PagSeguro Digital Ltd. Class A Common Shares

Good evening, my name is Ogir and I'll be your conference operator today. Welcome to Pegasiguro Digital earnings call for the first quarter of 2025. This live presentation for today's webcast is available on Pegasiguro Digital's investor relations website at investors.pegabank.com. Please refer to the forward-looking statements and reconciliation disclosure in this presentation and in the company's earnings release appendix. Finally, be advised that all participants will be in listen-only mode. After the presentation, to ask a live question, please use the raise hand button to join the queue. Once you are announced, a request to activate your microphone will appear on your screen. Please ask all your questions at once. Alternatively, you can also write your question directly into the Q&A icon located on the lower part of your screen. Today's conference has been recorded and will be available on the company's IR website after the event is concluded. I would now like to turn the call over to Gustavo Sequin, head of IR. Please, go ahead, sir.

Hello, everyone, and welcome to the Pike Bank's earnings conference call for the quarter ended March 31st, 2025. I'm Gustavo Sequin, Pike Bank's investor relations director. Thank you for taking the time to join us today. We will begin by sharing the highlights of the quarter, followed by our live Q&A session. Tonight, I am joined by Ricardo Dutra, our Principal Executive Officer, Alexandre Maiani, our CEO, and Artur Schunk, our CFO. Now, I would like to turn it over to Dutra. Please, Dutra.

Hello, everyone, and thank you for joining our First Order 2025 Learning School. I will begin with slide four, where we present our key operational and financial highlights. I am pleased to announce another strong quarter delivering growth with profitability despite this challenging microeconomic environment. We ended the quarter with 32 million clients, growing 0.6 million clients year over year. Our financial performance this quarter was marked by a robust top line growth in the resilient bottom line, while earnings per share grew at an accelerated pace. Payments TPV, reaching a record first quarter of 129 billion reais, a 16% growth year over year. Our credit portfolio and funding are experienced rapid year over year growth, further solidifying our financial strength and competitive position. Going to financial highlights, our net revenues increased 13% year over year, reaching 4.9 billion reais. Our non-GAAP net income was 554 million reais, a 6% growth year-over-year. Our diluted EPS on a gap basis reached R$1.72, 14% growth year-over-year, which reinforces our commitment to continuously create shareholder value. In this context, following our existing buyback program with R$1.9 billion repurchase over the past 12 months, we are pleased to announce the launch of two key initiatives to further enhance shareholder value and drive more efficient capital allocation. We are canceling 23.9 million stocks held in Treasury, and for the first time, we announced the payment of cash dividend of $0.14 per common share to be paid in June 6. Going forward, at the discretion of Paxiglou Board and company and market conditions, among other factors, we expect to pay dividends corresponding to approximately 10% of net income. In conclusion, This quarter's performance highlights our ability to consistently create value and deliver solid results. We remain one of the few companies in our segment to have posted positive results every single quarter since our IPO, a track record we have upheld despite evolving industry dynamics and economic cycles. On slide six, we illustrate the consistent growth in our earnings per share. Since our IPO in 2018, we have delivered a 15% CAGR for our reported GAAP-based ZPS metric. This trajectory reflects our strong operational execution and our disciplined capital allocation strategy, including increasing buybacks over time, which showcases our confidence in the long-term value of the company. Along the way, we have achieved several key milestones that have expanded our addressable market and increased profitability. The acquisition of our banking license enabled us to broaden our product offering and deepen customer engagement through our credit offerings and digital banking platform. More recently, our strategy has focused on winning the MSNBs, attracting and retaining these profitable customers while continuing to scale our platform. The results of this shift are already visible in our improving monetization metrics and sustained EPS growth. Moving to slide seven, We highlight how we've been building the company with a long-term vision. Our fully integrated ecosystem combining payments, banking, and credit allows us to use one business to effectively leverage the other by offering a comprehensive suite of products and features to our clients. This approach has allowed us to deepen engagement, boost monetization, and capture a greater share of wallet by becoming a primary financial partner for our clients. Moving to next slide, we show that on top of our robust performance, there remain significant room for market presentation and future growth. In some banking businesses, we have less than 1% market share, so that we strongly believe we are still scratching the surface in terms of the full potential our platform can reach. As we scale our banking operations, we open up new avenues for sustainable growth. including a deeper focus on cross-selling banking products, strengthening our deposit franchises, and increasingly expand and diversify our credit portfolio. Now, I'll pass to Alex, who will deep dive into our operational performance for Q125. Thank you.

