Q2 2021 StoneCo Ltd Earnings Call

Second quarter 2021 earnings conference call.

By now everyone should have access to our earnings release.

The company also posted a presentation to go along with the call all material can be found at www Dot stone dot com in the investor.

Investor Relations.

<unk> section.

Throughout this conference the company will be presenting non I FRS financial information, including adjusted net income free cash flow. These are important financial measures for the company, but are not financial measures as defined by ifr at reconciliations of the company's non op I FRS.

Financial information to the I S. R. S financial information appear in today's press release.

Finally, before we began our formal remarks I would like to remind everyone that today's discussion might include forward looking statements.

These forward looking statements are not guarantees of future performance and therefore, you should not put undue.

Reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward looking statements disclosure in the company's earnings cash placed in.

In addition, many of the risks regarding the business are disclosed in the Companys.

<unk> form 20-F filed with the Securities and Exchange Commission, which is available at Www Dot SEC Dot Gov.

Please note. This event is being recorded I.

I would now like to turn the conference over to your host Rafael Martins VP of Finance and Investor Relations Officer at stone.

Please go ahead.

Thank you operator, and good evening everyone.

Joining us here today, we have geography, all RSV, you Lia Matos, our CFO and Chief strategy Officer, <unk> <unk> our CFO.

Today, we will present, our second quarter 2021, operational and financial results as well.

With some recent trends that we are observing.

I'll pass it over to John So he can share the main highlights of our performance geography.

Thank you Hoffa and good evening everyone. Thank.

Thank you for participating in our second quarter earnings call.

The second quarter of 2021.

One was market by an acceleration of our core SMB business and evolution in our strategic roadmap balanced by a challenging short term scenario in our credit product.

Our SMB fundamentals are very strong with accelerating <unk> growth and record net addition of clients.

The high growth in our SMB.

<unk> segment led us to be the fastest growing player in the payments industry this quarter.

Largely driven by over 1 million SMB clients in over 100% SMB CTV growth.

These accelerating growth was achieved with healthy unit economics with TPG per client and revenue per client excluding credit.

Both increasing quarter over quarter.

We have been looking more at revenue per client in take rates. Because we believe this is a metric that better demonstrates our ability to monetize the relationship with our clients.

Nevertheless, take rate in Smb's ex credit was stable quarter over quarter at 179% compared.

Compared to one 8% in the first quarter 'twenty one.

Our cone product has moved from being an experiment and optionality to be clearly approving and high growth solution that added over 140000, new clients, 83% more than the previous quarter and over 60% of net addition of.

Clients of the leading player in the micro merchant space.

Our pork army SMB product, which enables clients to accept payments online is proving the strength of the online opportunity in Brazil, with 93% year over year TPG growth in second quarter of 'twenty, one and a 63% two year CAGR while.

At present take rate above 3%.

Also the engagement of our SMB clients with our financial platform showed a significant improvement in the quarter with prepaid card PPV banking money in and money out volumes and total banking accounts balance all grow between 4% and five five times.

Besides the number of stores in decline certainly in our digital accounts increased 45% quarter over quarter to 273000 clients.

The traction we are seeing in our banking transactional volumes together with the strong growth in number of active accounts gives us confidence to make sizable investments in.

Our digital account infrastructure as we believe this will be key to improve engagement and the level of satisfaction of our clients.

Our total revenue excluding credit grew by 68% year over year and the acceleration of our SMB business was the main driver behind such growth.

Encourage.

<unk> by this growth we have continued to invest in our business to drive further growth in aerospace <unk> technology distribution and customer service operations.

Our consolidated results were significantly impacted by short term challenges in credit products with higher level of Npl's and decrease the expectation of.

Recovery of nonperforming clients than we previously expected.

Although we recognize that our underwriting risk capability and collection process do you have to evolve given the early stage of our credit solution.

We are facing an unexpected deterioration of credit collaterals, given the problems associated with the registry of receivables systems.

For further details about these short term challenges you can refer to our recent release teaching on August 25.

As a result of a more uncertain scenario regarding the enforcement of guarantees we decided to take a cautious approach and stopped disbursement yor team, we built our product given the new environment and.

So the registry of receivables evolution.

We have also increased coverage for potential losses and as a result, our credit project contributed negatively to our reported revenues by 397 million in the quarter.

Despite the short term challenges I want to highlight that our opportunities regarding credit are huge.

We followed the short term we will continue to serve their working capital needs of our clients through prepayments, which is running smoothly, while we focus on a turnaround of our credit operation as Leah will double click shortly.

And softer our business continues to show great organic traction.

As the deal with links closed on July one.

We started managing the company, we reinforced our belief about how valuable the asset is despite the investments needed to enhance the business in the future.

Links is a scarce asset built over decades in which clients are sticky and switching costs are high.

The company has an unparalleled level of data for retailers.

And very Glenn wrote weight for each one of the verticals, which will enable a more assertive and differentiated offering of financial products in the future.

We are pleased to welcome aboard the <unk>. This quarter that has an incredible knowledge about retail and we are excited to work together on this journey onwards.

As a reminder.

<unk> links will start being consolidated into our financial results in the third quarter 'twenty one.

Before I pass it over to Leah I would like to close with some thoughts regarding how the quarter has helped us to reinforce our long term vision.

We recognize that we made mistakes in our execution and credit, especially not foreseeing.

<unk> the functioning of the registry system could harm our business.

However, this situation has also brought an impressive amount of learnings that we will use as fuel to boost the construction of what we envision as being a much better credit solution aimed at serving good merchants better.

We are building our capabilities for the.

<unk> hold them and therefore, we will continue to expand and enhancing our cornerstone operation opening new hubs and improving our execution.

We will make significant investments behind our financial platform, which is a huge opportunity and keep working hard to provide more financial solutions and workflow tools to our clients.

Long term, we expect to further advanced in our partnership with <unk> with the ambition of creating more and better by an experienced between inter consumers' in store sellers less.

Lastly, and more importantly, we keep our devotion to make our clients happy and to the evolution of our team.

We believe that incredible learnings from this quarter, we will.

To a new phase of our business and we are even more convinced of the opportunities ahead.

When we look backwards it is incredible to see the evolution of our team and our business and it makes us confident and eager for the years ahead.

We are in the early stages of our journey to become the partner of choice of Smbs in Brazil, and we will.

Take us to work hard to make sure. They can rely on us for the most important financial and technology needs.

With that said I will pass it over to Leah.

Leah.

Thank you Thiago and thank you everyone for joining us today.

Want to start by talking about the evolution of our core SMB business.

Continue which includes the strong product for brick and mortar F&B, our pogany product that enables SMB clients to sell online and our tone product focused on micro merchants.

As shown on page four milestone in tank Army had their volumes growing almost twofold, reaching close to 38 billion <unk> and TPG ton volumes.

The quarter jumped to $6.0 billion Reais.

And three fold when compared to the previous quarter, and 27 times higher than the previous year.

This solid growth in the SMB segment led our company to post the highest ticket growth in the industry. This quarter since we had a weaker comp in the second quarter of 'twenty because of.

Williams announced we're also showing our SMB two year, CAGR TPG growth, which accelerated from 42% in the first quarter of 'twenty, 1% to 48% in the second quarter of 'twenty, one and 58% in July.

Moving to page five we highlight that we have not only grown our SMB client base fast.

Locked he also did so with quality.

We have added 188000, new active clients in the quarter with net adds in our stone and for garden products, reaching 47000, and our micro merchant solution tongue, adding 140000.

The balance of net adds between stone and Tom.

The total of our decision to maximize unit economics of clients based on their profile and size, while offering solutions that are best suited for each client segment as we move the lower typically clients demand from stone to Tom product well the hub operation targeted larger smbs.

Thiago said on top of.

As a result of historical record. Net addition of clients. We have also seen increasing average CPD per client in all products within our SMB segment.

The average TPG of Smbs ex micro has grown 29% year over year, and 8% quarter over quarter, whereas average CPG or micro merchant.

Having a base has grown 126% year over year and 60% quarter over quarter.

Moving to page six we have seen continued penetration and engagement with our financial solutions, especially banking transactional services.

Number of active banking clients has increased over five times.

Client prior to last year, and 43% compared to last quarter, reaching 340000 clients with the number of SMB clients in stone that are settling transactions in stone accounts, increasing to 273000 with that the percentage of phone clients using at least one financial solution.

And comes from 20% last year to 48% in the second quarter of 'twenty one.

Banking money in and money out volumes in Smbs have surged increase.

Increasing four four times to $13.0 billion highs and five five times to $20.0 billion highs respectively. While total.

Increased eight car to TV grew 4.4 times to 294 million highs in total banking accounts balance grew three eight times to 862 million highs.

Now moving on to slide seven I want to talk about the short term challenges, we're facing with our credit product.

As.

It'll pay that in the teaching released last week. The registry of receivables system that was implemented in early June is not yet fully functioning and since then we better understood how relevant the problem of collateral leakage is.

As a result of this we see more uncertainty in the short term and our ability to enforce guarantees.

We have of nonperforming contracts.

This scenario has led us to take a cautious approach and stopped disbursements already in June as you can see in the chart.

In July the disbursements were nearly zero with only a few exceptions to fester registry system.

We also made an effort to adapt our credit metrics.

Pes are common market standards as we are presenting here.

On the top right of the page we show that our outstanding balance in this new methodology remained flat due to the combination of lower disbursements and loans repayments from clients.

Even though we have the perspective of lower Npls and improving.

Tomorrow recovery rates after the beginning of the new regulatory framework before the transition we already have provisions for over 100% of the outstanding balance of clients that we're not paying us for 60 days or more.

However, because of a potential deterioration in the quality of guarantees given this challenge.

Improving faced with the registry, we decided to constitute an even higher reserve to cover not only for the portfolio in which we see no payments for 60 days or more but all clients that are not being able to reduce principal for 60 days or more even though they're still paying interest.

So looking at the person.

As you know we have an outstanding balance of roughly 2 billion highs.

For which we have constituted bad debt reserves of 781 million house.

These reserves represents a coverage of 209% for clients with more than 60 days without payments and 112% for clients not amortizing.

In principle for 60 days or more.

The overall scenario in credit has led us to make an adjustment in the fair value of our portfolio, which negatively impacted our revenue by 397 million highs this quarter.

Despite the worse than expected performance, we have received over 100%.

Folgers amounts from the fourth quarter of 19, and first half of 'twenty cohorts as shown in the presentation.

From now on we will treat this legacy portfolios separately from new disbursements. So we can properly track the performance of each of them.

Moving to slide eight as Jaguar already mentioned.

Just wanted to a quick recap of our vision comments about recent learnings and what we're doing differently in order to have a more robust credit product as we previously indicated our vision for what they call internally a stone capital is to build an asset like model in which funding and underwriting risk for credit stays with multiple partners.

And while we're proud of test to be easy to sign up to completely embedded in our core financial platform and SMB operation rates must be attracted and simple to understand and reconcile repayments should be aligned with our clients' cash flow and for better clients, we should present better conditions.

Although we recognize that.

To work around the risk associated with our credit product.

Any of the features mentioned above we already built and we understand that the opportunity to work for working capital solutions to Smbs is huge.

The new receivables registry system will be transformational for Brazil, and when it is fully operational it will.

We had a basis for a much bigger market for collateralized credits.

In this process, we believe that merchants data will be key in our software business gives us an edge for the future.

Even though our credit solution was developed during a period with significant negative external factors such as the Lockdowns brought by.

Create authentic and the short term problems with the transition to the new regulatory framework. We also had many learnings in this process.

First we developed a product with the assumption of a functioning register system, which has yet to occur.

Second our previous assumption regarding recovery of nonperforming contracts was higher.

By the time served in the second quarter of 'twenty, one influenced by how relevant the problem of collateral leakage is.

Finally, we also made in 2019 the decision to use a fair value methodology when accounting for credit results.

Which although has an idea for a standard brings a lot of volatility and creates more manner.

Higher than them collect city.

We are working very hard to address all these points and have already taken some important steps we brought in 2021 a more experienced team to improve our credit scoring model risk management and funding capabilities.

We're also enhancing policies and processes to improve underwriting risk.

<unk> for a broader set of collaterals access guarantees that were contractually given to us and enhanced oil recovery recovery process and renegotiation capabilities.

