PagSeguro Digital Ltd. Class A Common Shares

Hello everyone and thank you for waiting. Welcome to PagSeguro PagBank's fourth quarter 2020 results conference call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After PagSeguro PagBank's remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through PagSeguro PagBank's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may pose their questions on PagSeguro PagBank's website. Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro PagBank's current assumptions, expectations and projections about future events. While PagSeguro PagBank believes that their assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on those foreign statements. Actual results may differ maturely from those included in PagSeguro PagBank's presentation or discussed on this conference call. For a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagSeguro PagBank's registration statements on Form 20-F, and other fillings with the Securities and Exchange Commission, which are available on PACSeguro PACBank's Investor Relations website. Finally, I would like to remind you that during this conference call, the company may discuss some non-JAEP measures. For more details, the foregoing non-JAEP measures, and the reconciliation of these non-JAEP financial measures to the most directly comparable JAEP measures are presented in the last page of this webcast presentation. Now I will turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.

Good evening from São Paulo, everyone. and thanks for joining our fourth quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Business Development Officer, Artur Shank, our Chief Financial Officer, and André Cazorro, our Head of Investor Relations. First of all, we hope you and your families are well and safe. We have been living unprecedented times since the outbreak of COVID-19 in Brazil, that started in the second half of March 2020. Merchants and consumers have changed their behaviors to face this unknown scenario, where people stay in their homes for a while and almost every industry was forced to accelerate digitalization and the adoption of alternative payment methods. Meanwhile, our dedicated employees have been doing an extraordinary job to keep serving our clients. both merchants and consumers with excellence, which led us to reach records in several KPIs. Thank you very much, PagSeguro PagBank team. Before presenting our achievements, I am pleased to report that PagSeguro completed the strongest financial performance quarter in our history, achieving record TPV in both PagSeguro and PagBank, Record net revenues that surpassed R$ 2 billion in a single quarter and record non-GAAP net income reaching R$ 430 million. These results reinforce our execution capability and our confidence to remain focused on democratizing financial services and promoting massive financial inclusion in Brazil, assuring that everyone has access to the best and most complete financial ecosystem in the country. Therefore, we continue to be the most profitable and leading company in terms of attracting and engaging millions of clients. Looking forward, our opportunities over the next years have never been greater. There will be more online purchasing, more digital banking, a stronger migration from cash to digital transactions, and a unique possibility to cross-sell a very profitable combination of payments plus banking for millions of customers. However, To fully capture the growth of those opportunities ahead, we need to keep investing in new initiatives, such as PEGI Bank. Important to mention, we are in a very comfortable condition in terms of funding and cash position, and we feel more and more prepared to accelerate important products that will support us to diversify our revenues, increasing the number of products per user, and consequently, our revenue per client. However, As the pandemic uncertainty remains, we must be cautious and pay attention to the intrinsic opportunities and risks. We are enthusiastic about vaccines. However, the speed of vaccination at scale are still unknown in Brazil, and we know that this will be key to accelerate the economy recovery. Additionally, The Brazilian government is discussing a potential second round of Corona Voucher, starting in March 2021, which would increase TPV volumes while impacting our take rate due to a volume mix with more debit transactions. In the regulatory landscape, the marketplace of receivables, which can be an opportunity for us, was postponed one more time by the Brazilian Central Bank, and the new expected launch date is June 7th. On Open Banking, also another opportunity for us, the first of the four phases began, and by regulation, we will be joining only the third phase, and we are following this initiative very closely. Regarding PICs, as we predicted, it is replacing wire transfers and very shipping for P2M. As we have been discussing, We believe PIX is a relevant add-on and will foster the cash conversion into electronic transactions, which help us to add new clients on both banking and payments. For companies like PagSeguro that invest in technology, product, and have entrepreneurial culture, there is a lot of opportunities out there, and we are prepared to capture them. That said, Arturo and I will present some slides, and we will have Q&A session at the end. On