Thank you, Ricardo. Hello, everyone. In this section, we'll walk through the performance of our business units for the first quarter of 2025. On slide 10, we announced that from this quarter on, we are adopting a new classification criteria for our client segments. Merchants with a total payment volume up to 3 million per month are now classified as MSMBs, compared to the previous threshold of up to 1 million per month. Additionally, we now define merchants with TPV above 3 million as well as online merchants, e-commerce and cross-border under the large retail and online segment . This change was implemented to more accurately reflect the dynamics of our business in line with our strategy of winning on the MS&B space. Moving to slide 11. In first quarter 25, we reached 32 million clients, adding 600,000 clients in the last 12 months. We ended the quarter with 17.7 million active clients, with our client base expansion driven by a sustainable growth of 5% year-over-year in the banking-only clients. As we have seen in previous quarters, we have been focusing on activating higher value clients prioritizing monetization and profitability. On slide 12, we show that our merchant acquiring business keeps growing in all segments. TPV reached R$ 129 billion in Q125, growing 16% year-over-year, with TPV per merchant growing 20% on a yearly basis. In the fourth quarter of 2024, we initiated a strategic repricing process in response to the ongoing interest rate hike in Brazil. Now, six months into this effort, we believe that acting early was crucial in partially offsetting the impact of higher rates, while also helping to manage our product mix more effectively. In accordance with the new segmentation mentioned previously, The MSMB segment, which now includes merchants with a monthly TPV up to 3 million reais, grew 11% year over year. For comparison purpose, if we have maintained the previous classification used through 4Q24, MSMB TPV would have grown 13% over the same period in 2024. This expansion of our core segment is mainly driven by increased productivity in our hubs. Meanwhile, the large retail and online segment, which includes merchants with monthly TPV about 3 million reais, as well as e-commerce and cross-border operations, grew 30% year-over-year, excluding the online businesses. Our large retail segment grew approximately 8% year-over-year. Growth was particularly strong in cards-not-present transactions, enabling us to extend our market reach beyond traditional POS channels. Now, on slide 13, we show that our strategy to deliver a seamless experience by integrating payments, banking, and value-added service drove cashing levels to 83 billion reais in the peg bank accounts. Cashing per active client, a key metric of our client engagement, grew 23% compared to the first quarter of 24, reaching 4.8 thousand reais per client. The evolution of our engagement metrics is shown on the bottom left graph, which demonstrates the increasing usage of our app. Furthermore, we observe the significant penetration increase of due payments and peak service, investments, and insurance products across our customer base. On slide 14, we show our strong deposits performance and cost of funding reduction. Total deposits were up 11%, reaching 33.9 billion reais. This growth is particularly noteworthy given our ongoing efforts to reduce the cost of funding. It shows that we are successfully managing our customer deposits while improving the efficiency of our funding base. The ATYs for total deposits decreased by 700 base points, reaching 90% of the CDI last year as a result of our strategic efforts to lower the average cost of funding, such as adjusting remuneration, the duration, as well as diversifying our funding sources. Our deposits are primarily utilized to fund prepayments to merchants and our loan book. As of December, our loan to total funding ratio, which measures our total funding against our expanded credit portfolio, stood at 114%. On slide 15, we highlight that we have been able to expand our credit portfolio gradually in a sustainable way. This quarter, our total credit portfolio reached R$ 3.7 billion, a 34% year-over-year increase led by the origination of secured products, which represents 85% of our book loan. Since the second half of 2024, we have gradually resumed credit underwriting for unsecured products, mainly focusing on working capital loans for merchants. This has been driven by the continuing improvement in asset quality, risk assessment, and collection processes. Consequently, there has been a 16% increase in working capital loans in the last quarter. When we consider the financial operations related to prepayment to merchants facilitated by our instant settlement feature on the acquiring side, our expanded credit portfolio exceeds R$ 46 billion, a 34% increase over the past 12 months. Our NPL 90 on the bottom right of the slide demonstrates the improvements in our asset quality in the last 12 months, moving from 4.5% to 2.3% in the period, which is significantly below the market average. Now, I turn over to Arthur for the financial highlights of the first quarter of 2025. Arthur, please.