In the third quarter of 21, new credit contracts will be accounted for on an accrual basis exploring new partnerships to enable the asset like model.

To inflation.

Now moving on to page nine we highlight the performance and strategic roadmap of our software business.

We're happy with the advancements we've made in the quarter and really excited for what lies ahead not only because our solutions continued to grow at a strong pace.

But especially due to the conclusion of the links acquisition.

Model, which will be consolidated into our results from the third quarter 'twenty one onwards.

Pro forma software revenue increased three 4% to $66.0 million in the quarter, which organically represents a 52, 5% growth.

With links pro forma revenue would have grown 31%.

105 million high reaching over $3.0 billion has annualized software revenue.

The number of subscribed clients in our software portfolio in the second quarter 'twenty, one little fourfold to 143000, while links reached 72000 and software clients a 13% growth.

The 300 page 10, we talk about our current focus on priorities and links as Thiago mentioned as the deal closed on July one and we started managing the company, we reinforced our beliefs about how valuable the asset is.

First a profound knowledge of how retail like for it to Brazil.

And products that.

Integrations can retail workflows, giving stickiness and high switching cost to the business as well as very low churn ratios.

Second the unparallel level data from retailers in each vertical will give us an edge in the future in terms of more differentiated financial offerings.

These strengths have links.

Have they made the company increased net revenue by 13% year on year in the second quarter. Despite the noise related to the delay in the approval of the acquisition that took almost one year to occur.

Today, we have five main priorities regarding inc's.

First to migrate Lake States, a strong platform and.

Links it offers to further penetrate financial products to linksys client base.

Second invest in technology capabilities to enhance the existing platform aiming to improve client satisfaction and achieve scale in the SMB market.

Third.

To build infrastructure and tools to enable.

And creates to have a multichannel storefront selling their products seamlessly across multiple channels online and offline.

Fourth to build a data management architecture that enables us to create new financial and technology products.

And lastly, capture synergies and cost efficiencies.

Merchant on page 11, we give a quick update on our key account business.

We saw two different growth dynamics within this client segment in the second quarter.

First we saw a growth in sub acquire volumes, which present more volatility and lower unit economics.

On the other hand, our platform clients.

So, whom we can offer value added services that result in better unit economics grew its volumes by 62% in the quarter.

This platform clients encompass a wide range of business models, including marketplaces E Commerce platforms software companies and omni channel retailers and are the strategic focus in our.

<unk> business.

It is important to note that although these sorts of acquired because of their incremental contributions. These clients are less strategic.

As an example, our top two sub requires only represent approximately 3% of our consolidated revenue net of funding costs.

Our kids expect this number to decrease in the future.

On page 12, we bring an update on our strategic investment and partnership with them well.

We're very excited to work closely with interesting to advance on four main value creation drivers, which were mentioned in our first quarter 'twenty one earnings call.

First we have.

And we only focus is to integrate linksys platform to enter.

Two into shop, enabling links client's inventory to be sold through winter shop digital channel, enabling an omnichannel purchase journey to enter consumers.

Chop to serve not account clients, leveraging stone payments and risk management platforms helped.

Have things Digitize Stone Enlink School service claims through winter shop.

Second we see an opportunity to create a data architecture that will enrich both consumer and seller ecosystem.

<unk> targeted offerings on incentives helped drive more buying experiences between inter consumers and stone cold.

Helped pillars.

Third we are jointly working to offer credit and working capital solutions to stone cold and into our client base as well as exploring cross selling opportunities to strengthen both ecosystem.

Lastly, we have finalized initial funding agreements and are further exploring opportunities.

<unk> committees to leverage interests retail distribution for stone funding capabilities.

With that I will pass it over to have file who will discuss our financial results in more detail.

Uh huh.

Thanks, Leah despite the short term headwinds with a credit product that we previously discussed.

We remain focused on the long term investing heavily for growth.

As shown on page 13, we increased our investments by approximately 180 million reais when compared to the same period last year with our marketing investments.

Over 230% sales force head count almost doubling.

Technology head count, increasing over 90% and our customer service and logistics personnel growing 88%.

In slide 14, we can see that our underlying business remains strong with a 45% client base growth excluding tonne, reaching 766.5000 clients.

While <unk> increased its client base by nine four times to 330000 clients the.

The growth in client base was a complaint by an increase in average TPB and F&B.

Which resulted in stone co presenting at 58, 6% PPV growth to $64.0 billion Reais.

$64.0 billion Reais, when excluding Corona voucher volumes.

Our total revenue and income was $617.0 million reais in the second quarter.

Representing an eight 1% decrease when compared to last year. The lower figure is primarily driven by a negative contribution of 300.

Or 7 million Reais from our credit product.

Moving to slide 15, we can see that our operating leverage was strongly impacted by the negative effect in revenue from credits and our decision to keep investing heavily in our business to support long term growth.

Also financial expenses increased as a percentage.

90, total revenue and income due to a higher CDI in Brazil.

Now going into more detail on each P&L line item on page 16, our revenue from transaction activities grew 57, 9%.

Driven largely by the strong TPG growth in Smbs.

Revenue from subscriptions.

<unk> services and equipment rental also presented strong results growing 91% when compared to last year.

Driven by both an increase in our software revenue and a significantly larger stone SMB client base.

Our financial income, which combined with the revenue from prepayment and the credit products was affected by the.

Grips and so the result of the credit product of minus $399.0 million Reais as a result of the increase in provisions for expected losses in credit and ended up decreasing 87, 7%.

40 million Reais in the quarter.

Excluding revenues from the credit product our financial income would have grown by 60.

A negative 7% year over year, demonstrating the strength of our prepayment operation.

Our cost of services were $306.0 million Reais this quarter 50.

52, 2% higher than previous year.

This increase was mainly due to higher investments in our technology and customer support teams and.

<unk> investment in time.

As well as higher costs related to depreciation of B O S.

Administrative expenses were $129.0 million Reais 35, 5% higher than last year due to higher third party services, mainly expenses with softer services higher depreciation and amortization expenses.

And hiring, especially due to amortization of fair value adjustment on intangibles related to acquisitions and higher travel expenses.

Compared with the previous quarter administrative expenses were $3, 6% higher.

Selling expenses were $225.0 million reais in the quarter, an increase of 94, 6%.

Fences every year.

Mostly as a result of higher marketing investments, mainly in <unk> and investments in hiring of salespeople.

Compared with the first quarter of 2021, selling expenses increased by 37, 1%.

So the same reasons that I just mentioned.

Europe, and Asia expenses were $163.0 million Reais 151, 8% higher than the previous year.

Mainly due to the higher outstanding volumes of prepayment and credit and higher cost of funds, mostly due to the higher end increasing base rate in Brazil.

Other income.

<unk> was positive by 777 million Reais, mainly related to a mark to market gain of $843.0 million reais related to our investment in India.

Excluding this effect other income was negative $66.0 million Reais 60.

62% higher year over year.

That mostly explained by share based compensation expenses and issuance fees regarding the $500 million bond.

Offering that was successfully concluded in June.

Finally, moving to slide 17, we show that our business, excluding the credit product continues to grow at a strong pace.

Total revenue in it.

Grew by 68% with take rates and adjusted earnings before taxes also increasing rapidly on a yearly basis.

Before we start the Q&A I would like to revisit our outlook for the year.

Given the short term challenges in credit, we decided to suspend previous guidance on the take rate and adjusted net margin for 2020.

We are keeping our guidance of active client base between one four and $6.0 million clients, including time and approximately 950000 clients excluding tongue.

It is important to highlight that links will be fully consolidated from third quarter 2021 onwards, with that said operator can.

One open the call up to questions.

At this time, we're going to open it up for questions and ask Chris If he would like to ask a question. Please press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your quest.

Please please press Star then two.

One moment please for the first question.

Our first question today comes from Tito law BARDA with Goldman Sachs.

Hi, Good evening, everyone. Thank you for the call and for all the information you provided a couple.

Two questions I guess first just to understand a little bit more on the issues with the credit.

Portfolio.

Why do you think it was.

It's a big write off given that the receivables market really only started only in June.

We're already two thirds through the quarter.

And you.

A lot of the loans you had done where pre the receivables markets. You just understand why it became such a big issue for you and you know why other players haven't really experienced that I think you were kind of expecting a receivables market to be a big growth factor, but just understand you know compared to other players.

Layers why you had such a much bigger impact and then following up on that in terms of I know you've mentioned three to six months to start lending again.

Or to the issues potentially get resolved.

He started lending again.

Much confidence do you.

And that the issues do get resolved I know you said, it's still a big opportunity.

<unk> for you, but is that happened already in the second half of this year or do you think you'd have to wait for next year. The foreseen that opportunity and then I'll ask another question after that thank you.

Hi, Tito Rafael here. Thank you for your question. So starting on the first point of your question I think there's two.

Two factors there that happened this quarter. So the first is we saw npls increasing right as.

We have mentioned.

In this release declines that are not paying us for 60 days or more are 19%. This number was around 12% last quarter.

And I think the second factor that is very important.

To explain is that we our expectation of recovery of nonperforming clients, we reduced that expectation a lot, especially given the problems in the registry and for everyone to remember our credit product was designed to be fully collateralized.

So when we saw that the new red.

Registry system was not working properly we saw that we could not enforced those collaterals. So given the methodology that we have been using the fair value methodology.

And we saw this company what we did is we decreased.

Our expectation of a recovery of nonperforming loans, so it was pretty much it.

Double effect Npls increased and our expectation of recovery of those Npls also decrease so that's why you see it.

The size of the impact that.

That you'll see there.

One thing that is important to mention is we had already before.

Over 100% coverage for those.

Clients not paying us for 60 days or more and when we saw the situation with the collaterals. What we did is we decided to increase the coverage cigna.

Significantly so we could have over 100% coverage for our clients not only not paying us for 60 days, but even for those clients that were paying us.

In the last 60 days, but they were not being able to amortize principle. So.

That's our decision in terms of being more conservative in terms of recovery and I think that the registry had a big role in that decision.

Regarding the second part of your question as we mentioned in the teaching in here as well.

Well.

The technical issues in the registry there or not there are complex rate. So that's why we mentioned three to six months.

The product that we have today is a collateralized product of course that we.

We are developing and improving our product it will depend on the risk appropriate opportunities that we have so we can resume disbursement.

Christmas, we we havent yet resumed to the disbursements as we have mentioned in our materials, we have disbursed pretty much 0.8 million Reais in July.

And we have not yet resumed so we have taken a cautious approach.

Assessing the risks not only of course in terms of improving the product, but also the externalities and how they invite.

Environment is in terms of technical.

Capability to start working so that's the latest that we have for this thank.

Thank you.

Uh huh.

Just to add to.

To your point Tito.

I'll start to talk a little bit about what they expect.

Going forward in terms of the operation right. I think that's also mentioned there are a lot of things that we're doing right now to turnaround our credit operations given all the learnings that we've had.

I think number one is we're making an assessment of our collateral talking to players and regulators to see if some regulatory or legal action would be needed.

Needed in order for a SEC guarantees given to us.

But of course in the operational side as well.

We have hired a lot of new experienced people that are working on processes and policies to evolve our product with the goal of really improving our underwriting capabilities are recovering and credit scoring processes.

And where.

We're adjusting our product so that we can have a broader set of collateral on clients.

And working in these strategic partnerships as we mentioned to really look for this asset light model that we talked about.

Just now so we're following closely what's going on but I just wanted to highlight that.

Alright, and many things that we're doing in the operation the turnarounds of the product.

Great. Thanks, Raphael and in there that's helpful. Maybe a follow up on that if I may.

I guess.

Is it because it's a collateralized product.

And.

Because of those issues could you say that you maybe even over provisioning more than you may need to because you're not sure about their collateral and you may still be able to recover some of that some of these loans you just because it's your provisioning based on uncollateralized product and you're not sure where it's going maybe in the.

Short term you have to provision more or is that the correct way to think about it but maybe you can get some of the SEC future.

Yeah. That's a great question. So of course, we will pursue those amounts and try to have a part of it back.

But we have to have our best.

As of now and what we're seeing now is that given the technical challenges. The system is not yet working so many challenges there when we look for example at the priorities of the credit contract within their registries theyre not yet correct and the bears.