slide three, we highlight the achievements of the four quarter and full year figures. Talking about pegs, record TPV of 55 billion reais in Q4, up 61% year over year. In full year 2020, TPV of 162 billion reais, up 41% year over year, while the whole car industry in Brazil grew only 11%. Important to highlight, that less than 5% of our volumes come from subacquiries. Online TPV grew 147% in Q4, year-over-year. In 2020, online TPV increased at 85% year-over-year. All-time high net merchants' ads of 765,000 ended in 2020 with 7 million active merchants. Excluding MoIP, Net Merchants Adds of 303,000 in the quarter. In 2020, a record of 1.8 million net new merchants added, much higher than 2019 net additions. Total revenue and income of R$ 2.1 billion in Q4, up 33% year-over-year. In 2020, total revenue and income of R$ 6.8 billion, up 19% year-over-year. Gnetic Rate of 2.3% or 2.44% excluding Corona Vouchers volumes Full Year 2020 Gnetic Rate of 2.59% Highly Impacted by Pandemic and Temporarily TPVM Exchange Adjusted Budget of R$ 726 Million Up 24% Year-over-Year In 2020 Adjusted EBITDA of R$ 2.3 billion, up 8% yearly. Record non-GAAP net income of R$ 430 million, reaching a net margin of 21%, or 30% net margin, excluding interchange and card scheme fees. In 2020, non-GAAP net income of R$ 1.4 billion, reaching a net margin of 21%, or 31% net margin excluding interchange and card scheme fees. Adjusted net margin excluding pandemic and PagBank investment effect of 30% in 2020, 2.6 percentage points higher when compared to the same period last year. We also have started to serve SMBs through hubs and I'll give more info about it in the next slides. Moving to PagBank. Record PagBank TPV of R$28 billion in Q4, up 256% year-over-year. In 2020, PagBank TPV of R$71 billion, up 245% year-over-year. All-time high quarterly app downloads, with more than 8.6 million downloads. PagBank clients of 7.9 million, with net additions of 1.2 million in the quarter. Full year 20, net additions of 5.1 million. PagBank consumer clients of 2.7 million, seven times higher in comparison to the same period of 2019, reaching 35% of PagBank active clients. PagBank revenues of 210 million reais in the quarter, up 146% year over year, represented 10% of total revenues and income. Full year, PagBank revenues of 540 million reais, up 118% year-over-year. Credit portfolio of 612 million, with working capital loans originations back to pre-COVID levels. Also, we are launching public payroll loans. Certificates of deposits reached 766 million in December 2020. Launching of third-party funds offered by PagInvest, Marketplace, and Home Insurance. We also acquired a minority stake of Boletoflex, a Brazilian company specialized in buy-now-pay-later service. At this point, available only for online transactions. Moving to slide 4, in Q4 2020, total payment volume reached R$ 55 billion, a growth of R$ 21 billion, or 61% when compared to the same period last year. The main drivers of the volume's growth were the acceleration in cash conversion into electronic payments, combined with a larger and resilient total addressable marketing retail, high exposure to online channels, such as e-commerce, cross-border, card not present transactions, among others. Our online volumes grew 147% year over year, as you can see in the bottom left of the slide. Top right, We showed that debit volumes grew significantly in comparison to the fourth quarter of 2019, but kept a similar mix in comparison to the Q3 2020, which is good news. Remember, debit has been the mechanism for government financial aid distribution, and in the fourth quarter, Brazilian workers always receive an additional salary, which also historically increased debit mix in Q4 every year. We continue to believe that higher participation in the mix is a temporary effect of COVID-19 that was generated because of the financial aids from the government, additional credit limit restrictions imposed by banks for their clients, changes in consumption behavior, and so on. Important to mention that according to the Brazilian Internet Association, 75% of credit card users in Brazil purchase in credit card installments. Therefore, once social distance measures start to relax, credit volumes should increase and get back to the similar past levels. Finally, bottom right, active merchants reached 7 million a quarter, adding 1.8 million new sellers year over year, and close to 800,000 new ones only in this Q4 2020. In November, We finished the acquisition of Moip, which cooperates with the all-time high net merchants ad figures. Excluding Moip, net merchants ads were 303,000, a solid quarterly growth. Turning to page 5, we present our revenue figures. In Q4 2020, total revenue and income grew 33% year-over-year, reaching R$ 2.1 billion in the quarter, accelerating the pace of growth quarter over quarter, another record achieved in this quarter. To be comparable to our previous reports, our net total revenue and income, excluding interchange and card camps fees, reached R$ 1.4 billion, up 31% year over year, as you can see in the top right of the slide. Bottom left, represent our operating revenues. Transaction activities and other services revenues of 1.4 billion reais, up 43% year-over-year, also showing very strong recovery. Financial income of 0.6 billion reais, growing 