Thanks, Alexandre. Hello, everyone, and thank you for joining us today. I am pleased to present our consolidated financial results for the first quarter of 2025. Turning to slide 17, we delivered total revenue and income of R$ 4.9 billion, representing a 13% year-over-year increase. This growth was driven by sustained strength across both our payments and banking segments, as previously highlighted by Alexandre. Our consolidated gross profit margin reached 39% of total revenue, reflecting the ongoing repricing process that partially offset the impact of higher interest rates throughout the quarter. Looking at the charts on the right side, payments revenue totaled R$ 4.3 billion, supported by TPV expansion and evolution of our clients and product mix. Banking revenue reached a record of R$ 582 million, growing 60% year over year, driven primarily by higher interest income from our expanding credit portfolio and increased float from our cash position. Additionally, revenue from service fees grew, supporting our strategy to deepen client engagement, improve principality, and drive greater profitability. Finally, the gross profit margin of our banking segment reached 70%, marking its fifth consecutive quarter of growth. Moving on to the next slide. Here we present a comparison of our gross profit from Q4 24 to Q1 25. The most significant impact comes from our repricing strategy, which helped offset the negative effects of quarterly seasonality and an average interest rate hike of 31 basis points compared to the last quarter of 2024. It is important to know that we initiated repricing at the beginning of Q4 24. In the right side of the slide, I want to highlight the strong performance of our banking business, which has become an increasingly strategic pillar in our overall results. banking gross profit grew 85% year over year, with its share of total gross profit rising from 13% to 22% in the last quarter. This growth was accompanied by a margin expansion from 60% to 70% of the same period. These results reinforce our resilience, the diversification of our revenue base, and our ability to scale complementary products and services efficiently. Moving on to the next slide, we take a closer look at our costs and expenses, providing deeper insights into their evolution and impact on our financial performance. Our continued financial discipline, a key lever in balancing growth and profitability, was instrumental in delivering this quarter's results. We achieved an additional 10 basis points of operating leverage compared to the same period of last year. On the cost side, transaction costs rose 5% from Q1 24, growing at a slower pace than TPV due to the shifting products usage by our clients. Financial costs increased 42% driven by higher interest rates and TPV growth, which required larger prepayment volumes. These effects were partially offset by funding initiatives aimed at diversifying sources and reducing interest expenses. Meanwhile, total losses declined, reflecting the evolution of our fraud prevention processes. Operating expenses decreased by 3% quarter over quarter, with marketing costs remaining in line with Q4-24 and reductions in personal and other administrative expenses. This reflects our disciplined approach to cost management and the efficiency achieved. Finally, tax efficiency remains a fundamental pillar of our business strategy. We continue to advance tax optimization initiatives aimed at enhancing profitability and driving long-term value creation for our shareholders. Moving on to slide 20, as demonstrated throughout the presentation, this quarter was characterized by resilient operational and financial performance. We achieved a non-GAAP net income of R$554 million, reflecting a 6% growth compared to Q1 2024. Shareholder value creation measured by diluted GAAP earnings per share reached R$1.72 in the last quarter, reflecting a 14% year-over-year increase. On the right side of the slide, I am pleased to present the improvement of 140 basis points in our annual return on average equity, which increased it to 15% from 13.6% as reported in Q1 2024. Despite maintaining a conservative capital structure, the company continues to deliver consistent returns. On the next slide, we will take a deeper look at our capital location strategy. So, on slide 21, I would like to share the initiatives we are executing to create value for shareholders and strengthen our capital structure. we maintained consistent execution of our buyback program throughout 2025, repurchasing over 8 million shares. To date, we have executed more than 75% of the current program, approved in August 2024. In addition to that, I would like to highlight two main initiatives that we are announcing this quarter, aligned to our commitment with sustainable shareholder value. First, we are immediately canceling approximately 24 million treasury shares, reflecting our confidence in the long-term value and performance of our business. Finally, as Dutra mentioned earlier, we have announced the first cash dividend in the company's history, 14 cents of dollars per common share, to be paid on June 6th. Going forward, we expect, at the discretion of PAG's board of directors, to pay dividends correspondingly to approximately 10% of net income, subject, among other factors, to market and company performance and financial conditions. This demonstrates the company's ability to balance growth and profitability and our commitment to strengthening the capital structure and creating value for shareholders. Our Basel index consistently declined from December 2023 to Q1 2025, reflecting an improvement of approximately five percentage points in capital structure. Moving on to the next slide. Let us take a quick look at this year's guidance. Q1 results are well aligned to the company's outlook for the year, confirming that we have started on the right path to delivering our expected performance. Diluted earnings per share, based on the same share count as of December 2024, excluding the effects of the new shares repurchase in 2025 and the new shares to be distributed under the 2025 long-term incentive plan, grew 15% year over year, demonstrating the resilience of our performance and the disciplined execution of our strategy. We expect this metric to continue improving throughout the year as we balance growth and profitability while exploring initiatives to strengthen our capital structure. Regarding CAPEX, current investment levels align with expectations for this point in the year. Now, I will turn it back to Alexandre for the closing remarks.