Something that has to be sold.

So I think it's possible that we have part of that.

<unk>, what we have seen in the last few weeks is when.

When we see players that were not saddling in our bank account.

And some of the smaller players started to settle we do see the flows coming back. So I think this is positive but still very small.

Paul given the total size of our.

Nonperforming loans, so we decided to work with information, we have and the take a cautious approach and.

And do the the increase in provisions to have a coverage that we think is adequate given the profile of the portfolio at the maturity of the portfolio.

So we are.

Very comfortable with the levels of provisions, we have now and that.

That's I think the latest we have.

Okay.

I'm fine.

Just one follow up is secure right. This project Pulitzer licensed product.

In the end of the day, we have to see.

<unk> cash flows of our clients coming to our bank accounts as we had the luck of receivables to create expectations for future collections. So what we are doing now we are talking to players to understand the problems and the problems in the registry and the reasons why some players are not selling selling transactions rights and discuss things with regularly.

Regulated how can we solve it so I think that if the flows comes to our bank accounts as we were expecting given that we have priority in the previews grew I think that we can make a new assessment about our ability to recover.

The money that we have Linda to our clients, but we.

The information, we have we decided to take a cautious approach and make the profusion as with it and in terms of your question about the future it's difficult to talk about the future now in terms of projections, but in the end of the day opportunities are huge and we are 100% focused on the execution as Leah said the demand hasnt changed.

<unk> in Europe, and our clients our client base grows a lot both in terms of clients and CPB. There in the end of the day, we want to see is potential collaterals, but the registry system has to mature in other for us to be comfortable with the collateral and while we are observing the evolution of the industry we.

We are turning around our projects in execution. So it can take anywhere from three to six months as we said, but the opportunities for the future are huge and it didn't decrease.

What we expect is the project that we want to offer to our clients and the opportunities that we see to our business.

Okay.

Okay, great. Thank you guys. That's very helpful and just one other question if I may I guess on the army.

You mentioned, you're focusing on more profitable accounts do you think that's going to continue to be a headwind for volumes as you maybe lose some of the acquired business.

And focus more.

One higher revenue generating.

<unk> is that the right way to think about it.

Hi, Tito just yeah to talk about <unk> Army.

Specifically the key accounts business like we said right I think.

We can separate that business in two groups. The first is a sub acquirers.

Yes.

Answer is we expect this low growth to continue but the unit economics of that is really not relevant and also we mentioned that the top proof of acquired which are a large part of the volume in the sub acquired segment. They represent only 3% of our revenue net of funding cost and we.

Expect this number to increase quite to the contrary on the other hand, we do see this you know a positive evolution in growth in the platform business right and and I think that's very aligned with everything that's going on in terms of our number one more platforms are growing in the markets not.

Donate marketplaces, but all different types of seller services platforms.

Any software providers that final bill payments and theirs and their offerings to their clients. Many retailers wanting to go omni channel. So we do see a lot of opportunities there, but that's where we're going to focus on right. We're going to focus on those platform services that we.

Not only.

Are much better opportunities in terms of of unit economics and growth.

Okay, Great and do it takes me a Cabo and then Raphael quote for the answers.

Thank you Tito.

Our next question comes from David Toga.

<unk> seen Evercore ISI.

Thank you good evening, you've been very clear that the next three to six months will be difficult for the credit business, but in terms of framing.

What financial income might be should we think about the 88% year over decline in the in the second quarter.

With $40 million, representing the approximate trough earnings for this business.

Hi, Hi, David Rafael here. Thank you for the question. So we have broken down that that financial income line decrease so if you look to.

The growth of our prepayment business, which is also embedded in that one.

Deadline, we have over 60% growth year over year, I think that when you have the credit product.

Normalizing you should see the growing very fast in what we are seeing is the prepayment business is indeed growing very fast.

Most of the S. Thiago mentioned so that.

The 397 million Reais of negative effect that we have mentioned this is all concentrated in the financial income line. So I think if you strip out that.

You can take a look at what the normalized.

Credit financial income would be.

Very good and then yeah, sorry, Hi, David Chuckled here just to follow up on that.

If you remember.

Previous to this situation with the collateral in the early beginnings of the credit doing less year, we were expecting something around one 5% to 2% risk adjusted return for the product. So that's.

Under cynically the rates that you're charging for our clients last the provisions we have less cost of funds. We had so I see this business as being a very profitable one I think we had the problem in terms of collateral leakage, we're changing the way we account for this product and in the third quarter onwards for the new credit disbursements, we use.

Baseball methodologies that basically we will book the provisions upfront and we will accrue the revenue over time. So there will be a margin to be accrued over time as we started to distribute the product back again, and we will help investor to reconcile both ways of booking because in the end of the day cash flow doesn't.

The accretion, but the way that you book.

Your revenues it change so I see this business as being a very profitable one our clients they need crowded too to evolve to buy more inventory and to grow so we need to serve them, but we have to do it at appropriate risk.

We learned that the collateral we were seeing.

Change did that gave us the protection that we were expecting so we attorney turning around the operation, but it's a very profitable business. When we think about the expectation of profitability I think that we were not too far from what we expect but in the end of the day, we have to make sure that we have the risk assessment of collaterals in the client strikes.

To get the product back on track.

Understood. Thanks for that Shadow and just as a follow up how much visibility do you have that you'll be through this difficult period with the registry of receivables by the end of six months.

Great question, David So.

So we have weekly meetings with the players.

Three registry of receivables with associations off the card players in the market with central banks. So everyone is following closely the implement the technical implementation that is being made by the three registrar registries now.

We think that once that is done the market through be very protected from collateral leakage. So I think that our confidence that we will get past. This is there's two factors in one hand, the following closely the industry evolution and the other hand rebuilding the project and working around our execution. So this.

And we think that we are as you know the size of the opportunity and the size of the impact we are following very very closely.

Understood. Thank you.

Thank you David.

Our next question comes from Mariana today.

Yeah.

This is <unk> hello, everyone. Thanks.

<unk>.

Could make some follow up related.

Related to the credit business.

As you pass through the issue.

The registry of receivables.

How do you plan to scale the portfolio, if you could give us a base amazing.

It related to Europe, plus laterals observation Asia.

Something around 800 million guidance per quarter should we keep this level or I assume are more.

Conservative approach going forward.

And the second follow up is when you said in the presentation that you're exploring.

Made new partnerships to enable Africa like module is this related to funding something similar that you are doing with la Quinta or should we expect kind of my model that you had in the beginning with a partner.

That was assuming the credit risk. Thank you.

Hi, Mariana Thiago here, so regarding expectation of new disbursements I think that our ability to scale. The credit solution has to do with how we built the project. The project is 100% embedded to our financial core solution.

So once we are comfortable with collateral.

And with the behavior of clients.

<unk> to show the value proposition for them and the on boarding process that we built for our clients are pretty easy. So I think that the demand for the product is high the usability of the projects and user experience is very good and our ability to make all the process works.

<unk> is very good this helped us in terms of selling the product, but in the other hand, we have to be comfortable with the risk. So that's why we are paying so much attention to the collateral in the end of the day. What we were doing was we were like advancing one month or one five months of cash flows to clients.

And we were selecting a very small percentage of that cash flow that we were taking back.

On a daily basis. So it was a project to be paid back in eight months. So the risk should not be so big we were not expecting to have provisions in the amounts that we have today. So the first thing we have to do here.

Is to make sure that the collateral of the industry moved it back that once we give credit to our clients. We can access dose collaterals and if not we have to access other type of collaterals in order for us to be comfortable to scale. The product back again, and we are making this so we are confident that once this solution has passed.

We will be back on track in terms of growth.

<unk> of our products and when we think about partnership will do two things when we have very good risk opportunities and clients that we really understand and we can make a very good assessment of them and the quality of the credits the amounts.

Fast disbursing, they're small and we're very comfortable we can use the same methodology, we had borrowed disperse the project and then we sell the outstanding balance to the market what was the orientations from the beginning for the other type of clients, we want to use like a marketplace in where we provide access to players that want to give credit to our clients.

We have to keep the level of service that we have always offered so we will balance those two methods and the partnerships that we are working is to use third party balance to provide credit to our clients and we beat the player in the middle helping both the partners to make the assessment of data and our.

But we have a very good experience. So we want to have both model's working.

That's clear thank you.

Thank you Martina.

Our next question comes from Jeff Cantwell with Google.

It goes in hand securities.

Clients.

Hi can you hear me.

Yes, Jeff.

Hey, Thanks for taking my question on the credit product. This is going to sound similar to some of the earlier questions, but I wanted to ask on credit in a very specific way.

My question is could you walk us through the next three to.

Months from two areas first from a regulatory perspective, and second from stones operational perspective, as you're thinking about those two areas right now.

The question I have after reading the tutoring paper and hearing the comments today is is what exactly is going to happen.

So over the next three to six months from a regulatory level and then there's also you know what should be happening concurrently by you by stone as you move forward with the learnings you've had from this I just want to put some markers down today for investors stake.

So they have been approximately understanding of what to expect so can you talk to.

We're about those two things would be much appreciated thank.

Thank you.

Hi, Jeff Yes of course, thank you for the question Thiago here speaking I think that from a regulatory perspective, the central Bank is doing an incredible work of helping the markets to get to a solution and the solution is.

That's a little bit about deregulation itself, it's about the technical implementation by the players.

A big change in the way that you see and use collaterals.

The way that you are registered the assets and the technology that was made was not based in the right place.

I think that as we disclose it in our teaching there are many technical evolutions that the three registry of receivable has to implement and that's what we'll be following in the next three to six months is about the technology of the registry of receivables and the interoperability between them to make sure that once.

So credit to our clients and we contractually received the guarantees of all the transactions for one specific card brands, we can access that collateral in all of the.

Payment players, regardless of the registry of receivables that you're using without having collateral leakage. So.

We get the interoperability in the system has to evolve I think we have talked a lot about this in the kitchen to be easier to understand and we will be following that implementation very closely in terms of the stone perspective, and what we are doing as Leah said, we are improving our underwriting riskier assessment.

The ability to make sure that we really understand the client and the behavior of the clients because two things happen here. One is the industry had this collateral leakage type of problem, but in the end of the day, our clients they decided to move from our payment solution to another required payment solution.

<unk> and then we were not seeing that cash flow anymore because of the collateral leakage. So what we want to evolve as why our clients move to another acquiring player at the end of the day, we understand that because of the pandemic. Many of the clients. They are trying to protect cash flows and renegotiate the contracts later in a decided to move.

<unk> not to pay the credit in the beginning so we want to evolve our risk assessment of our clients to make sure that we protect the business for this type of behavior in the future. Although it's important that the collateral is working pretty well. The other thing is that we have to evolve in terms of our recovery process our.

Negotiation with clients because if a client has a problem we have to renegotiate with them to give them the ability to repay us back in the way that suit best for them and for our risk and return assessment. So we are evolving a lot in terms of the recovery process and the renegotiation with clients. The other thing is improving the credit.

Our recurring process in other first to see other collateral more than the TPB and the card transactions that the clients have many clients. For example, they are the owner of the store and we are not seeing the store the extra restored the real state as a collateral.

As a collateral for the credit project for example.

Credit to proving our ability to have more collateral for the same clients and in the end of the day, Jeff as I. Just said there is some profile of clients that maybe we will not be the one increasing credit risk to create the products, but we can provide for them at the same level of experience with a third party partners providing.

So we have added and being in having us as the origination of partner we foresee in that relationship. So we are working on those fronts in terms of the turnaround that we are doing our operation in order to get the project back contract. So it's a two way execution here following the evolution of the.

During the three and rebuilding our product, but in the end of the day, what we have to keep in mind is the product has to be simple rates has to be see important client has to reconcile easily we have to be paid back aligns with the cash flows of our clients and we have to provide a better view for the better.

The interest and we have to work on a way to make our clients sell more by buying more products and evolving that is the fundamental of the projects. So that's what we're focused here in terms of our execution.

Okay, great appreciate all of that detail.

Also one.

Clark gears.

And ask you about links because there has been.

No.

Significant focus over the past several months.

About that and now it looks like that will begin being integrated.

The numbers going forward. So so you've had a significant amount of time to focus on this integration can.