8% year-over-year, driven by consumer behavior during the pandemic, leading to less credit card transactions installments in our transaction mix. Important to remember that our prepayment model is automatic to our clients, meaning that every credit installment transaction is automatically prepaid instantly in D plus 14 or D plus 30 days. Bottom right, our net take rate, which is the blended take rate net from transaction costs, such as interchange, processing, and card scheme fees, reached 2.3%. excluding the Corona Voucher's impact, our net take rate reached 2.44%. Moving to slide 6, we highlight the main operating and financial KPIs for PagBank. In the first chart, PagBank TPV, known as non-acquiring TPV, reached R$28 billion, up 256 year-over-year, or 244%, excluded the R$1 billion volumes related to Corona Rocha's top-up. In top right, we show the graph of PagBank TPV as a percentage of PagSeguro TPV acquired in TPV, which rated 51% due to high engagement of our merchants into PagBank products and services. Bottom left, we move to PagBank clients. We ended the year reaching almost 8 million active users, adding 5.1 million new clients 2020. PagBank consumers reached 2.7 million, already represent close to 35% of our PagBank active clients base. PagBank revenues of 210 million reais in the quarter, up 146% over a year. Full year, PagBank revenues surpassed half billion reais. up 118% year-over-year, maintaining a triple-digit growth, despite our decision to be more cautious on new credit originations between March and September 2020, resuming in Q4 2020. As a percentage of total revenue and income, PagBank revenues represented 8% in full year 2020 and 10% in Q4 2020. On the right side, we highlight our new initiatives, investments, and insurance. PEG Invest assets under custody reached 4.7 billion reais, a combination of clients' balance, deposits, and investments. Yesterday, we launched a crypto fund and incentivized the venture's fund distribution, adding more options in our 30-part investment fund distribution strategy officially launched in January 2021. We expect to roll out in the coming months our own homebroke platform and distribution of Brazilian treasury bonds. In terms of insurance products, we are launching two more products, home insurance and personal accident insurance, expanding our portfolio, which already counted to PagBank Health since 2020. Finally, Our credit portfolio and transactional account products increased their share in PagBank revenues in 2020 in comparison to the same period of last year. We remain confident that card issuance and credit offerings will be the main drivers of PagBank revenues, reinforcing our commitment to reach 30% of total revenue and income being generated by our banking initiatives in 2024. We'll move to the financial performance slides, and I'll turn the call over to Artur, our CFO, who, by the way, has been doing an amazing job as we navigate through this unique time together. Thank you very much. Artur, please go ahead.

Thanks Ricardo and good evening everyone. It is an honor to be with you today for the first time as PagSeguro PagBank CFO. Certainly, the foundations built by Eduardo during the last years were extremely relevant for now and for the coming years and I am looking forward to lead from here on. Hoping to continue the outstanding work done until now. Moving to slide 7, we are presenting our costs and expenses EBITDA and net income performance. Our non-GAAP total costs and expenses ended the quarter totaling R$ 1.5 billion, up 48% year-over-year and breaking by category. Sales and services costs grew 54% due to the TPV growth of 61% versus last quarter of 2019. Interchange costs up 37% year-over-year. Impacted by the mixed change toward more debit versus credit in the period. The growth of 78% in personal expenses are related to more tech developers and professionals to support the expansion of PagBank, PagInvest and Hubs initiatives. Our depreciation and amortization has also increased 188% year-over-year. driven by an unprecedented merchant addition during the whole 2020, boosting POS acquisitions depreciation and higher amortization of product development. Marketing allocated in sales and services increased by 40% year-over-year. Q420 Selling Expenses Reduction of 12% are explained mainly by chargebacks, decreasing 26% year-over-year as a percentage of the TPV, reaching 14 basis points in the quarter. Even with higher exposure to online sales, showing an operational improvement and a credit portfolio more than double compared to Q4 2019, with better delinquency rate performance in the new cohorts. The graphs in the middle of the slide present our results for the quarter. The first is the adjusted EBITDA that reached 726 million reais, up 24% year-over-year for the quarter. In the graph below, our Q420 non-GAAP net income was R$ 430 million, 4% higher in comparison to the same period of 2019, even with the pandemic effects. Net margin for the quarter achieved 21%, improving 250 basis points versus Q320. Moving to slide 8, we updated our managerial analysis on PagSeguro core business margins, presented last quarter by André Cazoto, our Head of Investor Relations. As we discussed, with the partial shutdowns in Brazil, TPV growth was negatively impacted, mainly during the second and third quarters. Additionally, there