Thank you, Arthur. Before we finish, let's turn to the next slide for closing remarks. Overall, this quarter results captured the discipline execution of our strategy focused on diversifying our revenue sources and preserve profitability in a challenging macro environment. I would like to highlight once again the increasing contribution from our banking business, which now represents 22% of our total gross profit and how the company, through resilient performance, starts the year on track to deliver the expected guidance. In the coming quarters, we'll focus on mitigating macroeconomic uncertainty, executing our repricing strategy, and maintaining financial discipline. In addition to that, we should keep working on ways to improve our capital structure, executing the initiatives that were recently announced. Finally, I should also emphasize that our long-term focus is to become the primary interface for our clients' financial lives, exploring the significant opportunities to drive future growth highlighted in this presentation. Now, let me give the word back to the operator and we'll start the Q&A session. Thank you.

Thank you for the presentation. We will now begin the Q&A session for investors and analysts. If you wish to ask a question, please press the raise hand button. If your question has already been answered, you can leave the queue by clicking on the same button. There's also the possibility to ask questions throughout the Q&A icon at the bottom of your screen. You may select the icon and type your questions with your name and company. Written questions that are not addressed during the earnings call will be returned by the investor relations team. Wait while we'll pull for questions. Our first question comes from Arnaud Shirazi from Citi. Mr. Shirazi, your microphone is open.

Hi, guys. Thank you for the opportunity of making question. My question is related to TPV. We saw the growth was slightly above 16% year over year this quarter, decelerating for 28% from the 4Q. What explains this? Thank you.

I don't know. This is Ricardo Dutra speaking. Thank you for the question. uh just i'll take advantage of our question just to remember that we are we are not a payment only company anymore right so 22 percent of our gross profit comes from the banking operations we already have a more than three billion reais in credit portfolio control npls uh close to 18 million active clients two-thirds of the clients are from the bank so just remember that company is much more diversified as of today than used to be in the past, and it is diversifying quarter after quarter. But going back to your question about TPV, you're right. We grew 16%. It's decelerated a little bit from the Q4. Important to say we had a kind of, I'm not saying easy comp, but the volumes in Q1-24 were a little bit higher than what it had in the past. So it's a difficult comp compared to Q1-24. And remember we've been saying that our focus is in winning the MSNBs and online. So if you look at slide 12, you're going to see that in large retails, we grew 8%. In e-commerce and cross-border, we grew more than 30%, and MSNB, we grew 11%. So it is aligned with the strategy that we've been saying to the market in the last, I would say, two years. Our plan is to win on MSNBs and win e-commerce. And part of the explanation is because we had this repricing. As interest rates in Brazil goes up, the tool to mitigate this increase in financial expenses is to make the repricing. And the larger retail are more sensitive to this type of movement, which is fine, which is fine, because our focus is in the MSNB. So we are always trying to balance growth with profitability. So we deliver a very decent growth in Q1, very decent profitability, but in large retails, We had this kind of deceleration, which is fine because these clients, they have lower margins usually. But part of the explanation is because it's natural that we've made the reprice and then we had a decrease in growth in the larger clients. But remember, we had, if you look at the financial expenses, we had a 42% year-over-year growth. So we had to make this price to keep the profitability of the company. Some of the clients are more sensitive and they have, I would say, moving part of the volumes to someone, another company, but that's the explanation.

Okay, got it. Super clear. And if I may, I have another question here. It's regarding the announcement of 10% dividend distribution on future net income for the following years. Why only 10% and not more, since the company has a lot of capital on the balance sheet?

