PagSeguro Digital Ltd. Class A Common Shares

Good evening, my name is Greg and I will be your conference operator for today. At this time, I would like to welcome everyone to PagBank PagSeguro's webcast Results for the third quarter 2021. This event has been 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 by webcast and may be accessed through PagBank PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view these 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 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 forelooking statements and risk factor sections of PACBank-PACSeguro's registration statement on Form 2NF and other filings with the Securities and Exchange Commission, which are available on PACBank-PACSeguro'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 these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation. Now, I'll turn the conference over to Ricardo Dutra, Chief Executive Officer. Mr. Dutra, you may begin your presentation.

Good evening from São Paulo, everyone, and thanks for joining our third quarter results conference call. Tonight, I have here with me Artur Schunk, our Chief Financial Officer, Alexandre Maiani, our Chief Operations Officer, and Eric Oliveira, our Head of Investor Relations. Let me start by giving you the highlights of this quarter. Record TPV in both acquiring and banking, record revenues in EBITDA, and the second best non-GAAP net income, only behind Q4 last year. We will see more details throughout the presentation. Quick update about COVID-19 in Brazil. While pandemic is not fully behind us, we have started to see signs of economy reopening in the back of the vaccination. In Brazil, we have been seeing a higher acceptance of vaccines in comparison to other countries. There is also a campaign to give extra shots to reinforce the immunity of the elderly and people with high-risk diseases or medical conditions. However, as a consequence of these almost two years of COVID-19, the Brazilian macroeconomic scenario changed very rapidly. Inflation rate went up above 10%, the unemployment rate continues to be above double digit, and the interest rates are increasing faster than the market expects. Regardless of this macroeconomic challenge, our track record gives us the confidence we can navigate very well during the crisis and grow our businesses. Our quarterly results, one more time, consolidate our winning strategy to continue to invest in technology to make clients' lives simpler, while guaranteeing a safe ecosystem, driving a profitable growth, and increasing revenue and profits diversification with cross-sell and up-sell of PagBank products. Our revenues have accelerated, driven by our new growth initiatives, mainly in serving larger merchants and long-tail, and cross-selling PagBank offerings for merchants and consumers, while we attract a more diversified client profile. This quarter, we launched the automatic payment, called debit automatic in Portuguese, DDA, and several new partnerships targeting the gaming community. On top of that, several milestones were achieved in our PagInvest initiative. We now offer seven investment funds and several CDs to foster our deposits. We also have a Brazilian treasury-bound trading platform, and our homebroke trading platform for equities started rollout this week, and we expect it to be available for all clients until the end of November. On the regulatory front, we continue to see the regulator fostering competition which could create opportunities for PECs. Therefore, our investment thesis remains the same. We will continue to combine the best balance between growth and profitability among Brazilian payments and fintech space while we prepare our company for the long term, where we expect to have a larger and more profitable company. It's only the beginning. We also know credit is one of the key drivers to achieve larger revenues and profits in the future. And we are one of the few players in Latin America that has been building gradually and consistently a very diversified credit portfolio with a healthy asset quality. We have a seasonal team, exclusive data, and right credit policies. There is no need to rush. Our main goal is to build up a solid credit business. One more time. I would like to reinforce that I'm 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 life cycle of every Brazilian citizen, promoting massive financial inclusion in our country, Thank you very much, PagBank and PagSeguro team. That said, Artur and I will present some slides, and we'll have Q&A session at the end. So turning to slide three, we highlight the achievements of the third quarter. Record total revenue of 2.8 billion reais, up 56%. In the blocks below, we can see PagBank revenues reaching almost 240 million reais, and acquiring revenues reaching R$ 2.5 billion. All-time high consolidated TPV of R$ 126 billion, up 86%, with PagBank TPV reaching an impressive R$ 59 billion, growing 158% versus Q3 2020. Acquiring TPV grew 58%, excluding corona voucher, reaching 6-7 billion reais, with Hubs TPV growing very rapidly and reaching around 15% of the year-to-date acquiring TPV. Adjusted EBITDA of 742 million, up 40%, with acquiring adjusted EBITDA reaching 818 million, and PagBank adjusted EBITDA, reducing losses as a percentage of PagBank revenue, and increasing its margin, gaining traction to reach the in the coming quarters. No gap in an income of R$419 