was a temporary change in consumer behavior, meaning less leverage and with spending more oriented essential goods. The consequence was a change in PV mix, with faster growth on debit card transactions, including the Corona Vouchers, and lower growth on credit installments. Extremely correlated to market credit availability, with lower appetite of banks in the past months, all these temporary changes drove to lower take rates and margins. We estimate the pandemic impact was R$ 420 million, decreasing our margins in 6.2 percentage points in 2020. This negative impact is expected to be transitory and should recover over time, not only for PagSeguro, but for the whole payments industry. Moving to PagBank Investments, we started our initial investments in May 2019. Despite the pandemic, we kept investing in the most important verticals. PagBank is essential for our business growth strategy, which unlocks a market 17 times larger than acquiring. In 2020, the impact was R$ 187 million of PagBank investments, or 2.7 percentage points negative impact in net margins. We expect PagBank to be a creative in 2022, becoming a bottom-line creative initiative for our company for the coming years, while we cross-sell products and diversify revenues. In comparison to 2019, our net margin would be 2.6 percentage points higher, reaching 30% or close to 40% as our peers report a total revenue excluding interchange and card scheme fees. Our focus right now is growth, entering in a market 17 times larger than payments, as we discussed in the last quarters. Profitability is part of our DNA, and we will continue to deliver solid bottom-line results. However, PagBank investments and new initiatives are the most efficient capital allocation strategy for now. Moving to slide 9, we want to share a few comments about our investment in the short term. In 2020, our capital expenditure reached R$ 2 billion, representing 30% of our total revenue and income. 72% of this investment was related to POS acquisition. driven by a record of 1.8 million net merchant additions in our platform last year, and a much higher demand for additional POSs from our active merchants, giving a faster adoption of new sales channels, such as takeout and delivery. Regarding to intangible assets, the increase is related to our growth in software, platform investments, product development and IT teams. In the next slide, we show our main trends in the credit portfolio, where the performance is improving every day. We ended 2020 with a total credit portfolio of 612 million reais. Working capital loans originations are back to pre-pandemic levels since November 2020. And nowadays, with all the data collected, model improvements, and seasonal theme, we could increase our origination by approximately 10 times. We do have strong demand from merchants. However, we have decided to wait until we have more visibility about vaccines rollout and economic recovery before being more aggressive in credit offers. Working capital loans represented 54% of the credit portfolio, reaching R$ 311 million and an average ticket of R$ 4,000. Although our NPLs are low and under control, we saw a significant decrease in the current NPLs when we compared to pre-pandemic cohorts as we show in the first graph in the right side. Credit cards represented 42% of our total credit portfolio, We already issued more than half million credit cards focused on our best merchants. We also started offering credit cards for consumers with collateral, meaning clients that invested in PagBank CDs or choosing PagBank to receive their salaries. As you can see in the chart below, trends in the new cohorts for credit cards and PLs continue to be encouraging. Knowing that no body will assume a credit risk without receiving the proper return related to the risk assumed, we continue our focus on improving our credit models, themes, and processes that are allowing us to show the current performance and driven the company to improve earnings per share accretion in the future. Finally, other initiatives such as payroll loans represented just 4% of the credit portfolio. We launched public payroll loans in some cities and we are ready to scale up this product during 2021. Now, before I pass the word back to Ricardo, I would like to comment about our cash position and funding strategy. In December 2020, our cash position, considering cash and cash equivalents, financial investments, account receivables from issuers, and Credit Portfolio reached almost R$ 19 billion. Our Credit Portfolio represents only 3% of the current assets. Excluding PagBank Client Balance, PagBank Certificate of Deposits and Account Payables to our merchants, We ended the year with a solid net positive cash and working capital position of R$ 8 billion. Right graph compares our PagBank CDS balance to our credit portfolio. 100% of our credit operations are funded by third parties. Our operation generates cash to support our business growth and we also have R$ 16 billion in AAA accounts receivable to be securitized if needed. We are always evaluating other potential alternatives of funding, ensuring that PaxSeguro is the only Brazilian acquired with a full banking license that helps us to reduce our funding costs. Currently, it is below CDI, the Brazilian interbank rate. Now, I pass the word back to Ricardo.