The dividends that we are announcing, it's initiatives that are combined with the share buybacks. So we'll keep working in both initiatives. As you could see, we've been much more aggressive in buybacks in the past quarters. We bought more than 1.1 billion reais in shares in the last 12 months. So the idea is to combine dividends with buybacks. We keep doing the share buybacks and we plan to keep doing so. And the 10% is just to have a sense of what we have in mind at this point. It doesn't mean that we could not change, but remember, this is a combined initiative with buybacks.

Got it. Super clear.

Thank you.

Our next question comes from Beatriz Abreu from Goldman Sachs. Hello, Mrs. Abreu. Your microphone is open.

Hi, everyone. Good evening and thanks for the call and taking my question. My question is on deposits, right? So we saw some contraction there in the quarter. The is a decrease on So the decrease on checking accounts, you know, somewhat understandable given the higher cost of opportunity due to the higher rate environment, right? But CDs also fell in the quarter. So just wanted to understand a bit what drove the decrease there in deposits and if the 90% of CDI is a floor of what you can pay on deposits without seeing any significant outflows. Thank you.

Beatriz, it's Arthur speaking. Thank you for your question. So when we take a look on the deposits, we are managing all the actually we are managing all the funding lines. Sometimes we have more deposits. Sometimes we have other deposits growing or even interbank deposits. When we compare quarter over quarter, we have part of the explanation is related to seasonality. When we put more focus on analyzing deeply checking accounts and cds sometimes we have amount moving from checking accounts to cds in terms of cds we are putting together in-house distribution third-party distribution and the most important point to me is put attention on the the average total cost that is stable in terms of comparison to other and past quarters. Actually, we are doing a great job on working to reduce the cost of funding for the company. And the second point is the 85% of the distribution of CDs in-house versus 74% of the distribution in Q1-24. So we are doing a great job on reducing costs, and also we are distributing more deposits to our clients that will engage them more and allow us to cross-sell more products for them.

Great. And do you think you can lower even more the API paid on total deposits or is 90% sort of a floor that you're seeing?

Well, we are working to do that. So there are initiatives that we are thinking about to reduce the cost, but also we need to balance the total amount that we have versus the cost that we are or the percentage that we are paying for our clients. So we can reduce, but losing amount is not good for the company because we need to move to expensive or other lines that are more expensive than deposits. So we are working hard to focus and distribute those products to our clients to engage them in the ecosystem and also working to reduce the cost for the company too.

Super clear. Thank you so much.

Thank you.

Our next question comes from William Borranyard from Itaú BBA. Please, Mr. Borranyard, your microphone's open.

Thank you. Thank you. Good night, everyone. My question goes on the gross margin. So looking at the slide 18 you provided, it seems like repricing is more than offsetting funding cost growth, right? So my question goes... If it is fair to believe that from now on, as the average interest rate will grow lower than it grew sequentially in the first quarter. So is it fair to believe that from now on gross margins should improve sequentially? Or there could be any effects on lower repricing efforts from now on, or even TPV mix changes that could impact eventual margin gains from in the second quarter onwards.

William, it's Arthur speaking again. Thank you for your question. So when we have this comparison, this breach on slide 18, as you mentioned, we are including repricing and mix of products together in the same bucket. The majority of the positive result comes from the repricing that we had, but not 100%. I could say that we didn't compensate 100% of the increase from the SILIC rate. And on top of that, during the first quarter, we have two increases from the central bank on the basic interest rate for the country. And the fully impact on the cost will be in the second quarter and also in the third quarter because we had an increase last week. So What we can say is we are working hard to reprice our clients to reduce the cost of funding for the company. On top of that, taking care on the costs, transactional costs, total losses, and even compensated through expenses to continue to growing our results going forward. So I see that we can have more impacts on gross profit in Q2 and Q3. But in the end of the day, we have the guidance. that shows a growth from 7% to 11% versus last year. And we are confident that this guidance will be achieved until the end of the year.

Thank you, Arthur. But just checking, so how would you compare the magnitude of repricing effect in your gross margins, maybe in the second quarter? How would you compare the expectations with what happened in the first quarter?

Well, we usually say that we are repricing, in each round, we are repricing 60% to 70% of the clients. That will be a little bit less in terms of amount. so we are not sharing exactly the amount that we are doing and as i as we communicated before our strategy of repricing is uh aligned to the central bank increase so after the increase from the central bank we have some days uh to take all the repricing 100 implemented so it's difficult to set exactly the magnitude of of the impact going forward But we are doing all the efforts that we can do to reprice our clients without to lose volumes, without to lose clients, and also keeping the margins up as much as possible.