This should talk about the integration how is it going so far are you feeling optimistic about the potential for new synergies revenue synergies and cost synergies. How are those looking for you right. Now can you help us size the opportunity for the combined company because theres a lot of interest in this combination so was hoping to get an update or any color you might be able to provide.

Under pro forma outlook would be appreciated.

Okay.

Yes, Jeff of course juggle here again.

So about links May message here is that is incredible to see how resilient the business is.

If you remember, even though the business faces the pandemic situation and with many of the.

Can you closing their stores.

The business proved to be very resilient and it has the noise of the acquisition.

It was delayed which was more than one year and even though you pass all of that is delivered 13% net revenue growth. So it's impressive how resilient. The business is we are very impressive.

Client host TQM deeply integrated the product or to the retail workflow. So when we talk to clients. It's incredible to see how deeply integrated the solution S. I don't think that the clients are willing to change.

Links systems. So it provides us a big opportunity to integrate with far financial.

The Russians and to help our clients to move that inventory Orion because they really know how to use this link system and I don't think they'd be are willing to change the Pos and ERP that needs house. So we you can see by the client retention, which is very very high we are still making assessment of the links numbers, but.

So we can say is that there are great opportunities in terms of cost and expense synergies on top of this top line synergies that we have talked in the past. So we are currently focused on mapping all of them and we already initiated some of that execution. It will be easier to talk about links numbers in the third quarter. After we consolidate them and use the same.

What I can see standards and procedures that we use so we decided to provide some preliminary numbers that we have received from the company and we will continue to be 100% focused on the execution and once we consolidate in the third quarter will be much easier to talk about the synergy potential that we are seeing putting some numbers in terms of opex.

So we just started to manage the company first of July. So we had a plan, but now we are executing for almost two months in the third quarter will be much easier to give color for you and followed the ambassadors about synergies in numbers.

Okay understood appreciate that.

Thanks for thanks for taking my questions.

Thank you very much Jeff.

Our next question comes from Mario Perry with Bank of America.

Yeah.

Hi, everybody. Thanks for the opportunity to ask a question two questions. Let me change the focus a little bit.

You're maintaining your target of achieving 950000 clients excluding comp by the end of the year.

It means that you have to add almost 190000 clients in the next two quarters.

When you're adding close to 45 to 50000, so it seems like you were expecting.

And things can acceleration in client adds in the third and fourth quarter.

Can you give us an explanation why Europe positive about that.

And second question is is related to this mark to market of the Interstate Ryan do you. You noted it was a significant gain of almost 800.

And a $6 million.

Is this something that should continue to create volatility to your results going forward. Thank you.

Hi, Mitra how file here. Thank you for the question. So regarding your first question. We are as we said in the presentation. We are investing heavily in the growth of the operations.

50, though.

We should see an acceleration in the internet ads excluding coal.

And I think you will see that in the second half of course, we will always balance the unit economics of clients right we cannot take the.

Irrational economic decisions, if we have a client that.

That is best suited for Tom product.

<unk> example, we direct our clients so that solution.

But I think that we should see acceleration given the very strong investments we have been doing so our S. Jago said not all of the investments that we do.

You see the result in the same quarter right we have to.

Upload investments upfront, sometimes when youll.

Product for our results in the following quarters.

So that's why we maintain that same guidance off of of active client base and the end of the year.

Regarding your second question in the inter.

That's a that's right. So you should see the volatility in the other income expenses line, we're adjusting that in.

You'll see the adjusted net income.

But given that we don't have a significant influence in the company. That's how we should account for it so thats why youll see that.

Mark to market in that in that line I think that if people.

Look of course, it's a public traded company you can follow the stock price and people can I think.

Calculate that effect and try to to to estimate the impact that will have and we'll keep adjusting this.

Our in our adjusted net income metric.

Mario Chuckled here just to just to give a.

An additional comment here.

Though we are balancing better both projects.

Don in stone.

Mainly focused on getting the best and PFS from our clients and the best cost of acquisition and lifetime value.

Our ratio in the products, we have we see that our hubs that are doing very very well in terms of productivity. We are opening new hubs. So our expansion.

Waqar project in the core channels, we use are doing pretty well. So that's why we are confident that we can get to the numbers that we have just stopped them very impressive powered by the growth of the business I think that the team understood how to manage revenue per client in a different way and I think that now the projects much more robust.

Four Oh I'm very.

Positively impressed by the new balance did the team achieved and very confident with the growth of the court.

Okay now that's helpful.

<unk> like to do.

GAAP at this level of clients ranked.

And again I do realize you are making the investments.

And you are adding hubs and people.

But the economy can you just tell us a little bit about how you're seeing the economic scenario in Brazil, because again, there was a lot of optimism on maybe.

It may be a few months ago, but given the high level of inflation, the rising interest rate environment.

They're getting less optimistic over the economy. So also how does that tie into your guidance of 950000 clients.

I think that in the end of the day.

I'm not in a specialist in terms of macro so don't have much to say about it but I think that in the end of the day our market.

People are still very small and the coverage that we have gives us the ability to increase a lot the size of our operation because we still have lot of regions that we have to cover so despite of the macro environment and we have learned how to manage this keep in mind that we are growing the company between between 2015 an hour.

Sure It was not a easy macro scenario, but in the end of the day, our business has a lot to offer for retailers in Brazil, and the market is very big and we have a very small market share yet. So I think the macro changes do not impact too much our ability to grow in terms of clients, we have always to pay.

You mentioned two two interest rates curve because in the end of the day it can impact our cost of capital.

As you know that we have a big outstanding balance of prepayments. So we have to adjust pricing over time to make sure that we are following the cost of capital of the company and that's a situation that we follow very closely.

On our treasury team and our pricing team, but that's the the main kpis in terms of macro that we look at the yield curves of Brazil, and how we adjust cost of funding and pricing of the products in terms of number of clients I think that's basically market sheds Q2 small the opportunities ahead that are very very big.

We can that's why we can increase our operation without being too much impacted by that.

Okay, and then just a final question related to the same topic.

You can discuss a little bit about the competitive environment right.

Your peers is making a big portion for the SMB segment.

No that another.

Warm or sort of IPO later this year. So can you just talk give us a little Samsung of the competitive environment and my question is I thought your net adds this quarter was a little bit weaker than what we were forecasting. So I don't know if there was a reflection of.

More competition or you know like.

If you can just.

That's an overview.

Of the.

On the competitive environment, there would be helpful. Thank you.

Yes Mario.

Although we are happy for our growth through the one I'll, let you down so we will make sure that we keep the growth increasing in the speeds we expect.

I'm very happy with the level of growth.

We have now, but I think that we have much more things to do to increase our growth overtime for us. It's clear that competition has intensified a little bit but on the other hand, we are much stronger that we were one year ago. So some comments here one we have a much more robust product so engagement of clients are increasing.

<unk>, our distribution is much more robust and the service capabilities that we have invested are providing a better experience to our clients I think the the level of experience that we offer.

Don't have a parallel to that in the markets. We have learned is this better balance between investment and return that I just said so it's.

It gave us the opportunity to access new markets that we were not present in the micro merchant segments. It is a very positive news that we had we learned how to operate in that segment. So we expect good growth from that segment, we think that the numbers show the strength of the team the strength of the business model. So we are very confident.

Confident that we can keep winning in the SMB space.

So I think that the dynamics of competition, it's pretty much what we have experienced our ability to manage for different products, new markets and balancing investments I think that is what makes our numbers a b E.

In the place they are.

I'm very happy with the growth that we have presented and we have the discipline of the team.

Okay. Thank you very much.

Thank you Mario.

Our next question comes from Domingos <unk> with Jpmorgan.

Thanks, guys also Cortez.

For taking the question.

First one is I guess on the operational side. So you mentioned basically 35% of your clients are not reducing principle.

That's what's baked in the presentation and then I think you mentioned in the call maybe pay interest or not.

And 19% or general release.

So on the year and 19% or not being either so my question is.

In between those two numbers there were 16% of their clients for being able to collect something.

What's happening on those guys case, so is the guy swiping.

Our liquid I guess I'll be on relief that's.

That's one option, so it's and they're not paying either because you're not charging or slightly such as small volume that are only being able to poach a part of that then.

If you could really elaborate with some examples.

We usually only go up to 10% from the same volume or 20% and then the list.

That's one word and.

And that's what's.

Allowing us to to get them to principal.

More visibility on that and then ask the second one.

Hi, Domingos Rafael here. Thank you for the question that's right. So you have 19%.

Outstanding balance and obtain for 60 days or more and 35 not paying interest so.

I think theres two things that can happen. There. So one is clients that were their cash flows were impacted so they their sales reduced significantly. So they they are being able to pay us back, but they are not being able to reduce them.

<unk> principal and the other effect and those two effects might be correlated sometimes.

<unk>, which is.

They are shifting volumes away to other requires to try to sort of bypass the collateral so.

You have a.

A small percentage.

Of their total sales being moved to us.

In that case. They also don't have the ability to amortize principle and it's inter.

<unk>, because we cannot of course take all of their flows and all of their sales.

To pay us back otherwise disarms merchants.

And it's not healthy so I think that's why you have that gap in between those two numbers and I think that's an important point that we mentioned about the registry system.

And the new system, when it's working properly it will be much better by the exact reason that.

When merchants will transact with all the acquirers.

It should we should see those flows as well and we should have the ability to withhold the amounts that those clients OS.

And in that case, we would have a different scenario, but that that sort of.

The situation.

Between between those 54%.

Outstanding balances.

And my second question is let's assume.

It doesn't work the collateral.

Does your zero or virtually zero origination and all of this means.

Don't want to be doing unsecured lending.

Or should you adjust lending rates any further.

Adjusting the addressable market within your client base and started migrating to these other.

With this product because I.

I would assume you have long enough relationships with select clients, where you would be comfortable to and evening and uncollateralized weigh in if we shouldnt read that uncollateralized is something thats, just not possible to do in southern Europe that stone molecule.

Hi, Domingos juggle here. Thank you for the.

<unk>. So two things one is I believe that the industry will stabilize sharply. So as we said we are following very close the discussion I think that that's a functionality of the interest which is very good for everyone. It decreases the risk for lenders and it decreases the price of the credit to clients. So.

So by the focus that the industry is putting on this I think that it will be resolved shortly.

To your question, we don't intend to to have clean credit risk from our clients. So what we are doing is we are seeking for audrey collateral and guarantees of the owner of the merchant personally for example.

<unk> is the owner has assets.

We are seeking for guarantees of the real estate and other type of guarantees we don't want to incur in clean credit risk, but in the end of the day, if the clients need a clean credit risk we want to be the one.

Accessing partnerships that can provide this to our clients without having these type of risks.

Risk in our balance sheet. So our strategy is to have a collateralized products in which we can offer good rates to our clients in the aligned with their cash flow and have a very controlled the kyushu. So that that's the reason why we're surprised by the collateral leakage.

We don't tend to have clean credit risk in our company as of today.

Very clear thank you guys.

Thank you.

Our next question comes from <unk> Agarwal with HSBC.

Okay.

Hi, Thank you for taking.

My question.

Again on that there's a chance either thank you for the PJM does they have to have that understanding but this problem that you're having with the business changed procedures.

It could have happened previously is that right I mean before like last year, you really when you actually just giving credits at that.

That's why we did not have that its just the seasonal operating.

So why didn't we have this problem last year or earlier this year why is it happening now.

Maybe I'm missing something here.

And then I ask my next question.

Hi, Anyhow Thiago here.

So I think two factors as we have disclosed that npls are increasing so npls are not in the level of npls that we had in the past during 2020. So in fact, when you see ability to collect cash flows decreased a lot by.

By what we have observed an seo now in the other hand.

In June seven the New register system begin to operate and the new regulation begin to operate so our expectation was since we had the collateral set contractually with our clients and we had the priorities in place we have the lock of receivable in the old regulation, we were expecting that all.

Players would be settling transactions in the right way and then we would have the priority on the cash flow of the clients in the accounts that we have set in the registry system. So we were expecting to have access to collateral that it was given to us in the past, but because of.

Any issues on one of other players, we would be able to access that collateral and it didn't happen.

Until now so that was the big frustration, we have in terms of expectation to recover.

The flows and Thats, what we are following closely to see where the situation. We will land we expect to have the.