million, up 27% year-over-year. CapExper sales went down from 33% in Q3 2020 to 15% in Q3 2021. Moving to Peggy Bank, in September, our active clients surpassed R$12 million, driven by R$1 million net addition in the quarter, while active merchants totaled R$7.7 million. Our credit portfolio reached R$1.6 billion in September, with NPL 90 under control, with new cohorts, those after August 2020, operating at single digit. Total NPL 90 is running at low double digits. Turning to slide 4, we present TagSeguro's highlights, our acquiring business. Our acquiring TPV grew 58%, excluding Corona Voucher, driven by our successful execution to serve not only long-tail merchants with excellence, but also SMBs through our hubs, increasing our market share that reached between 9.5% and 9.7%, as we can see right below the chart. The chart on the top right, we can see our acquiring TPV growth is accelerating versus previous years and growing 63% year-to-date. ahead of 45% guidance we gave last quarter. The positive trends remain, and we are happy to announce that in October, we reached a new all-time high daily TPV for the third consecutive quarter, processing more than R$1 billion in payments in one single day. In Q3, our active merchants reached 7.7 million. As the chart on the bottom right shows, our gross additions remain healthy in comparison to previous years. However, the net ads were impacted by a higher mortality related to lockdowns, a higher churn related to Wirecard news flow during the second and third quarter of 2020. Besides that, it is worth to remember that there is no impact on acquiring TPV trends. As for active merchants, we consider at least one transaction in the last 12 months. Moving to slide five, Acquiring revenues grew 52% in comparison to the same period in last year, or 35% on a two-year CAGR basis. The growth was due to the growth of our merchant base and our successful execution to serve SMBs through our hubs. Despite our SMBs merchants have lower take rates, their TPVs are five times larger than long tail, and that's why our net take rate maintained a flattish trend in comparison to the previous quarters. Bottom left, As the client mix is changing towards larger merchants, combined with a larger share of wallet, we can see the growth of TPV per merchant increasing 18% versus same period last year. Our adjusted EBITDA reached R$ 818 million, a 35% growth year over year. Despite the high investments 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 evolution in slide six. Hubs TPV continues to deliver a strong growth and represents approximately 15% of year-to-date acquiring TPV, outpacing the best estimate of our models due to the economy reopening and a strong execution to serve larger merchants, combined with a powerful competitive advantage, which is PagBank. I'm also happy to say that in October we reached more than 300 hubs fully operating. At the same time, we are also observing hubs break-even between three to four quarters and paybacks between four to five quarters. Our software solution reached 1.3 million subscribers, or 17% of PAX active merchants. Last quarter, we announced a Conceals acquisition, one of the most disruptive fintech in 2021, according to Daily Finance Magazine, which speeded up our conciliation product roadmap. This will also help us to expand our conciliation software, offering to SMBs and long-tail clients. which were not served by our previous solutions, Audio Tech. Moving to slide seven, TAG Bank revenues continues to present healthy trends, reaching almost 240 million reais, up almost 80% year over year, with better trends in the adjusted Vida losses, which had a negative margin of 58% in 2020, versus a negative margin of 32% in Q3 2021. We had net addition of 1 million new PagBank clients in Q3 2021, surpassing the mark of 12 million PagBank active users, being 46% of these clients composed by consumers. Products per user remained stable versus the same period last year, despite the healthy growth in number of new clients. On top right, PagBank's growth stake rate improved 31 basis points compared to previous quarter, reaching 1.93%. This is the result of the increase in monetizable TPV, as we show on the chart bottom right, increase at 52% year-over-year. Moving to slide eight, quick update regarding initiatives to improve client convenience and experience. During this quarter, we closed a partnership with big brands that are now available at our Pegabank shopping, such as Booking.com, AliExpress, and recognizing gaming companies such as Xbox, PlayStation, and Steam. Finally, PAG Invest assets under custody and deposits surpassed R$6 billion, up 88% year-over-year, driven by our increasing number of clients and new products available. In September, investors' active clients were 391,000, and we are offering more than seven investment funds in our platform. Expecting to reach 100 funds by year-end. We also have five bank CDs and two of them with credit card offerings using CD balance as a collateral. In September, we launched the Treasury Bronze trading platform and this week we launched our Home Broke trading platform for equities, combined with free financial education content to explain the basics of investments for our clients. I'd like to turn the conference over to Arthur, our CFO, who will talk about our credit portfolio and our financial results for this quarter. Arthur, please go ahead.