Okay, very clear. Thank you.

Thank you. Our next question comes from Antonio from Bank of America. Hey, good evening, team.

Thank you for your time. I have two questions. I would like to continue on Arnon's questions. So first, on TPG, as for the deceleration, I'd like to check if you also had some impacts of the repricing strategy on MSNBs, as I understood that you had some on large accounts. And also that you have tough comps here as first Q24 was stronger than usual. But we do see volumes coming down from growth, coming down from 20 to 11% in a year. So I would just like to be a bit diver here. If you could share if you have an impact from churn related to repricing or any other effects that you could share. That's on volumes. On your capital distribution, I was just curious if you could share a little bit more on why cash dividends and not more buybacks. I understand that you mentioned that this will be a strategy combining both, but why? If you could share a little bit more, it would be great. Thank you for your time.

Hi, Antonio. Regarding the first one, the repricing and how it could have affected the MSNBs. When you look at the MSNBs segment, it goes from one real to three million reals per month. So there could be some impact in these clients. As we said before, in the large retail, they are more sensitive and the impact on churns are more immediate. In MSNBs, it could take a while. We keep following that to control the churn rates. The larger the merchant, higher the probability that he could have some churn. And when I say churn, it doesn't mean that he's going to stop working with us, but he could move some of the volumes to another company. So, We keep monitoring that. I would say nothing is popping up in our screens here saying that we have a crisis or that the churn is spiking up. But, yes, there could be some churn in the staff of clients. And remember that also in the 11%, there could be some mortality of the clients throughout this year. So when you look at the MSNBs that go from 1 real to 3 real, you have – I would say, different profiles of clients. But yes, it's natural that when you increase prices, you have some friction with the clients. And the whole market is increasing prices. Some companies have different strategies. They make one increase based on the future curve. As Arthur mentioned before, we wait to see what's going to be the interest rate, and then we decide to reprice. We do not reprice all the clients at the same time. We have different clusters for different MCCs, different geographies in Brazil. So, I mean, answer your questions. There could be some impact in the MSNBs and repricing, yes, but it's not something that is popping up in our screens here saying that we have a problem. So, but yes, there could be. Regarding dividends, yeah, we could keep going with the share buybacks and only buyback shares, but we decided to combine part of the discussions that we had in the past quarters dividends appeared as an option. And then we decided to make this 250 million, around this 250 million. And again, it's going to be combined. Both initiatives are going to be combined to deliver or to increase the shareholder value of the company. Or to some extent, we're going to increase our return on equity because the equity will go down. So it's the following process. initiatives we've been doing in the past year to increase our return on action, increase the shareholder value.

okay okay thank you if i may follow up on the first one um you mentioned that uh on msnbs you could have some impact related to mortality and what do you mean by that is the usual mortality of the long tail uh pressured by by the hybrid environment or something uh rather than the usual impacts and also on the large accounts that you mentioned that you had some deceleration related to repricing. Among those segments within those clients, could you share which segments it was? Like large merchants, online, what was the part here? That's it for me. Thank you very much.

Okay, Antonio. Just reinforce that we keep looking at many metrics here, but we think that gross profit reflects the best metric for the company because it includes many, many variables. It includes the TPV times take rate, it goes revenues, minus interchange costs, minus card scheme fees, minus losses, minus financial expenses that you know is very important for our business here. But going back to our question TPV, the large retail grew 8% over a year. So that's something that we keep working with these clients, but it's not the main focus. The main focus is the winning on MSNBs. So it grew 8%. The e-commerce and cross-border grew more than 30%. And the MSNBs grew 11%. When you look at the MSNBs, part of the mortality It is related to usually smaller merchants. Many merchants that you have, some of them, you've been seeing the unemployment in Brazil. Some of the merchants they could have employed, they have lower volumes. But I would say to you that the mortality is related to the mortality of the companies in Brazil overall. And with these interest rates, it tends to have more difficulties for some types of businesses. a mix of everything there's no silver bullets here it's a mix of many many variables it's the mortality it's the little bit of the pricing and and so on so i don't have the specific number to give you here but usually large retails are more sensitive to increases so that's why it grew uh eight percent year over year uh versus the 16 of the company on average that's perfect that's perfect thank you

Our next question comes from James Friedman from Susquehanna. Mr. Friedman, the microphone is open.