Priorities once all this the situation stabilize and big part of that cash flow come back to us. So we make a risk we made the research and the vast majority of clients that we give credit. They are operating so we can see the account receivables that they have rewarded players we can make visits to them.

The vast majority is live is transacting, but the flows is not coming to the bank accounts that we have set so we don't have the ability to access the collateral.

We expect that once the situation evolve maybe we can exit the collateral that we were expecting.

And last this problem.

Seen at any other.

Our classes is that because we haven't heard that from other participants.

So well.

Was it that stone was targeted by some of the other clients who are being aggressive in taking a M merchants and that resulted in losses for you on the credit side.

Or did you see this problem I'll call it.

Other acquirers as well and other players as well.

And in a similar manner as yours.

I think banks, we were impacted in their credit product, but I don't see menu either acquiring players offering credit in the way that we do in Brazil, Our prepayment project is running smoothly.

Mostly we have disclosed the numbers of the prepayment project for everybody to understand that the prepayments was not impact the only impact we had was in the credit products. So yes, I see that banks were impacted for these two.

But when you compare to our players I think that the outstanding balance we had in the operation with builds.

<unk> is different than what other players did that's why we were more impacted than others.

Okay.

Perfect.

On the the change in methodology that you implemented this quarter.

Sorry, if I do the numbers for.

For the previous quarters.

Made about there.

150 million seen the third quarter and fourth quarter of 2020, now and about a that was the revenue from the credit.

What these numbers look like if under the new metallurgy.

I'm trying to understand that once you start accelerating credit again, what would be the impact in the revenue recognition.

Because of the Pneumococcal Chi.

Hi, Anita how far out here so I.

We have changed the accounting methodology for the new disbursements old.

Contracts that we had until now in the portfolio that we are calling the legacy portfolio. This.

We will continue to be accounted for at fair value methodology. So the accrual basis will be only for the new disbursements and I think that the fair value methodology brings complex city and the volatility that is higher than the actual volatility and complexity of the operation. So that's one of the reasons why we decided to change.

Changes in methodology, but again this is only valid for the new disbursements.

Florida that we had until June 30th this will still be accounted for at fair value method.

Okay, but I understand why you changed it what I'm trying to estimate is that obviously now that I can I suppose.

Any if you what do you think that $500 million during a quarter previously in.

Revenue was a much higher during that quarter now that revenue.

They moved out of our differentiation is going to be much lower because of the hematology. So could you quantify that a bit how much good revenues from credit.

QUADRA.

Oh, Yeah look like once you start giving credit again.

So I think that's the rationale.

To calculate for example revenue on an accrual method is the average outstanding balance.

And the rates that you actually charge the client when you look at the past.

We did.

The account is the way we were doing so we don't have that number for you I think we can chat offline. If you want we can try to reconcile the numbers and but.

But I think that the accrual method is actually much much simpler than the fair value methodology, which embeds. The estimates of cash flows are from clients. So on and so forth. So I think.

We can fight the chat offline so I can help you.

Terrific side of those numbers.

And under this methodology would you be according to their shouldn't separately in the cost line.

Believe it or not are be netted against the revenue, yes, that's right and you have so the provisions will be a separate in the cost line.

Instead of netted in the revenue as it is in the fair value method.

Okay, perfect and lastly on the credit side, you said that you could argue that that's a marketplace.

And giving credit for their clients. They are not comfortable so just wanted to clarify it would it be more like a marketplace, where you're just getting a fee that is a percentage of the loan amount.

Or would you have more like a partner bank model, where you can split the profit on the Norton.

Tightening her thiago here I think that the mindset is exactly what you just said we want to have multiple partners in which we can rely to have.

Have the balance sheets into offered a credit to our clients and we want to split our resorts with them. So but we are just analyzing what will be the best the best alignment with our partners. So don't have too much to disclose now I think the next quarter, we have more color about the way that.

We will operate with third parties and in terms of the reconciliation that features you just asked so taking into account the debt fair value you have both revenues and costs and all the provisioning upfronts.

Hep fronts, when we change to accrual basis as we just said.

We will book the provisioning upfront and it to be on the cost line and then you have the revenue coming over time as we accrual death, but we will give information to investors to understand what is this revenue going forward in terms of size of disbursements rates. So it will be very easy to reconcile.

Once we start to disbursement under the new methodology, and we will always have the old legacy.

Product with fair value and the new credit products and the new disbursements will be based on accrual basis, and we reconciled to the very simple to understand we can bring these in the next quarter for you and we can.

Chet offline after the call to help you better understand.

Perfect. Thank you so much for the disclosure and I Hope you will keep giving us some of these additional disclosures that you provided this quarter.

But understanding the profitability of the credit and the prepayment business separately.

So much.

Thank you and you know how we will continue to count on us.

There are no further questions at this time. So this will conclude the question and answer session.

Now I'll turn it over to your host for final consideration.

Yeah.

Thank you I just would like to say thank you very much for precipitate on our second.

Second quarter earnings call and see you next quarter. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Yeah.

[music].

[music].

[music].

Good evening, ladies and gentlemen, thank you for standing by welcome to the Stone co second quarter 2021 earnings Conference call.

By now everyone should have access to our earnings release.

The company also posted a presentation to go along with the call all material can be found at Ww.

E W. Dot stone dot com in the Investor the Investor Relations section.

Throughout this conference the company will be presenting non I F. R. S financial information, including adjusted net income free cash flow. These are important financial measures for the company, but are not financial measures as define.

W. Ifr at reconciliations of the company's non op I FRS financial information to the I S. R. S financial information appear in today's press release.

Finally, before we began our formal remarks I would like to remind everyone that today's discussion might include forward looking statements. These forward.

Bye <unk> statements are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward looking statements disclosure in the company's earnings Cat.

In addition, many of the risks regarding the business are disclosed in the Companys form 20-F filed with the Securities and Exchange Commission, which is available at Www Dot S E T Dot Gov.

Please note this event is being recorded.

I would now like to turn the conference over to your host Rafael Martins.

He's VP of finance and Investor Relations Officer at Stone co. Please go ahead.

Thank you operator, and good evening everyone.

Joining us here today, we have geography, our CEO Lia Matos, our CFO and Chief strategy Officer, Marcelo <unk> our CFO.

To date, we will present.

For second quarter, 2021, operational and financial results as well as discuss some recent trends that we are observing.

I'll pass it over to John So he can share the main highlights of our performance job.

Thank you Ofer and good evening everyone.

Thank you for participating in our second.

Our earnings call.

The second quarter of 2021 was market by an acceleration of our core SMB business and evolution in our strategic roadmap balanced by a challenging short term scenario in a credit product.

Our F&B fundamentals are very strong.

Accelerating <unk>.

Carlos and record net addition of clients.

The high growth in our SMB segment that has to be the fastest growing player in the payments industry. This quarter, largely driven by over 1 million SMB clients in over 100% SMB TPG growth.

These accelerating growth was achieved with the help.

If you go economics with TPG per client and revenue per client, excluding credit both inquiries and quarter over quarter.

We have been looking more at the revenue per client in take rates. Because we believe this is a metric that better demonstrates our ability to monetize the relationship with our clients.

Nevertheless, the craziness.

Unit and visa ex credit was stable quarter over quarter at 179% compared to one 8% in the first quarter 'twenty one.

Our top product has moved from being an experiment and optionality to be can be a proving in the high growth solution that added over 140000 new clients.

And as I spend more than the previous quarter and over 60% of net addition of clients of the leading player in the micro merchant space.

Our foregoing the SMB product, which enables clients to accept payments online is proving the strength of the online opportunity in Brazil, with 93% year over year chip if your growth.

To the second quarter of 'twenty one.

63% two year CAGR why at present take rates above 3%.

Also the engagement of our SMB clients, we filed our financial platform showed a significant improvement in the quarter with prepaid cards, TBD banking money in and money out volumes and <unk>.

I'm thinking of accounts balance all grow between four and five five times.

Besides the number of SMB clients Saturday in our digital accounts increased 45% quarter over quarter to 273000 clients.

The traction we are seeing in our banking transactional volumes together.

Total bit on growth in number of active accounts give us confidence to make sizable investments in our digital account infrastructure. As we believe this will be key to improve engagement and the level of satisfaction of our clients.

Our total revenue excluding credit grew by 68% year over year and the acceleration.

Is the sort of SMB business was the main driver behind such growth.

Encouraged by this growth we have continued to invest in our business to drive further growth in areas, such as technology distribution and customer service operation.

Our consolidated results were significantly impacted by short term.

<unk> credit product with higher level of Npl's and decrease the expectation of recovery of nonperforming clients than we previously expected.

Although we recognize that our underwriting risk capability and collection process do you have to have all <unk>.

The early stage of our credit solution.

We are facing an unexpected deterioration of credit.

<unk> given the problems associated with the registry of receivables systems.

For further details about these short term challenges you can refer to our recent release to Chin on August 25.

As a result of a more of a certain scenario regarding the enforcement of guarantees we decided to take a cautious approach and.

It's called a disbursement yor team rebuilt our project given the new environment, and we followed the registry of receivables evolution.

Have also increased coverage for potential losses, and as a result.

Project contributed negatively to our reported revenues by 397 million in the quarter.

To stop the short term challenges I want to highlight that there are opportunities regarding credit they're huge.

In the short term, we will continue to serve their working capital needs of our clients through prepayments, which is there any smoothly why are we focused on a turnaround of our credit operation as Leo will double click shortly.

In softer.

Despite continues to show great organic traction.

That's the deal with links closed on July 1st and we started managing the company, we reinforced our beliefs about how valuable it is despite the investments needed to enhance the business in the future.

Links is a scarce asset built over decades in which clients are sticky.

<unk> been switching costs are high.

The company has an unparalleled level of data for retailers in a very Glenn wrote weight for each one of the verticals, which will enable a more assertive and differentiated offering of financial products in the future.

We are pleased to welcome aboard the links to this quarter that has an incredible knowledge about.

And so and we are excited to work together on this journey onward.

As a reminder, links will start being consolidated into our financial results in the third quarter 'twenty one.

Before I pass it over to Leah I would like to close with some thoughts regarding how the quarter has helped us to reinforce our long term vision.

We recognize that we made mistakes in our execution and credit, especially not foreseeing, how the functioning of the registry system could harm our business.

However, this situation has also brought an impressive amount of learnings that we will use as fuel to boost the construction of what we envision as being a much better credit solution.

So having good merchants better.

We're building our capabilities for the long term and therefore, we will continue to extend and enhance the our cornice NB operation opening new hubs and improving our execution.

We will make significant investments behind our financial platform, which is a huge opportunity and keep working hard.

And they provide more financial solutions and workflow tools to our clients.

We expect to further advanced in our partnership with <unk> with the ambition of creating more and better buying experience between intercourse humorous and strong sellers.

Lastly, and more importantly, we keep our devotion to make our clients happy and to the evolution.

Hard to borrow team.

We believe that incredible learnings from this quarter will take us to a new phase of our business and we are even more convinced of the opportunities ahead.

When we look backwards it is incredible to see the evolution of our team and our business and it makes us confident and eager for the years ahead.

We are in.

<unk> all stages of our journey to become the partner of choice of Smbs in Brazil, and we will continue to work hard to make sure. They can rely on us for the most important financial and technology needs.

With that said I will pass it over to Leah.

Yeah.

Thank you Thiago and thank you everyone for joining.

Year to date.

Wanted to start by talking about the evolution of our core semi business, which includes the stone product for brick and mortar smbs, our pogany product that enables SMB clients to sell online and our tone product focused on micro merchants.

As shown on page four while stone Unplug army have their volumes growing.

As to the two fold, reaching close to 38 billion. He is in T. P V.

Loan volumes in the quarter jumped to $6.0 billion Reais, a threefold when compared to the previous quarter and 27 times higher than the previous year.

This solid growth in the SMB segment led our company to both the highest ticket growth in the.

Almost read this quarter since we had a weaker comp in the second quarter of 'twenty because of Lockdowns. We're also showing our SMB two year, CAGR TPG growth, which accelerated from 42% in the first quarter of 'twenty, 1% to 48% in the second quarter of 'twenty, one and 58% in July.

In this page five we highlight that we have not only grown our SMB client base fast, but we also did so with quality.

