PagSeguro Digital Ltd. Class A Common Shares

Hello everyone and thank you for waiting. Welcome to PagSeguro PagBank's first quarter 2021 results conference call. This event is being recorded and all participants will be in 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 this 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 post 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 in PACSeguro PACBank's current assumptions, expectations, and projections about future events. While PACSeguro PACBank believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially 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 factors sections of PagSeguro PagBank's registration statement on Form 20-F and other filings with the Security and Exchange Commission, which are available on PagSeguro PagBank's Investor Relations website. Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of those non-GAAP financial measures to the most directly comparable GAAP 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 first quarter results conference call. Tonight, I have here with me Artur Schunk, our Chief Financial Officer, and Eric Oliveira, our Head of Investor Relations. First of all, we hope you and your families are well and safe. Before we move on, just a quick update about the outbreak of COVID-19 in Brazil. It seems the worst is over, however, The economic recovery may take a while due to the speed of vaccination rollout in Brazil. Although we are enthusiastic about the availability of effective vaccines, the rate at which vaccinations are taking place in Brazil is still low when compared to other countries like the US. Consequently, merchants and consumers have changed their behaviors to keep working in this scenario with more digitalization, less cash, and the adoption of alternative payment methods. Meanwhile, our dedicated employees have been doing an extraordinary job to keep serving our clients with excellence. Thank you very much PagSeguro PagBank team. Despite the pandemic, the resilience of our business model and our focused execution allowed us to achieve great results and records in several KPIs in this quarter. I'm pleased to report that PagSeguro achieved a record consolidated TPV growing 102% year-over-year and kept adding 300,000 merchants and more than 1 million pack bank users per quarter, while total revenues were above R$ 2 billion in the quarter. In fact, we are the company with the highest growth in terms of volumes, net ads, and have been increasing our acquiring market share in the past quarters, reaching approximately 9% in Q1 2021 versus 5.9% in Q1 2019. Our last quarter's performance have reinforced our belief that both businesses, acquiring and banking, will deliver robust growth in years to come. Talking about banking, we continue to see unprecedented changes in the highly concentrated banking industry in Brazil. Although we have experimented the entry of new players in the last few years, PagBank being a precursor of this movement, in December 2020, More than 70% of the Brazilian credit portfolio was concentrated among the top five banks. We see that as a huge business opportunity and a reason to bring more competition to an economic segment that has been basically the same for decades. The opportunity to change people's lives thrives the stamina that runs impacts professional things. We consider ourselves exceptionally well positioned to continue to disrupt banking in Brazil because of three main reasons. First, Our Tech DNA Approximately 6.5 thousand engineers in UOL Group with the best in class professionals working for PEGS Second, our unique expertise and knowledge on the Brazilian Internet Since the early beginning back in 1996 which today the most visible aspect is the UOL audience with a reach around 90% among Brazilian Internet eyeballs Right after Facebook with 93% and Google with 96% reach. And third, the fact that we are the first woovers. Creating a new market unserved by the competition before us. And finally, but not least, a strong culture and excellent execution. I would resume as Peg's way of doing it. We operate in an evolving industry whose answers to some questions are not 100% clear. For that reason, we permanently promote self-criticism. But having said that, we can affirm our investment thesis relies on the following six pillars. First, payments is the best entering door for digital banking. PEGS has the largest Brazilian merchant base that generates recurring revenues through a digital account that naturally provide cross-selling opportunities for additional banking products. Payments industry has consistently grown two digits in the last two decades, driven by merchants accepting new electronic payments. New payments methods, such as NFC, P2P, among others, continue to replace cash transactions. For example, in the first quarter, NFC volumes increased in almost eight times in