PagSeguro Digital Ltd. Class A Common Shares

Good evening. My name is Caio and I'll be your conference operator today. At this time, I would like to welcome everyone to PagBank PagSeguro's earnings conference call for the second quarter of 2021. This event is being recorded and all participants will be in listen-only mode during the company's presentation. After the speaker'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 PagBank PagSeguro'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 PagBank PagSeguro'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 PagBank PagSeguro's current assumptions, expectations and projections about future events. While PagBank PagSeguro 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 PagBank PagSeguro'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 PagBank PagSeguro registration statement on Form E20-F and other filings with the Securities and Exchange Commission, which are available on PagBank PagSeguro's Investor Relations website. Finally, I would like to remind you that during the 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 Ricardo Dutra, Chief Executive Officer. Please, Mr. Dutra, you may begin your presentation.

Good evening from São Paulo, everyone, and thanks for joining our second 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, we hope you and your families are well and safe. Before we proceed, let me share a quick update about the current situation related to the pandemic and its impacts in Brazil. Last quarter, We shared our improving confidence that it seemed the worst was over. The vaccination continues to take place. Currently, approximately 70% of the population took at least one shot, and around 30% took two shots already. The contamination death ratios have been decreasing, which has been encouraging authorities to ease the social distance measures in several regions of the country. The ongoing secular shift from cash to electronic and digital transactions continues. reinforcing that the consumer behaviors are changing despite the reopening. And we have seen millions of people being included into the financial system. We also see across the world several companies embracing the digital banking strategy to explore this unique opportunity. For example, in this quarter, we were honored to see PayPal and Square announcing their initiatives to expanding into financial services. which is the move we have done in May 2019 with the launch of PagBank. In addition, as the regulators in Brazil continue to foster competition, players with tech DNA, strong execution and robust balance sheet have the chance to explore new verticals, cross-selling strategies and close the existing loop between merchants and consumers while optimizing the gross profit generation per user. Having consistently invested during the last years in our two-sided ecosystem has been paying off. In June 2021, the number of PagBank clients surpassed 11 million, and the engagement continues to increase as the number of logins only in our app per workday reached 10 million, or one login per user per workday. Another example is the credit expertise. After more than three years, The combination of sophisticated data analytics, an incredible team, the banking license, and the unique active merchant base gave us the diligence to decelerate the underwriting amid the pandemic, to warm up the giants for their reopening. We are delighted to announce that our credit portfolio surpassed the mark of R$1 billion, with an increasing origination for the coming months and control NPL ratios. In payments, the scenario also looks brighter. Our acquiring TPV continues to grow strongly, giving us the confidence to review upward our payment volumes guidance for 2021. Compared with Q2 2020, Pegaseguro was the company in the Brazilian market with the highest acquiring TPV growth among the top five Brazilian acquirers, 89% year over year, and probably the highest total net revenue growth, 75% year over year. Our strong brand superior logistics infrastructure and complete banked offer to our merchants, among other strengths, allowed us to keep growing the long tail and to roll out our hubs faster than expected. Our RUBS results have been impressive, reinforcing our thesis that it's easier to go up in the pyramid than to go down, and that even SMBs are underserved in the country. With this new TPV mix, as we commented last quarter, Our take rates are stable and we expect the stake rate level for the rest of the year. Finally, we continue to pursue for the optimum capital allocation and the best balance between growth and profitability. We reduced the capital per sale ratio from 25% in Q2 2020 to 70% in Q2 2021. A positive surprise leading to a guidance review for CAPEX in 2021, driven by lower POS acquisitions, since we took the right decision last year to prepare the inventory levels, which reinforced our massive scale and purchasing power, improving the unit economic of our cohorts. Investments in technology have been helping us to maintain our strategy to grow organically, and we are happy to highlight four new products. First, Cell Phone Insurance, our fourth insurance product distributed by PEGS. We also launched an exclusive investment fund, PEGS Bank All Seasons, which gives the options to our clients to diversify their investments. We will also launch Brazilian Treasury Bonds trading platform. Our PEG Invest Vertical already counts with 5 CDs and 50 investment funds with several asset allocation strategies such as equities, corporate bonds, FX, gold, even cryptocurrencies. Finally, we are launching an overdraft loans product initially offered only to our best cohorts which will expand the credit options for our clients. All the positive impacts we have been producing in our society will be shared in the next months in our first sustainability report, where all the stakeholders will have the opportunity to follow closer our initiatives to serve better our clients, measured by the highest standards available in the market. Also, we plan to have our first investor day in November, a brand new initiative to discuss the strategic plans for the company for the coming years. where Luis Frias, our founder and chairman, and part of the Pag Senior Management Team will share their thoughts about the trends, the