We have added 188000, new active clients in the quarter with net adds in our stone and for garden products, reaching 47000, and our micro merchants solutions tongue, adding 140.

Moving thousands.

The balance of net adds between stone and Tom are a result of our decision to maximize unit economics of clients based on their profile and size, while offering solutions that are best suited for each client segment as we move the lowered TPG clients' demand from stone to film product well the hub.

40% targeted larger smbs.

<unk> said on top of having our historical record. Net addition of clients. We have also seen increasing average CPG per client in all products within our SMB segment.

The average TPG of Smbs ex micro has grown 29% year over year.

Operating and 8% quarter over quarter, whereas that received the view of our micro merchant client base has grown 126% year over year and 60% quarter over quarter.

Moving to page six we have seen continued penetration and engagement with our financial solutions, especially banking transactional.

In Europe.

The number of active banking clients has increased over five times, when compared to last year, and 43% compared to last quarter, reaching 340000 clients with the number of SMB clients installed that are settling transactions in stone accounts increasing to 273000.

So that the percentage of phone clients using at least one financial solution increased from 20% last year to 48% in the second quarter of 'twenty one.

Banking money in and money out volumes in Smbs have surged.

Increasing four four times to $13.0 billion and $5.

With times to $20.0 billion highs, respectively. While total prepaid card to PV grew four four times to 294 million highs in total banking accounts balance grew three eight times to 862 million highs.

Now moving on to slide seven I want.

<unk> put out the short term challenges, we're facing with our credit product.

As we have said in the teaching released last week. The registry of receivables system that was implemented in early Joan is not yet fully functioning and since then we better understood how relevant the problem of collateral leakage is.

As a result of this.

Talk up we see more uncertainty in the short term and our ability to enforce guarantees of nonperforming contracts.

This scenario has led us to take a cautious approach and stopped disbursements already in June as you can see in the chart in July the disbursements were nearly zero with only two exceptions to fester registry system.

We also made an effort to adapt our credit metrics to more common market standards. As we are presenting here in the top right of the page we show that our outstanding balance of this new methodology remained flat due to the combination of lower disbursements and loans repayments from clients.

Even.

Have the perspective of lower Npls and improving recovery rates. After the beginning of the new regulatory framework before the transition we already have provisions for over 100% of the outstanding balance of clients that we're not paying us for 60 days or more.

However, because of a potential deterioration.

Even though with the quality of guarantees given the challenges being faced with the registry, we decided to constitute an even higher reserve to cover not only for the portfolio in which we see no payments for 60 days or more but all clients that are not being able to reduce principal for 60 days or more even though they're still paying interest.

And looking at the portfolio, we have an outstanding balance of roughly 2 billion highs.

For which we have constituted bad debt reserves of 781 million house.

These reserves represents a coverage of 209% for clients with more than 60 days without payments and 112% for our.

Interest not amortizing principle for 60 days or more.

The overall scenario in credit has led us to make an adjustment in the fair value of our portfolio, which negatively impacted our revenue by 397 million highs this quarter.

Despite the worst than expected performance, we have received over 100.

Client event of the disbursed amounts from the fourth quarter of 19, and first half of 'twenty cohort as shown in the presentation.

From now on we will treat this legacy portfolios separately from new disbursements. So we can properly track the performance of each of them.

Moving to slide eight as.

Third person already mentioned I wanted to do a quick recap of our vision comments about recent learnings and what we're doing differently in order to have a more robust credit product.

As we previously indicated our vision for what we call internally a stone capital is to build an asset like model in which funding and underwriting risks for credit stays.

Thiago pool partners.

Our product has to be easy to sign up to completely embedded in our core financial platform in F&B operation rates must be attracted and simple to understand and reconcile repayments should be aligned with our clients' cash flow and for better clients, we should present better conditions.

With more although we recognize that we have to work around the risk associated with our credit products. Many of the features mentioned above we already built and we understand that the opportunity to work for working capital solutions to Smbs is huge.

The new receivables registry system will be transformational for Brazil, and when it.

Operational it will create the basis for a much bigger market for collateralized credits.

In this process, we believe that merchants data will be key.

Our software business gives us an edge for the future.

Even though our credit solution was developed during a period with significant negative external factors.

As far as the Lockdowns brought by the pandemic in the short term problems with the transition to the new regulatory framework. We also had many learnings in this process.

First we developed a product with the assumption of a functioning register system, which has yet to occur.

Second our previous assumption regarding recovery of loan.

I mean contract was higher than observed in the second quarter of 'twenty, one influenced by how relevant the problem of collateral leakage is.

Finally, we also made in 2019 the decision to use a fair value methodology when accounting for credit results.

Which although has an idea for a standard brings a lot of volatility.

<unk> and creates more management complexity.

We are working very hard to address all these points and have already taken some important steps. We brought in 2021, a more experienced team to improve our credit scoring model risk management and funding capabilities.

We're also enhancing policies and processes.

Politics prove underwriting risks through a broader set of collaterals access guarantees that we're contractually given to us and enhanced oil recovery recovery process and renegotiation capabilities starting in the third quarter of 21, new credit contracts will be accounted for on an accrual basis flooring new partnerships.

Table the asset light model, we envision.

Now moving on to page nine we highlight the performance and strategic roadmap of our software business.

We're happy with the advancements we've made in the quarter and really excited for what lies ahead not only because our solutions continued to grow at a strong pace.

But especially due to the.

The inclusion of the links acquisition, which will be consolidated into our results from the third quarter 'twenty one onwards.

Pro forma software revenue increased three fold to $66.0 million in the quarter, which organically represents a 52, 5% growth.

With links pro forma revenue would.

31% to 305 million high reaching over one 2 billion highest annualized software revenue.

The number of subscribed clients in our software portfolio in the second quarter 'twenty, one little fourfold to 143000, well links reached 72000 and software clients a.

Have grown 8% growth.

In page 10, we talk about our current focus on priorities and links.

As Joe mentioned as the deal closed on July 1st and we started managing the company, we reinforced our belief about how valuable the asset is.

First a profound knowledge of how retail lines.

Third threats in Brazil.

And products that have deep integrations to retail workflows, giving stickiness and high switching cost to the business as well as very low churn ratios.

Second the unparalleled level data from retailers in each vertical will give us an edge in the future in terms of more differentiated financial.

Awesome.

These strengths have links made the company increased net revenue by 13% year on year in the second quarter. Despite the noise related to the delay in the approval of the acquisition that took almost one year to occur.

Today, we have five main priorities regarding inc's.

All migrating to expect a strong platform and create offers to further penetrate financial products to links with client base.

Second invest in technology capabilities to enhance the existing platform aiming to improve client satisfaction and achieve scale in the SMB market.

Third.

First build infrastructure and tools to enable merchants to have a multichannel forefront selling their products seamlessly across multiple channels online and offline.

Fourth to build a data management architecture that enables us to create new financial and technology products and.

And lastly capture synergies.

Just efficiencies.

On page 11, we give a quick update on our key account business.

We saw two different growth dynamics within this client segment in the second quarter.

First we saw a growth in sub acquire volumes, which present more volatility and lower unit economics.

And on the other hand, our platform clients for whom we can offer value added services that result in better unit economics grew its volumes by 62% in the quarter.

This platform clients encompass a wide range of business models, including marketplaces E Commerce platforms software companies and omni channel retailers.

And are the strategic focus in our key accounts business.

It is important to note that although we serve some acquired because of their incremental contributions. These clients are less strategic.

As an example, our top two sub requires only represent approximately 3% of Oracle.

Taylor stated revenue net of funding costs and we expect this number to decrease in the future.

On page 12, we're bringing an update on our strategic investment and partnership with them.

We're very excited to work closely with interesting to advance on our four main value creation drivers, which were mentioned in our first quarter 'twenty one.

Following this call.

First we have three main focuses to integrate linksys platform to intersect.

Winter shop, enabling links client's inventory to be sold through winter shop digital channel, enabling an omnichannel purchase journey to enter consumers.

Chop to serve not account clients leveraging stone.

One earn some risk management platforms helped to digitize stone Enlink sports service claims through winter shop.

Second we see an opportunity to create a data architecture that will enrich both consumer and seller ecosystem.

And two targeted offerings on incentives helped drive more buying experiences.

Payment between inter consumers and stone cold sellers.

Third we are jointly working to offer credit and working capital solutions to stone cold and into our client base as well as exploring cross selling opportunities to strengthen both ecosystems.

Lastly, we have finalized the initial.

This funding agreements and are further exploring opportunities to leverage interest retail distribution for stone funding capabilities.

With that I will pass it over to have file who will discuss our financial results in more detail.

Uh huh.

Thanks, Leah despite this short term headwinds.

This will fund credit product that we previously discussed we remain focused on the long term investing heavily for growth.

As shown on page 13, we increased our investments by approximately 180 million reais when compared to the same period last year with our marketing investments growing over 230%.

<unk> sales force head count almost doubling technology head count increasing over 90% and our customer service and logistics personnel growing 88%.

In slide 14, we can see that our underlying business remains strong with a 45% client base growth excluding tonne, reaching 700.

With $5066.0 clients.

While <unk> increased its client base by nine four times to 330000 clients.

The growth in client base was a campaign by an increase in average TPB and F&B.

Which resulted in stone co presenting at 58, 6% PPV growth.

Third 64 billion Reais.

Or $64.0 billion reais, when excluding Corona Basra volumes.

Our total revenue and income was $617.0 million reais in the second quarter.

Representing an eight 1% decrease when compared to last year, the lower figure is primarily.

Just didn't buy a negative contribution of 397 million reais from our credit products.

Moving to slide 15, we can see that our operating leverage was strongly impacted by the negative effect in revenue from credits and our decision to keep investing heavily in our business to support long term growth.

Any driven financial expenses increased as a percentage of total revenue and income due to a higher CDI in Brazil.

Now going into more detail on each P&L line item on page 16, our.

Our revenue from transaction activities grew 57, 9% driven largely by the strong <unk> growth.

Also smbs.

Revenue from subscription services and equipment rental also presented strong results growing 91% when compared to last year.

Driven by both an increase in our software revenue and a significantly larger stone SMB client base.

Our financial income, which combined with the revenue from.

Growth in payment in the credit product was affected by the negative result of the credit product of minus <unk> $399.0 million Reais as a result of the increase in provisions for expected losses and credits and ended up decreasing 87, 7%.

240 million Reais in the quarter.

Excluding revenue from the credit.

From our financial income would have grown by 67% year over year, demonstrating the strength of our prepayment operation.

Our cost of services were $306.0 million Reais this quarter.

52, 2% higher than previous year.

This increase was mainly due to higher investments.

Product technology and customer support teams and higher investment in tax.

As well as higher costs related to depreciation of B O S.

Administrative expenses were $129.0 million Reais.

35, 5% higher than last year due to higher third party services, mainly expenses with softer.

<unk> is this higher depreciation and amortization expenses, especially due to amortization of fair value adjustment on intangibles related to acquisitions and higher travel expenses.

Compared with the previous quarter administrative expenses were $3, 6% higher.

Selling expenses were $225.0 million Reais.

Certain border an increase of 94, 6% year over year.

Mostly as a result of higher marketing investments, mainly in ton and investments in hiring of salespeople.

Compared with the first quarter of 2021, selling expenses increased by 37, 1%.

So the same reasons that I just.

Isn't it.

Financial expenses were $163.0 million Reais 151, 8% higher than the previous year.

Mainly due to the higher outstanding volumes of prepayment and credit and higher cost of funds, mostly due to the higher end increasing base rate in Brazil.

Mentioned other income net was positive by 777 million Reais, mainly related to a mark to market gain of $843.0 million reais related to our investment in India.

Excluding this effect other income was negative $66.0 million reais.

62% higher.

Per year.

Mostly explained by share based compensation expenses and issuance fees regarding the $500 million bond.

<unk> was successfully concluded in June.

Finally, moving to slide 17, we show that our business, excluding the credit product continues to grow at a strong pace.

Total revenue and income grew by 68% with take rates and adjusted earnings before taxes also increasing rapidly on a yearly basis.

Before we start the Q&A I would like to revisit our outlook for the year.

Given the short term challenges in credit, we decided to suspend previous guidance on the take rate and adjusted net.

Ear over for 2020 one.

We are keeping our guidance of active client base between one four and $6.0 million clients, including time and approximately 950000 clients excluding tongue.