Hi. Thank you for taking my question, Jamie Friedman. My questions are also about this, well, slide 18 and 19. These are good slides. And I'll just ask my two up front. So, Arthur, in terms of the... The transaction costs, this is slide 19. So the transaction costs actually declined as a percentage. They grew at 5% less than the total volume. You said in your prepared remarks that was partly due to mix. I was wondering if you could elaborate on that. That's my first one. And then in terms of, I know you get a lot on this on the repricing on slide 18. How durable do you think the repricing is? What are you expecting from, if anything, the competition on the repricing front? And what's embedded in your outlook on repricing for the remainder of the year? Thank you so much.

Hi, Jamie. I will start with the last one, and then Artur can answer the first one. Interest rate of the economy in Brazil used to be 10% and today it's close to 15%, 14.75% to be more specific here. So it's an increase that nobody, I'd say at the beginning of Q1 24, nobody expected that. The expectation was that the rates should go down by the end of 24. as I could see, we have this growth in interest rate, not only in Brazil, but in many countries of the world. So that's the raw material for part of our company and for competitors as well. So the increase for the companies that are looking for profitability. And we understand that everyone in our sector today is focused on profitability, not in market share or other metric. It's a matter of time. So everyone will increase the prices because that's the raw material for everyone. We will keep working with our clients and make this price increase in a very smart way. I mean, with the lowest impacting in churn and lowest impacting in the growth of the company try to balance these two variables increase prices and keep growing and i would say looking forward i would stick with the guidance we are uh reaching the guidance in this first quarter 25 we expect to to reach the guidance for the whole year the gross profit earnings per share and capital expenditure so that's the i would say the best answer i could give to you at this point Regarding the first one, I'll leave Arthur to answer.

I don't know if it was clear, Jamie, but if you need more explanation, I can help you.

No, that was great. I was just, the second question was about the mix in transaction costs. So, you know, what is it? Is that like, what are you referring to? Is that the PIX mix or is that the debit credit or? If you could elaborate, that was 1.3%, only grew 5%. Slide 19.

Yeah. Slide 19. Well, transaction cost that we have here is related to all the costs that we have for the transactions in terms of banking and payment. Includes fee, schemes fees, interchange fees from cards. and other small items that also we include here that is related to banking and payments. But the majority of this transaction cost is related to interchange scheme fees.

Perfect. Thank you so much. I'll drop back in again. Thank you.

Our next question comes from Renato Meloni from Autonomous Research. Please, Mr. Meloni, your microphone's open.

Hi, everyone. Thanks here for taking the questions. So I just wanted to go back to your deposit and credit growth and how you've been balancing the two. If you were looking at the loans to funding ratio that you put on your slides, that has been hovering about 110% to 115%. So I wonder if you have a target there, you aim to stay here. And then going forward, do you see the deposit base at the current cost as a limitation for credit growth? And then if you have to face the decision between growing credit more and sustaining lower cost of funding, which one would you do? Thank you.

Hi, Renato. Well, the first one, we don't have a target for this loan-to-funding chart that we see in XI14. We're just giving this information to the market, but there is no specific target. And I would say to you that we could have more deposits if we wanted to. As you could see in the same slide in the bottom left, we moved it from 74% from 3% off platforms to our own platform. So today's 85% and Q125, which is great news because we are just having the clients using our platform. We could have more enough platform if you wanted to. And I would say to you that our credit portfolio today of 3.7 billion, if we decide to grow this credit portfolio, funding will not be a problem. And with the spreads in Brazil, the cost of funding that we might need to have in an additional funding that you might need to access to have growth in credit portfolio will not be a limitation, will not be a constraint, because maybe a few bips higher if we decide to grow aggressively. And the spreads of the loans support that with no constraints. So there will be no decision between one or the other, as you asked it. So if we decide to keep growing the credit portfolio, funding will not be a constraint, I would say to you.

And then the marginal cost is similar, regardless of how much you're accelerating.

Yeah, exactly. Because when you think that we have 40 billion in total funding, our credit portfolio is 3.7 billion. So even if we grow, I don't know, let's say 30%, one quarter, we're saying to grow 1 billion. So it's 1 billion growth compared to 40 billion that we already have. So it would be a small amount compared to the volume that we already have. So it's not a constraint.

And Renato, on top of that, and that's the reason we are providing total funding that slide not only the deposits that we have because we have been working uh in the last two years to diversify uh funding source lines players products so we have a lot of space to grow credit portfolio as we want with a similar cost that we are presenting the slide 14. perfect thank you thank you

Our next question comes from Maria Gages from Safra. Please, Mrs. Gages, your microphone's open.