comparison to the same period of last year. We consolidate our leadership in long-tail markets, and we see limited competition as incumbents have given up serving these clients. Now, we will prove our thesis that is much easier to go up in the pyramid than to go down in it with our hub strategy. Our hubs are extremely successful and we are gaining market share with profitable SMBs clients very rapidly. Second, online score. Online payments go on a score for us and our focus has delivered a growth of 140% in Q1 2021. PAX is enhancing omnichannel solutions for merchants and increasing cross-border transactions. In first quarter, cross-border volumes increased three times compared to the same period of last year. Third, cards and lending are core. Because banking industry is highly concentrated, Brazilian unbanked populations is still huge and the spreads are very high. This is an opportunity for us 17 times larger than payments in terms of revenue pool. PEGS has been working with cards and lawyers in the last three years, mainly focused on the micro merchants, creating a unique database and credit models to manage returns and risks. Clearly, a strong entry barrier for new players. Fourth, new financial products are core. PEGS' movement to go up in the pyramid to conquer market share in SMB's market can and will be replicated with other financial services. Fifth, technology. Customer Experience and Product Development are core. Technology, innovative and client-centered culture combined with a lean structure promotes disruption, awareness and engagement. In the first quarter, PEGS reached 480 million apps downloads and processed 81 billion reais. We believe that value relies on active and recruitment clients. and we are happy to announce that we surpassed the market of 10 million active clients in PagBank's second anniversary. And sixth, regulatory environment helps. Regulatory changes such as peaks, marketplace of receivables and open bank create a positive environment for new players like us. With these initiatives and achievements, we are truly committed to keep promoting the financial inclusion in Brazil, making investments that are creative and will bring higher returns in the future. Finally, the pandemic is not over in Brazil. This year will be another challenging one, but if you're prepared to face it and ready to explore the economic rebound in the coming years. That said, Artur and I will present some slides and we'll have a Q&A session at the end. On slide three, we highlight the achievements of the first quarter. We break down in three sections. First, operating and financial results. Second, PEG-Seguro or acquiring business. And third, PagBank or a banking business. Start with the operation and financial highlights. Consolidated TPV of 81 billion Reais, up 102% year over year. Total revenue and income of 2.1 billion Reais, up 30% year over year, with consolidated net take rate of 2.41%. Adjusted BIDA of 573 million Reais, up 12% year-over-year, despite PagBank and HUB's investments. Non-GAAP net income of R$ 327 million, down 11% year-over-year. Excluded one-time events during the quarter adjusted a bid of R$ 617 million, up 20% year-over-year, and non-GAAP net income of R$ 371 million, up 1% year-over-year. Moving to PagSeguro, Acquiring TPV of R$ 50 billion in Q1, up 58% year-over-year, despite new lockdowns in the end of March 2021. Online TPV grew 140% year-over-year, while Hubs TPV grew 410% year-over-year, diversifying our exposure to new segments. Active merchants of 7.3 million, with net addition of 201,000 new merchants, or 1.8 million more merchants in comparison to the same period of 2020. Total acquiring revenues of 1.9 billion Reais, with adjusted EBITDA of 725 million Reais, margin of 38%. During this quarter, we launched Pegifone, the first worldwide one-stop-shop POS which combines acquiring, banking, and software. We also launched Moderninha Profit, the smallest POS with integrated printer, and Auditech App, our reconciliation software. Moving to PagBank, PagBank TPV of R$31 billion, up 261% year-over-year, boosted by wire transfers and bill payments. PagBank app downloads of 48 million, with almost 7 million downloads recorded. PagBank active clients of 9.1 million, up 144% with net addition of 1.3 million in the quarter. PagBank consumer clients of 3.5 million, five times larger than first quarter 2020. In first quarter 2021, consumers represented 38% of PagBank active clients. Credit portfolio of 773 million reais, deposits of 5 billion reais, and PagBank CDs surpassing R$1.4 billion in March 2021. During this quarter, we also announced the cashback offering for payroll portability and launched new third-party investment funds and personal accident insurance. Moving to slide four, two years ago, we launched PagBank, aiming to explore and capture the existing opportunities in Brazil. At that time, we had a