It is important to highlight that links will be fully consolidated from third quarter 2021 onwards.

Net margins that operator can you. Please open the call up to questions.

At this time, we're going to open it up for questions and answers if he would like to ask a question. Please press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

With that the withdraw your question. Please press Star then two.

One moment please for the first question.

Our first question today comes from Tito of BARDA with Goldman Sachs.

Hi, Good evening, everyone and thank you for the call and for all.

Just can you provided a couple of questions I guess first just understand.

But more on the issues with the credit portfolio.

Why do you think it was.

Such a big write off given that the receivables market really only started early in June so as they grow you already two thirds through the quarter.

Again from my end.

A lot of the loans you had done where pre the receivables market. So just to understand why it became such a big issue for you.

And you know why other players Havent really experienced it I think you were kind of expecting a receivables market to be a big growth factor, but just understand.

So compared to other players why you had such a much bigger impact and then following up on that in terms of I know you've mentioned three to six months to start lending again.

Or to the issues potentially get resolved.

Have you started lending again, how much confidence do you.

You have in that the issues do get resolved I.

There's a big opportunity for you, but is that happened already in the second half of this year or do you think you'd have to wait for next year before seeing that opportunity and then I'll ask another question after that thank you.

Hi, Tito Rafael here. Thank you for the question so starting on the first point of your question.

You said, there's two factors there that happened this quarter. So the first is we saw npls increasing right.

As we have mentioned.

In this release declines that are not paying us for 60 days or more are 19%. This number was around 12% last quarter.

And I think the second factor.

I think very important to explain is that we our expectation of recovery of nonperforming clients, we reduced that expectation a lot, especially.

Given the problems in the registry and for everyone to remember our credit product was designed to be fully collateralized.

So when we saw.

That is that the new registry system was not working properly we saw that we could not enforce those collaterals. So given the methodology that we have been using the fair value methodology and we saw this company. What we did is we decreased.

Our expectation of a recovery of nonperforming loans.

Thought it was pretty much a double effect.

Npls increased and our expectation of recovery of those npls.

So decrease so that's why you see.

The size of the impact.

That you'll see there.

One thing that is important to mention is we had already before over 100.

So it'll reach for those clients not paying us for 60 days or more and when we saw the situation with the collaterals. What we did is we decided to increase the coverage.

<unk>, so we could have over 100% coverage for our clients not only not paying us for 60 days, but even for those clients that.

<unk> in the last 60 days, but they were not being able to amortize principle. So.

That's our decision in terms of being more conservative in terms of recovery and I think that the registry had a big role in that decision.

Regarding the second part of your question as we mentioned in the.

We're playing in here as well.

Technical issues in the registry, there or not there are complex rate. So that's why.

We mentioned three to six months.

The product that we have today is a collateralized product.

Of course that we are developing and improving our product it will depend on the risk appropriate opportunities that we have.

The diesel weekend resumed disbursements, we we havent yet resumed to the disbursements as we have mentioned in our materials, we have disbursed pretty much 0.8 million Reais in July and.

And we have not yet resumed so we're taking a cautious approach.

Assessing the risks not only of course in terms of improving product, but also the extra.

And how the environment is in terms of technical.

Capability to start working so that's the that's the latest that we have for this.

Thank you.

Uh Huh alright, So let me just add to your point Tito just to talk a little bit about.

What we expect going forward in terms of the operation right. So I think as Hakan mentioned there are a lot of things that we're doing right now to turnaround our credit operation is in all the learnings that you've had.

Number one is we're making an assessment of our collateral talking to players and regulators to see if some regulatory or legal.

Both should would be needed in order for a SEC guarantees given to us.

But of course in the operational side as well.

We have hired a lot of new experienced people that are working on processes and policies to ballpark product with the goal of really improving our underwriting capabilities our recovery in credit scoring processes.

And we're adjusting our product so that we can have a broader set of collateral from clients.

And working in these strategic partnerships as we mentioned to really look for this asset light model that we've talked about.

Just now, but we're following closely what's going on but I just wanted to highlight.

Gladys Theres already many things that we're doing in the operations.

Turnarounds.

Product.

Great. Thanks, Raphael and India. That's helpful. Maybe a follow up then on that if I may.

I guess.

Is it because it's a collateralized product.

And.

Because of those issues could you say that you maybe even over provisioning more than you may need to because you're not sure about their collateral and you may still be able to recover some of that some of these loans you just because it's your provisioning based on uncollateralized product and you're not sure where it's going.

Maybe in the short term you have to provision more or.

Is that the correct way to think about it but maybe you can get some of this back future.

Yeah. That's a great question. So of course, we will pursue those amounts in and try to have a part of it back.

Maybe we have to have our best estimate as of now and what we're seeing now is that given the technical challenges. The system is not yet working so many challenges there.

When we look for example at the <unk>.

Priorities of the credit contract within their registries, they're not yet correct and the bears.

Something that.

But so so I think it is possible that we have part of that flow back what we have seen in the last few weeks is.

When we see players that were not saddling in our bank account.

And some of the smaller players started to saddle, we do see the flows coming back. So I think this is.

It has to be done, but still very small given the total size of our nonperforming.

Nonperforming loans, so we decided to work with information, we have and the take a cautious approach and and do the the increase in provisions to have a coverage that we think is adequate given the profile of the portfolio at the mature.

As part of the portfolio. So we are.

Very comfortable with the levels of provisions that we have now.

I think the latest we have for Europe.

Okay, Yeah. Thanks, Jonathan.

Just one follow up I think you are right. This project the Pulitzer licensed product.

At the.

If they would have to see cash flows of our clients coming to a bank account because we had the luck of receivables to create expectations for future collections. So what we are doing now we are talking to players to understand the problems and the problems in the registry and the reasons why some players are not salary settling transactions rights and.

And of the does things with regulators how can we solve it so I think that if the flows comes to our bank accounts as we were expecting given that we have priority in the previews rule I think that we can make a new assessments about our ability to recover all the money that we have Linda.

And this clients, but we have the information we have we decided to take a cautious approach and make the profusion is with it and in terms of your question about the future it's difficult to talk about the future now in terms of projecting but in the end of the day opportunities are huge and we are 100% focus on the execution as Leah said.

The tour Femen Hasnt change in Europe, and our clients.

Our client base grows a lot both in terms of clients and CPB. There in the end of the day, we want to see is potential collateral but.

But the registry system has to mature in order for us to be comfortable with the collateral and while we are observing.

The pushing of the industry, we are turning around our projects in execution. So it can take anywhere from three to six months as we said, but the opportunity to the future are huge and it didn't decrease.

What we expect is the project that we want to offer to our clients and the opportunities that we see tour business.

The old Okay, great. Thank you guys. That's very helpful and just one other question if I may I guess on the army.

You mentioned, you're focusing on more profitable accounts do you think that's going to continue to be a headwind for volumes as you maybe lose some of the sub acquire business and.

And focus.

Martin.

Revenue generating opportunities is that the right way to think about it.

Hi, Tito just yeah to talk about polka Army specifically the key accounts business like we said right I think that we can separate that business in two groups. The first is a sub acquired.

Switch.

Yes. The answer is we expect these low growth to continue but the unit economics of that is really not relevant.

And also we mentioned that the top two sub requires which are a large part of the volume in the sub acquire segment. They represent only 3% of our revenues net of funding costs.

Fires and we don't expect this number to increase quite to the contrary on the other hand, we do see this you know a positive evolution in growth in the platform business right and and I think that's very aligned with everything that's going on in terms of.

Number one more platforms are growing in the mark.

Not only marketplaces, but all different types of seller services platforms.

Many software providers that want to embed payments in nurse and their offerings to their clients. Many retailers wanting to go omni channel. So we do see a lot of opportunities there, but that's where we're going to focus on right. We're going to focus on those platform services.

That we think are much better opportunities in terms of of unit economics and growth.

Okay, great. Thanks, Leah Cabo and then Raphael foot for the answers.

Thank you Tito.

Our next question comes from David.

Architect with Evercore ISI.

Thank you good evening, you've been very clear that the next three to six months will be difficult for the credit business, but in terms of framing.

You know what financial income might be should we think about the 88% year over decline in the in the second quarter.

Toga up to 40 million he is representing the approximate trough earnings for this business.

Hi, Hi, David Rafael here. Thank you for the question. So we have broken down that that financial income line decrease so if you look.

The growth of our prepayment business, which is also embedded in that one.

That line now we have over 60% growth year over year, I think that when you have the credit product.

Normalizing you should see the growing very fast in what we are seeing is the prepayment business is indeed growing.

To lessen varies mostly S. Thiago mentioned so.

The the 397 million Reais of negative effect that we have mentioned business all concentrated in the financial income line. So I think if you strip out that.

You can take a look at what the normalized.

Credit financial income would be.

Understood and then yeah, sorry, Hi, David Chuckled here just to follow up on that if you remember our previous to this situation with the collateral is in the early beginnings of the credit doing less year, we were expecting something around one 5% to 2% risk adjusted return for the projects. So.

Basically the rates that you're charging for our clients last the provisions we have less cost of funds we had.

So I see this business as being a very profitable one I think we had the problem in terms of collateral leakage, we're changing the way we account for this product and in the third quarter onwards for the new credit disbursements we.

So that's the accrual methodology that basically we will book the provisions upfront and we will accrue the revenue over time. So there will be a margin to be accrued over time as we started to distribute the product back again, and we will help investors reconcile both ways of booking because in the end of the day cash flow doesn't.

We used the change, but the way that you book your.

Your revenues you change so I see this business as it has been a very profitable one our clients they need crowded too to evolve to buy more inventory into grow so we need to serve them, but we have to do it at appropriate risk.

We learned that the collateral we were seeing.

Doesn't it gave us the protection that we were expecting so we have Tony turning around the operation, but they're very profit the business. When we think about the expectation of profitability I think that we were not too far from what we expect but in the end of the day, we have to make sure that we have the risk assessment of collaterals in the client strikes.

To get the product back on track.

Understood. Thanks for that Shadow and just as a follow up how much visibility do you have that you'll be through this difficult period with the registry of receivables by the end of six months.

Great question, David So.

We have weekly meetings with the players.

Three registry of receivables with associations off the card players in the market with central banks. So everyone is following closely they implement the technical implementation that is being made by the three ranches registries now.

We think that once that is done the market through be very protected from collateral leakage. So I think that our confidence that we will get past. This is there's two factors in the one hand, the following closely the industry evolution and the other hand rebuilding the project and working around our execution. So this.

This is something that we are as you know the size of the opportunity and the size of the impact we are following very very closely.

Understood. Thank you.

Thank you David.

Our next question comes from Mariana today, all with UBS.

And Hello, everyone.

It's a good maker from follow up related to the credit business.

You pass through the issue with the registry of receivables.

Do you plan to scale the portfolio, if you could give us a base amazing.

Related to Europe, plus levels observation Asia.

Something around 800 million.

What should we keep this level or a zoom or more.

Conservative approach going forward.

And the second follow up is when you said in the presentation that you're exploring.

Maybe new partnerships to enable us to collect module is this related to funding from consumer that's where you are doing with la Quinta or should we expect a similar model that youre heading the beginning with a partner.

That was assuming the credit risk. Thank you.

Hi, Mariana Thiago here, so regarding expectation of new disbursements I think that our ability to scale. The credit solution has to do with how we built the project. The project is 100% embedded to our financial cost solution.

So once we are comfortable with collateral.

And with the behavior of clients, it's easy to show the value proposition for them and the on boarding process that we built for our clients are pretty easy. So I think that the demand for the product is high the usability of the project and user experience is very good and our ability to make all the process works.

That's real nameless is very good this helped us in terms of selling the product, but in the other hand, we have to be comfortable with the risk. So that's why we are paying so much attention to the collateral in the end of the day. What we were doing was we were like advancing one month or 115 months of cash flows to clients.

And we were selecting a very small percentage of that cash flow that we were taking back on a daily basis. So it was a project to be paid back in eight months. So the risk should not be so big we were not expecting to have provisions in the amounts that we have today. So the first thing we have to do here.

Just to make sure that the collateral of the industry moved it back that once we give credit to our clients. We can access dose collaterals and if not we have to access other type of collaterals in order for us to be comfortable to scale. The product back again, and we are making this so we are confident that once the solution has passed.

