream, opening new addressable markets as corporate, for example, and connecting everything with our core, retail. This quarter, corporate and issuer services revenue, which reached all-time high record at 519 million reais, grew 83% quarter-over-quarter and 19% year-over-year. Corporate had its better quarter year to date, probably the best quarter for the year, reaching 197 million reais of revenue, benefiting from derivative demand from our corporate clients, also related to DCM activity in the period. Issuer services reached the highest level in 11 quarters, at 322 million reais, a growth of 105% quarter over quarter and 41% year over year. The positive result was led by DCM activity, as already said, rewarding some underwriting we did with good corporate quality names in the first quarter this year, when DCM market became dysfunctional after Americana's events. We do not expect the same magnitude of revenue for corporate and issuer services in the fourth quarter. Moving to slide 12, total SG&A excluding revenue from incentives has increased to 1.5 billion reais as already anticipated in our previous quarter. The main impacts on third quarter were inclusion of modal expenses, which represented R$111 million, and the seasonal expenses related to the expert event, around R$60 million. The ratio between people and non-people expenses were 68% people and 32% non-people, in line with the long-term trend of 70% and 30%, respectively. When we gave our SG&A guidance between 5 and 5.5 billion reais for the year, modal was not being considered. Even including modal in our numbers, the SG&A guidance remains the same. On slide 13, as we said on the last earnings call, We remain focused on cost discipline, keeping both efficiency and comp ratios near all-time lows since our IPO. Last 12 months, efficiency ratio decreased from 38.3% to 37.3% quarter-over-quarter, close to our lowest level since fourth quarter 19, when we reached 37.1% efficiency ratio. Compensation ratio decreased from 26.8% to 25.7% quarter-over-quarter, the best level in 12 quarters sequentially. It is natural to assume higher levels of comp ratio when compared to 2020, when our share-based compensation program was just kicking in. Our cost control discipline is a priority and has played an important role in our operating margins, which we're going to talk on the next slide. EBT, a good proxy for earnings power, reached R$1,157,000,000 this quarter, a 18% growth year over year and 20% growth quarter over quarter. It is our all-time high quarterly EBT, beating the fourth quarter 21 in BT at the peak of the last bull market cycle. Our EBT margin has also improved in the quarter, increasing 86 bps year-over-year and 74 bps quarter-over-quarter, driven by operating leverage. Excluding modal, our EBT margin would have been 28.8%. Our year-to-date EBT margin is in line with our annual guidance between 26% and 32% from 2023 to 2025. Moving to the next slide. Our net income also benefited from operating leverage, reaching 1 billion and 87 million reais this quarter, up 11% quarter-over-quarter and 5% year-over-year. Despite the best quarterly net income in our history, the growth has been lower when compared to EBT growth. We expect this to be the trend, given our accounting tax expenses should be higher going forward in the next years to come. In terms of net margin, third quarter 23 presented a 26.3% margin. a 123 bps decrease quarter over quarter and a 218 bps decrease year over year. Expert, modal and higher tax expenses in the quarter are the main reasons behind lower net margin sequentially. Excluding the impact from both modal and expert in the quarter, net margin would have been around 100 pips higher and flat quarter over quarter. Now moving to the last slide, our return on average equity has continued to grow sequentially. In third quarter 23, our annualized ROE reached 22.6%, increasing 58 base points quarter over quarter, despite Modal's effect, which added 2 billion reais to our equity. Excluding modal, our return on average equity would have been 23.4%, an increase of 143 bps quarter over quarter. At XP, we have a conservative approach towards our balance sheet. But when we look at our capital ratio, plus our capacity to continue generating healthy profits over time, plus the lack of need to retain too much capital to grow, it is our desire to gradually reduce the level of our capital ratio at XP Inc. level. In second quarter 23, our capital ratio was 24.2%. We ended third quarter 23 with a capital ratio of 22.1%. The reduction, quarter over quarter, was mainly driven by the dividend payment of $320 million in September. Looking forward, We expect to end next year with a capital ratio below 20%, to a very conservative level. To get there, we need to continue expanding our net income and returning capital to shareholders. In that context, we have decided to pay an additional dividend on December this year of 73 cents per share, around 400 million US dollars. Now both Mafra and I will be happy to take your questions.