future of finance, and how we are preparing the company to keep consolidating its leadership in financial services and payments. I am very encouraged by the recovery trajectory and pleased with the momentum in both businesses, PagSeguro and PagBank. Finally, Nothing of this would have happened without the confidence of our shareholders, the commitment of our suppliers, and the best and most committed team working hard every day to promote our mission, being part of the financial lifecycle of every Brazilian citizen, promoting a massive financial inclusion in our country. Thank you very much, PagBank and PagSeguro team. That said, Arthur and I will present some slides, and we will have Q&A session at the end. On slide 3, we highlight the achievements of the second quarter. Record total revenue of R$ 2.4 billion, up 75%, with acquired revenue reaching R$ 2.2 billion, and packed bank revenue of R$ 182 million. All-time high consolidated DPV of R$ 102 billion, up 154%, with acquired DPV growing 89%, with Hubs TPV and Online TPV maintaining the strong growth trends observed in the past quarters, and PagBank TPV growing 341%, both in comparison to the same period of last year. Adjusted EBITDA of 629 million, up 64%, with acquired adjusted EBITDA reaching 730,000,000 and Peggy Bank Adjusa Debida reducing losses as a percentage of Peggy Bank revenue, gaining traction to reach the break-even in the coming quarters. Non-GAAP net income of R$ 345,000,000 up 12% year-over-year. CapEx per sales went down from 25% in Q2 2020 to 17% in Q2 2021. In June, our PagBank active clients surpassed 11 million, driven by an outstanding 2.1 million net addition quarter, while active merchants continued to the healthy net addition pace above 220,000, reaching 7.6 million active merchants. Next slide, we present PagSeguro's highlights. While in Q2 2021 versus Q2 2020, Total Cards Industry in Brazil grew 52% Our Acquiring TP View grew 89% Driven by the secular shift to electronic payments, combined with our successful go-to-market strategy to serve not only long-tail merchants, but also sellers larger than long-tails to our hubs. Our active merchants reached 7.6 million. Although our metric for active merchants is considered at least one transaction in the last 12 months and it may differ from other players, in the chart below we can see our dominance in number of merchants when compared with other players in the industry. In Q2, we had 226,000 merchants net ads. Although it is a strong number, it wasn't better because we saw a higher churn in April 2021 related to the business mortality from April 2020 during the peak of pandemic and lockdowns in Brazil. As for active merchants, we consider at least one transaction in the last 12 months. Businesses that closed in April 2020 and did not generate any TPV since then only affects our churn rates in April 2021. Important to say, We did not observe higher churn in May and June, and we had healthy net ads in these two months. Moving to the right side of the slide, TPV trends observed in July and first day of August are also encouraging. Despite the hard comps due to the corona voucher program distributed last year, volumes grew 55% year over year in July. Additionally, During the last week, the Saturday before Father's Day in Brazil, we reached a new all-time high daily TPV. Bottom right, we see that in the first seven months of the year, acquiring TPV grew 70%. Moving to slide five, acquiring revenues grew 77% in comparison to the same period last year, or 35% on a two-year CAGR basis. The growth was due to a better TPV mix towards credit cards volumes and our successful strategies to serve larger merchants, which supported the acquiring net take rate of 2.24%, stable in comparison to the first quarter. Bottom right, our adjusted EBITDA reached R$730 million, almost a 60% growth in comparison to the second quarter of 2020. Important to mention that last year there was a tax provision reversal in the amount of R$ 84 million, which we excluded for a better comparison. Despite the high investment to roll out our hubs and continuous improvements in our payment services to our merchants, we were able to gain market share, consolidate our position, and increase EBITDA. Moving to the next slide. Taking the opportunity to explore in the previous slide, I want to share the results of our hubs. Hub's TPV grew four times year-over-year, outpacing the best estimate of our models due to economy reopening and a disciplined execution to serve large merchants, combined with a powerful competitive advantage, which is PagBank. We are the only payments company in the market with a complete digital account and without any conflict of interest with controlling shareholders or partners. which allow us to look for the best combination to serve merchants and leverage the gross profits per clients, exploring both money flows, the cash-in and the cash-out. We are targeting merchants on average four to five times larger than our average long-tail seller. And by the end of 2021, we are expecting to cover more than 80% of the Brazilian GDP with approximately 300 hubs throughout the country. Packed by a strong sales culture, which mingles young professionals with seasonal sales professionals for other sectors, we are creating a unique relationship model, driven not only by clients' activation, but also by clients' engagement. We are also observing a larger number of software subscribers, which was 801,000, already represent 11% of Pag's active merchants. Finally, PagBank continued to be the best strategy to engage merchants and increase cross-selling opportunities. In June, we reached 82% of live users. Pags merchants that use payments and digital banking within the last 12 months. A growth of 54 percentage points in comparison to Q2 2019. Moving to July 7, we'll give some infos about our online and omnichannel volumes. Bottom left, online TPV grew 104% year-over-year, driven by web checkouts, cross-border transactions, and link of payments. Omnichannel volumes, which considers volumes from merchants that accept not only POS transactions, but also use online payment solutions, doubled their share in comparison to Q1 2020, last quarter before the outbreak of COVID-19 in Brazil. We continue to take advantage of Moiv platform increasing the