few products in our portfolio, provided the base digital account features only to our merchants. In slide five, we can see all the achievements throughout the last two years becoming a complete ecosystem now serving both merchants and consumers as we were able to combine acquiring, banking, partnerships, software, marketplace, insurance, investment, loans, and cards. Moving to slide six, we show how powerful is our ecosystem and how it is boosting our growth trends. First, I'll talk about client acquisition and awareness. We reached 7.3 million active merchants up 33% year-over-year and 9.1 million PagBank clients in the first quarter of 2021. It represents a growth of 146% year-over-year. Moving down, we can see we reached 48 million downloads in PagBank as of March 2021. Talking about engagement, We observed the acceleration of volumes growth. Consolidated TPV increased 102% year-over-year, while net consolidated TPV grew 215% when compared with Q1 2020. Our market share in the Brazilian payments industry reached 9%, more than 3 percentage points in comparison to the first quarter of 2019. Our products per user ratio increased from 2.5 to 2.7. which also indicates higher engagement of our clients. Last, but not less important, in third quarter, tax monetization. Revenue and EBITDA growth shows we were able to monetize our businesses and to balance growth with profitability. Total revenues increased 30% year over year, and our adjusted EBITDA increased 12%. Moving to slide seven, we'll start presenting our operating figures for the acquiring business. Our TPV growth remains strong, with a 58% increase over a year, boosted by TPV per merchant growth, which grew 18% when compared with first quarter in 2020, and net merchant ads that reached 300,000 between January and March this year, ended the quarter with 7.3 million active merchants. The strong growth, despite new lockdowns in Brazil, was driven mainly by a fast cash conversion into electronic payments and success in our new verticals and client segments, such as online and hubs. Volume's growth for April and May were very strong, respectively 108% and 91% increase year over year, despite the new lockdowns we had in Brazil in 2021. Moving to slide eight, total acquiring revenues were 1.9 billion reais, Class A Common Shares acquired intake rate increased 17 basis points in comparison to the previous quarter, reaching 2.23%. Moving to slide nine, here we present some new acquired initiatives we have been exploring. First, our online TPV, which has been growing much faster than previous year. In first quarter 2021, our online volumes grew 140% versus 13% in 2020. The acquisition of MoIP, the digitalization process boosted by pandemic, and our several initiatives to incentivize online payments and omnichannel solutions were the main drivers. Also, we are happy to announce card not present transactions during this quarter increased 116% year-over-year. Moving to our SMB Hub strategy, our 2021 volume trends indicate we will be in the top of the range of our current guidance, which was 11% of acquiring TPV. Our forecast is to have 250 to 300 hubs uprun in several cities and regions until the end of 2021, reaching 83% of Brazilian GDP coverage. Finally, software subscribers reached 621,000, 8.5% of PAGs active merchants. We plan to provide additional disclosure of our hubs strategy in the coming quarters. Now, moving to slide 10, we'll share some PagBank figures. Starting with the strong growth of PagBank TPV, once again, a triple-digit growth totaling R$ 31 billion, accelerating the growth in comparison to 2020. On the top right, we have our PagBank Active Client figures. which was 9.1 million being 38% composed by consumers. Net ads were 1.3 million with consumers representing 58% of first quarter net additions. These figures show our strength to serve both merchants and consumers with our two-sided ecosystem. Bottom left, we share our product per user ratio. In first quarter 2021, our products per user reached 2.7. 0.2 higher than the same period of 2020, reinforcing clients' stickiness to our ecosystem. TAG Bank revenues reached R149 million, up 48% year-over-year, and accelerated in April 2021 to above 80% when compared to April 2020, Although April 2020 was the worst pandemic month in Brazil, impacted by lockdowns, which drove down withdrawals and card spending. Additionally, for those clients with higher engagement, such as merchants active in PagBank and consumers with payroll portability, we offer some free ATM withdrawals per month, exchanging short-term revenues for higher engagement and future monetization. In the first quarter of 2021, PEG Bank adjusted EBITDA was a loss of R$ 78 million, driven by headcount increase, marketing expenses, and transaction costs. Also, in the first quarter, we had a one-time event related to digital account losses, not related to loan provisions