Thanks, Ricardo, and good evening, everyone. Following our presentation in the slide 9, September ended with a total credit portfolio reaching R$ 1.6 billion, being 57% of working capital loans, 39% of credit cards, and 4% of other credit products. The performance is improving day after day based on efficient credit models, experienced team, and several learnings from the results of past cohorts. All our credit products grew very fast in the last 12 months, mainly due to low credit origination from April to August 2020, always being carefully with asset quality. Our delinquency rates continue to be under control and trending down due to the phase-out of the effects related to the lockdowns and the new credit model's adoption in August 2020 onwards. The cohorts on the new credit model are presenting a single-digit NPL 90-days ratio. maintaining our asset quality while we expand our credit products. The total NPL 90 days are running at a low double digit. This quarter, we launched the overdraft loans offering one more product to our best merchants. It is important to have a broad portfolio to offer the right product for the client needs. Moving to slide 10, we present the costs and Expenses Analysis. Our non-GAAP total costs and expenses total 2.2 billion reais, up 66% year over year, as a reflection of volumes growth and investments to develop and launch new products and services to merchants and consumers, and expenses to expand sales channel to serve every size of business in Brazil. On cost of sales and services, there was an increase of 42% compared to Q3 2020, mainly related to higher transaction costs, reflecting strong acquiring TPV growth with more credit card mix and higher DNA due to investments in R&D, technology and POS devices. Selling expenses presented an increase of 95% year over year. driven by higher personnel expenses for the expansion of Hubs, Salesforce, and for PagBank teams and higher marketing expenses to consolidate PagBank brand awareness. The most relevant increase in expenses was on financial expenses line due to higher working capital needs to fund the accelerated growth of prepayment TPV and higher basic interest rate that grew from below 2% per year to more than 6% per year. Comparing to Q3 2020, the positive working capital needs due to lockdowns and acquiring TPV mix towards to debit with lower duration of credit transactions helped to reduce financial expenses last year. It is important to mention that for every 100 basis points of increase in the Brazilian interest rate, The net income is impacted by approximately 70 million reais and financial expenses increase 90 to 110 million, both in annual basis. Moving to slide 11, this part of a challenger environment for financial expenses due to higher basic interest rates, our team delivered once again a solid quarterly result. In the top left, Our consolidated net take rate reached 2.44%, slightly better than Q2 2021 and 9 basis points higher than Q3 2020, driven by better TPV mix with more credit transactions with a lower share of debit transactions and helped by a larger PagBank revenue. In the bottom left chart, the adjusted EBITDA achieved R$741 million on third quarter with a growth of 18% versus last quarter. Adjusted EBITDA margin remains flattish at 26.7%. Excluding the exchange and card scheme fee, our adjusted EBITDA margin was 41.4%. In the top right graphic, We share our strong cash position with a positive balance of R$ 8.7 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements. This positive position increased R$ 500 million in comparison to last quarter due to rise of accounts receivables from issuers. Finally, in the bottom right, we share our capital allocation During the third quarter of this year, we invested almost R$ 426 million, being 52% in POS acquisitions and 48% in R&D to develop new products, features, and services. As a percentage of revenues, CAPEX decreased 18 percentage points, reaching 15% versus 33% in the third quarter of 2020. Moving to the last slide of this conference call, as Dutra said in his initial remarks, the positive trends of this year led us to review our acquiring TPV growth guidance from 40% to above 45%, last conference call. As we continue to observe a very positive trend, we are increasing the bar to between 50% and 53% in 2021. We project a reduction of capital expenditures in R$ 100 million, setting a new level of R$ 1.7 billion for this year, optimizing the cash flow generation. Finally, a slightly update on DNA levels, expected to end the year between R$ 800 to R$ 900 million. After we move to the Q&A section, I would like to turn to Alexandre Maiani Our new Chief Operating Officer to say some words.