Hi, guys. Good evening. Thank you for taking our question. Most of them have been answered, but maybe two quick ones. First, a follow-up on the credit portfolio. So, just wanted to get a quick update on your guys' appetite towards credit lines. We saw a slight uptick in their working capital loans. I know it's not representative, but just wanted to get a quick review on your guys, if anything in terms of appetite has changed. And also, you provided the basal ratio and just wondering if you guys are targeting an optimal level in terms of basal ratio as well. Thank you.

Maria, thank you for the question. The credit portfolio, You're right. We've been growing faster in the working capital in the last quarter. We plan to keep doing so. We see this, I would say, opportunity to increase this exposure to our best merchants in terms of credit profile. There is no change in the guidance or what you had in mind. This is part of the plan. We expect to grow working capital faster than other lines for this year. We'll keep growing the other lines, but working capital will grow faster.

And the second question is about the Basel index. So I can help on that one. We don't have exactly a target of this Basel index, but it's important to mention that since December 2023, we reduced it from 33% to 27%. And all the efforts that we have here is to optimize in a solid way our capital structure. So we are taking decisions to dividends, decisions to buy back, and also investing in the company through our CapEx. But we don't have exactly a target to pursue. And we know that we can do more and more as time goes by, but in a solid way for the company.

Thank you.

Thank you. Next question comes from Eric Ito from Bradesco BBI. Mr. Ito, your microphone is open.

Hi, guys. Good evening. Thanks for the call. I think my question, I have just a quick follow-up on your banking. I think throughout the presentation, you guys were very clear on saying how important the banking business is. And it's already representing 22% of the total gross profit compared to 13% in the first quarter. So I just want you to understand if you guys have any target here or any idea of how much you think it could represent maybe by the end of this year on your total gross profit expectation for the year and maybe 2026, how much you think this line can grow. And then a second follow-up here is still on credit, but maybe... If you guys could give more color on your expectations for growth for the unsecured credit line, the working capital, how do you see this growth under this scenario? Just some numbers on the previous question from Maria. Thank you.

Hi, Eric. Thank you for the question. We are not giving disclosure about how important could be the gross profit of the banking in the following quarters. I would say to you that you know that once you create this credit portfolio, you start to generate operational leverage because the system is the same. It doesn't matter if you have 10 million reais in credit portfolio or 10 billion reais. Usually the technological system, the back office is the same. So we do expect to have operational leverage. We've been growing the credit portfolio in a very sustainable way, I would say. NPLs are under control and the credit portfolio keeps growing. We've been growing working capital faster than other lines, and we think that's going to be what's going to happen in the following quarter as well. We're not giving a specific number here. I just would say to you that we expect that credit portfolio keeps growing, and then we have operational leverage because of the items that I just mentioned to you.

In terms of, just to complement here, in terms of the unsecure growth in credit portfolio and the products that we are developing, we resumed our overdraft account last year. Now it's a positive margin. It's performing well. And we are working to scale that part of our business. And regarding to working capital, we resumed the operation this year. And now we are working to measure track the results and working hard to also scale that business. We invested a lot in the past years in terms of developing a better process, hiring a seasonal team, investing to develop credit models, collection process, behavior model. So we have been investing a lot to develop this piece of our business because we know that it's very important to the future. That is the beautiful piece of our business. We have the payments very well developed, and now we also have in the other side the banking to navigate in macro scenarios that are not doing great in a positive way for our company.

And just to complement Eric and take advantage for question, in slide eight, we gave some numbers about our penetration. And you could see that we are, to be honest here, scratching the surface in terms of banking businesses and credit portfolio that it could reach in our platform. So we're not giving the guidance, but we do expect to grow in these banking businesses faster. As you could see, our gross profit grew 86% over the year. So it's, I'd say, good possibilities here and good opportunities in the banking sector.

Very helpful. Thank you, guys.

Thank you very much. Thank you.

Thank you. That's all the questions that we have for today. I will pass the line back to PagSeguro Digital's team for their concluding remarks. Please, go ahead.

Hi, everyone. Thank you very much for investing the time to listen to us and thank you very much for the questions. Thank you.

This does conclude PagSeguro Digital's conference call. We thank you for your participation and wish you a very good evening.