or credit risk management, amounting to R$ 73 million. The massive data leak in Brazil, which happened in January 2021, did not affect any of our systems, data, or infrastructure. However, it provided information to fraudster activities in online transactions and bill payments. As we identified these transactions, we immediately blocked them. Again, this is a one-time event. Moving to slide 11, we present some additional data about PagBank and PagInvest. The number of active cards increased three times in comparison to the first quarter of 2019. In May, we launched a new home marketing campaign in partnership with Visa to foster card payments. In this campaign, PagBank clients will receive cash prizes, and one of them, we get a house. Day-to-day banking, the number of PagBank app logins was 549 million in the first quarter of the year, while bill payments transactions has been gaining a lot of traction. This is a very good sign, since usually, clients select their main banks to centralize bill payments. Finally, PEG Invest assets under custody reached R$ 4.2 billion, up 127% year-over-year, with PEG Bank CDs almost doubling in size quarter-over-quarter. Worth to say, all this AUC is based on PEG Bank CDs and a few investment funds. We plan to have equities and treasury bonds in the following weeks, which we expect to help increase assets under our custody. Recently, we allowed our investment platforms to receive orders 20 hours a day, 7 days a week, and we also launched new third-party investment funds managed by well-known investment firms in Brazil, such as Western Asset, Alaska, Hashdex, BNP Paribas, Journey, and AZQuest. Now, I'd like to turn the conference over to Arthur, our CFO, who will talk about our credit portfolio and our financial results for the quarter. Arthur, please, go ahead.

Thanks, Ricardo, and good evening, everyone. In the slide 12, we show our credit portfolio where the performance is improving every day, based on credit model's result. We ended the month of March with a total credit portfolio of R$ 773 million, being 53% of working capital loans, 43% credit cards and 3% of other credit products. As we have been tracking very close the NPLs by cohorts for working capital loans and for credit cards, trends are getting better since August 2020, showing very healthy numbers. Our confidence has been increasing and encouraging us to reach the highest level of credit disbursements in May. We expect to increase credit originations going forward, mainly in the second half of this year. Our cash position remains very strong, with a positive balance of R$ 8.1 billion, enforced by the issuance of PACBank CDs to fund the credit disbursements. Loans-to-deposit ratio was 53%, guaranteeing stamina to grow our credit portfolio in a healthy and sustainable way. Moving to slide 13, we present our quarterly financial results. In the top left of our consolidated net pick rate reached 2.41%, representing an increase of 11 basis points in comparison to Q4-20 and 6 basis points versus Q3-20, driven by better TPV mix with more credit and lower debit transactions and a longer duration for credit cards receivables in installments. In the top right graphic, we share our non-GAAP total costs and expenses, which totaled R$ 1.6 billion in the first quarter of 2021, up 51% year-over-year. Cost of sales and services represented 70% of total costs and expenses reminded at the same level of Q1 2020 and increased 49% year-over-year. The main drivers were higher interchange and card scheme fees following the TPV growth, higher depreciation and amortization related to our solid active merchants additions during the past quarters and expenses to new products and services developed to PagBank. Selling expenses represented 23% of total costs and expenses and increased 94% year-over-year due to headcount expansion for our hubs and the one-time digital account losses of R$ 73 million previously explained by Dutra. If we exclude the digital account losses, this line increased 56% versus the same period of last year. In the bottom left chart, our adjusted EBITDA was 573 million reais, excluding the negative effect of 73 million reais related to one-time digital account losses not related to loan provisions or credit risk management and the positive effect of 29 million reais related to tax provision reversal. The recurrent adjusted EBITDA was R$ 618 million, with a margin of 30%. Finally, in the bottom right, we share our capital allocation strategy. During the first quarter of the year, we invested almost R$ 393 million, being 62% in POS acquisitions and 38% in other initiatives, mainly related to product and software developments. as a percentage of revenues, CAPEX, decreased 4 percentage points, reaching 19% versus 23% in the first quarter of 2020. Thank you all for joining us tonight. Now, I pass the word back to Dutra to conclude the presentation.