barriers against competition and potential pressures on yields once its anti-fraud system guarantees the best approval rate in the market, and split payment solutions is highly customizable for e-commerce, marketplaces, and other payment methods. On the bottom right, although it represents a small portion of our total DPV, BOA Compra, our subsidiary focus on providing cross-border transactions for merchants, is growing steadily. Moving to slide 8, another grateful surprise. We had a record net addition of 2.1 million new PagBank clients, surpassing the mark of 11 million PagBank active users, being 45% of these clients composed by consumers. Combining with the increase in product per user ratio, which went from 2.6 products in Q2 2020 to 3 products in this quarter, accelerated PagBank TPV, which grew 341% year-over-year. PagBank revenues continue to present healthy trends, reaching R$ 182 million, up 89% year-over-year, with the better trends in adjusted EBITDA losses, which had a negative margin of 80% in Q2 2020 versus negative margin of 55% in Q2 2021. Moving to slide 9, we need to share some additional information about the engagement metrics. The number of active cards indexed to 100 increased four times in comparison to Q2 2019, while card spends doubled in comparison to Q2 2020. PagBank app logins reached an incredible mark of 783 million, three times more than the same period of 2020, which is similar to say that every PagBank client logged in our app on average one time every workday. The number of payroll portability skyrocketed, increased seven times, backed by our cashback incentive to clients with formal paychecks to make the portability to PagBank, being able to receive up to R$600 or $120 in the next 36 months. Finally, PagInvest assets under custody almost reached R$5 billion, up 85% year-over-year, driven by our increasing number of registered clients with access to CDs and investment funds offers. In July, Registered clients were 647,000 and we are offering almost 50 investment funds on our platform, which has been key to deepen our relationship with our clients as well to attract new ones. As I said in my initial remarks, we are happy to launch our Brazilian treasury trades platform in the next week. Now, I would 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. I also hope all of you and your family are well and in a good health. Following our presentation in the slide 10, the performance of our credit portfolio is improving every day based on efficient credit models, our experienced team and several learnings from the last three years of operation. June ended with a total credit portfolio surpassing R$ 1 billion. being 56% of working capital loans, 41% of credit cards and 2% of other credit products. I would like to reinforce that credit underwriting in Brazil is not a 100-meter sprint race. It is a marathon where learnings from the experience, patience and preparation make all the difference. We have been preparing the company since day one, and now we already achieved more than three years of credit underwriting to micro-merchants. The portfolio is 100% booked in our balance sheet, which provided us the awareness and diligence to decelerate in the past and to speed up now. Additionally, we see the registry of receivables as an opportunity for tech companies which provide financial services Even though markets should not assume the registry as a parachute for poor credit underwriting. On the right side, our cash position remained very strong with a positive balance of R$ 8.2 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements, loans to deposit ratio, was 62% guaranteeing stamina to grow our credit portfolio in a healthy and sustainable way. Moving to slide 11, we present our quarterly financial results. In the top left, our consolidated net take rate reached 2.43%, two basis points higher in comparison to first quarter 2021, and 13 basis points versus fourth quarter 20. Driven by better TPV mix with more credit, lower debit transactions, and helped by a larger bug bank revenue. In the top right graphic, we share our non-GAAP total costs and expenses, which totaled R$1.9 billion in the second quarter of 2021, up 87% year over year. Cost of sales and services represented 67% of total costs and expenses, increasing 63% year over year at the same level of TPV growth, driven by higher interchange and card scheme fees, higher depreciation and amortization related to our solid active merchants additions during the past quarters, and expenses to implement new products and services. Selling expenses represented 26% of total costs and expenses, and increased 155% year-over-year due to the headcount expansion for hubs and bank teams and higher marketing expenses for new campaigns. Financial services jumped from a share of 2% in the second quarter of 2020 to 7% in the second quarter of 2021, mainly due to a TPV mix improvement requiring additional working capital volumes to prepay our merchants. On top of that, the increase of the Brazilian basic interest rate and the exchange rate devaluation for international transactions for Boa Compra also pushed the expenses up versus last year. In the bottom left chart, the adjusted EBITDA went from 384 million reais in the second quarter of 2020 excluding the benefit of 84 million reais related to a tax provision reversal last year to an adjusted EBITDA of 629 million reais this year with a growth of 64% versus the same period of 2020. Finally, in the bottom right, we share our capital allocation. During the second quarter of this year, we invested almost 407 million reais being 50% in POS acquisitions and almost another 50% in R&D to develop new products, features, and services. As a percentage of revenues, CAPEX decreased 8 percentage points, reaching 17% versus 25% in the second quarter of 2020. Moving to slide 12, the last one of this conference call. As Dutra said in his initial remarks, the positive trends of the first semester led us to review our acquiring TPV growth guidance from above 40% to above 45% in 2021. We also project a reduction of capital expenditures in R$ 200 million, setting a new level of R$ 1.8 billion for this year, optimizing the cash flow generation. Now we end our presentation and we can start the Q&A session. Thank you. Operator, please.