We will be back on track in terms of growth.

All of our products and when do we think about partnership we will do two things when we have very good risk opportunities and clients that we really understand and we can make a very good assessment of them and the quality of the credits the amounts.

Past disbursing, there's more of a very comfortable we can use the same methodology, we had borrowed disbursed a project and then we sell the outstanding balance to the market what was the orientation from the beginning for the other type of clients, we want to use like a marketplace in where we provide access to players did want to give credit to our clients.

Just really have to keep the level of service that we have that they have always offered so we will balance those two methods and the partnerships that we are working is to use third party balance to provide credit to our clients and we beat the player in the middle helping both the partners to make the assessment of data and our clients.

But we have a very good experience. So we want to have both model's working.

That's clear thank you.

They come out of it.

Our next question comes from Jeff Cantwell with Guggenheim Securities.

Clients.

Oh can you hear me.

Yes, Jeff.

Hey, Thanks for taking my question on the credit product. This is going to sound similar to some of the earlier questions, but I wanted to ask on credit in a very specific way.

My question is could you walk us through the next three to.

Months from two areas first from a regulatory perspective, and second from stones operational perspective, as you were thinking about those two areas right now.

The question I have after reading the paper and hear your comments today is what exactly is going to happen.

So over the next three to six months from a regulatory level and then there's also you know what should be happening concurrently by you by stone as you move forward with the learnings you've had from this I just would've put some markers down today for investors stake.

So they happened and profitably understanding of what to expect so can you talk to us.

I worry about those two things would be much appreciated. Thank you.

Hi, Jeff Yes of course, thank you for the question Thiago here speaking.

Think that from a regulatory perspective, the central Bank is doing incredible work of helping the markets to get to a solution and the solution is.

It's a little bit about the regulation itself, it's about the technical implementation by the players. It was a big change in the way that you see and use collaterals are in the way that you are registered the assets and the technology that was made was not baked in the right place.

I think that as we disclose it in our teaching there are many technical evolutions that the three registry of receivable has to implement and that's what we'll be following in the next three to six months, it's about the technology of the registry of receivables and the interoperability between them to make sure that once.

So credit to our clients and we contractually received the guarantees of all the transactions for one specific card brands, we can access that collateral in all of the.

Payment's players, regardless of the registry of receivables that theyre using without having collateral leakage. So.

We think the repeatability and the system has to evolve I think we have talked a lot about this in the kitchen to be easier to understand and we will be following that implementation very closely in terms of the stone perspective, and what we are doing as Leah said, we are improving our underwriting risk assessment.

The ability to make sure that we really understand the client and the behavior of the clients because two things happen here. One is the industry had this collateral leakage type of problem, but in the end of the day, our clients they decided to move through our payment solution to another required payment solution.

And then we were not seeing that cash flow anymore because of the collateral leakage. So what we want to evolve as why our clients move to another acquiring player at the end of the day, we understand that because of the pandemic. Many of the clients. They are trying to protect cash flows and renegotiated contracts later in a decided to move.

Not to pay the credits in the beginning so we want to evolve our risk assessment of our clients to make sure that we protect the business for this type of behavior in the future. Although it's important that the collateral is working pretty well. The other thing is that we have to evolve in terms of a recovery process.

Negotiation with clients because if a client has a problem we have to renegotiate with them to give them the ability to repay us back in the way that suits best for them and for our risk and return assessment. So we are evolving a lot in terms of the recovery process and the renegotiation with clients.

The other thing is improving the.

Our recurring process in order for us to see other collateral more than the TPB and the card transactions that the clients have many clients. For example, they are the order of the store and we have not seen this store the extra restored the real state as a collateral.

As a collateral for the credit project for example.

Credit is improving our ability to have more collateral scored the same clients and in the end of the day, Jeff as I. Just said there is some profiles of clients then maybe we will not be the one increasing credit risk to create the products, but we can provide for them at the same level of experience with third party partners providing.

So we have added and be in having us as the origination partner, we foresee in that relationship. So we are working on those fronts in terms of the turnaround that we are doing our operation in order to get the profit the back contract. So it's a two way execution here following the evolution of.

During the three and rebuilding our product, but in the end of the day, what we have to keep in mind is the product has to be simple rates has to be see important client has to reconcile easily we have to be paid back aligns with the cash flows of our clients and we have to provide a better view for the better.

For instance, we have to work on new ways to make our clients sell more by buying more products and evolving that sundar named two of the projects. So that's what we are focused here in terms of our execution.

Okay, great appreciate all of that detail.

Also I wanted.

Clark gears and ask you about links because there has been.

No.

A significant focus over the past several months about that and now it looks like that will begin being integrated.

The numbers going forward. So so you've had a significant amount of time to focus on this integration.

This should talk about the integration how is it going so far are you feeling optimistic about the potential for new synergies revenue synergies and cost synergies. How are those looking for you right. Now can you help us size the opportunity for the combined company because theres a lot of interest in this combination she was hoping to get an update or any color you might be able to provide.

Can you talk about my outlook would be appreciated.

Okay.

Yes, Jeff of course juggle here again.

So about links my message here is that is incredible to see how resilient the business is if.

If you remember, even though the business facing the pandemic situation and with many of the.

It underpins closing their stores.

The business has proven to be very resilient and it has the noise of the acquisition.

It was delayed it was more than one year and even though you're best all of that is delivered 13% net revenue growth. So it's impressive how resilient the business is.

We are very impressive.

Client host Tiki and deeply integrated the projects are to the repay workflow. So when we talk to clients. It's incredible to see how deeply integrated the solution is I don't think the declines are willing to change links systems. So it provides us a big opportunity to integrate with foreign financial.

The emotions and to help our clients to move that into entry Orion because they really know how to use this link system and I don't think there'd be a willing to change the Pos and ERP that needs house. So you can see by the client retention, which is very very high we are still making assessment of the links numbers, but.

So Louie and say is that there are great opportunities in terms of cost and expense synergies on top of this top line synergies that we have talked in the past. So we are currently focused on mapping all of them and we already initiated some of that execution.

Be easier to talk about Lynx numbers in the third quarter. After we consolidate them and use the same.

What accounting standards and procedures that we use so we decided to provide some preliminary numbers that we have received from the company and we will continue to be 100% focused on the execution and once we consolidate in the third quarter will be much easier to talk about the synergy potential that you're seeing putting some numbers in terms of opex.

So we just started to manage the company first of July. So we had a plan, but now we are executing for almost two months in the third quarter will be much easier to give color for you and followed the bachelors about synergies in numbers.

Okay understood I appreciate that.

Thanks for thanks again for taking my questions.

Thank you very much Jeff.

Our next question comes from Mario Perry with Bank of America.

Yeah.

Hi, everybody. Thanks for the opportunity to ask a question two questions. Let me change the focus a little bit.

You're maintaining your target.

<unk> 960000 clients, excluding Tom but by the end of the year.

It means that you have to add almost 190000 clients in the next two quarters.

When you're adding close to 45 to 50000, so it seems like you were expecting.

Let's get an acceleration in client adds in the third and fourth quarter.

Can you give US you know explanation why Europe positive about that.

And second question is related to this mark to market of the Interstate Ryan you you noted it was a six.

Can you ask him gang of almost 800.

And that $6 million.

Is this something that should continue to create volatility to your results going forward. Thank you.

Hi, Mitra how file here. Thank you for the question. So regarding your first question. We are as we said in the presentation. We are investing heavily in the growth of the operations.

50 Boe.

We should see an acceleration in the bin and ads excluding coal.

And I think you you'll see that in the second half of course, we will always balance the unit economics of clients right we cannot take the.

Irrational economic decisions, if we have a client.

That is best suited for Tom product.

<unk> example, we direct our clients so that solution, but.

But I think that we we should see acceleration given the strong investments we have been doing so S. Jago said not all of the investments that we do.

You see the result in the same quarter right we have to.

Upload investments upfront, sometimes then you'll.

Product for our results in the following quarters.

So that's why we maintain that same guidance off of of active client base are any end of the year.

And your second question in the inter.

That's a that's right. So you should see the volatility in the other income expenses line, we're adjusting that in.

You'll see the adjusted net income.

But given that we don't have a significant influence in the company. That's how we should account for it. So that's why you'll see that our mark to market in that in that line item I think that if people are look of course, it's a public traded company you can follow the stock price and people can I think.

Our calculated that effect.

And try to to to estimate the impact that will have and we will keep adjusting this in our in our adjusted net income metric.

<unk> chuckled here just to just to give a an additional comment here, although we are balancing better both projects.

Stone are mainly focused on getting the best NPS in our clients and the best cost of acquisition and lifetime value.

Ratio in the projects, we have we see that our hubs are doing very very well in terms of productivity. We are opening new hubs. So our expansion.

<unk> is a core product in the core channels, we use are doing pretty well. So that's why we are confident that we can get to the numbers that we have just talked I'm very impressed about by the growth of the business I think that the team understood how to manage revenue per client in a different way and I think that now the project is much more robust.

And for them.

I'm very.

Positively impressed by the new balance did the team achieved and very confident with the growth of the court.

Okay now that's helpful.

Like you know to get to this level of clients right.

And again I do realize you are making the investments.

And you are adding hubs and people.

But you know the economy getting can you tell us a little bit about how you're seeing the economic scenario in Brazil, because again, there was a lot of optimism on maybe.

Maybe two months ago, but given the high level of inflation, the rising interest rate environment.

They're getting less optimistic over the economy. So also how does that tie into your guidance of 950000 clients.

I think that in the end of the day I'm.

I'm not in a specialist in terms of Microsoft don't have much to say about it but I think that in the end of the day our market.

People are still very small and the coverage that we have gives us the ability to increase a lot the size of our operation because we still have lot of regions that we have to cover so despite the macro environment and we have learned how to manage this keep in mind that we are growing the company between between 2015 and also.

Sure It was not a easy macro scenario, but in the end of the day, our business has a lot to offer for retailers in Brazil, and the market is very big and we have a very small market share yet. So I think the macro changes do not impact too much our ability to grow in terms of clients we have always to.

Pay attention to to interest rates curve because in the end of the day. It can impact our cost of capital as you know that we have a big outstanding balance of prepayments. So we have to adjust pricing over time to make sure that we are following the cost of capital of the company and that's a situation that we follow very closely.

Our treasury team and our pricing team, but that's the the main kpis in terms of macro that we look at the yield curve is off Brazil, and how we adjust cost of funding and pricing of the products in terms of number of clients I think that's basically market share there's still too small the opportunities ahead that are very very big.

We can that's why we can increase our operation without being too much impacted by that.

Okay, and then just a final question related to the same topic.

You can discuss a little bit about the competitive environment. One of your peers is making a big portion for the SMB segment.

No that another.

That's what's to IPO later this year. So can you just talk give us a little Samsung of the competitive environment and my question is I thought your net adds this quarter was a little bit weaker than what we were forecasting. So I don't know if there was a reflection of.

More competition or you know like if you can just then.

Warm and overview of the.

The competitive environment, there would be helpful. Thank you.

Yes, Mario although we're happy for our growth we don't want to let you down so we will make sure that we keep the growth increasing in the speeds we expect.

Give her a very happy with the level of growth.

We have now, but I think that we have much more things to do to increase our growth overtime for us. It's clear that competition has intensified a little bit but on the other hand, we are much stronger that we were one year ago. So some comments here one we have a much more robust product so engagement of clients that are increasing.

Our distribution is much more robust and the service capabilities that we have invested are providing a better experience to our clients I think that the level of experience that we offer are you don't have a parallel to that in the markets.

We have learned is this better balance between investment and return that I just said so it's.

<unk> the opportunity to access new markets that we were not present in the micro merchant segments.

So very positive news that we had we learned how to operate in that segment. So we expect good growth from that segment, we think that the numbers show the strength of the team the strength of the business model. So we are very confident.

Gave us we can keep winning in the SMB space.

So I think that the dynamics of competition, it's pretty much what we have experienced our ability to manage through different projects new markets and balancing investments I think that is what makes our numbers a b E.

In the place they.

Constant very happy with the growth that we have presented and with the discipline of the team.

Okay. Thank you very much.

Thank you Mario.

Our next question comes from Domingos, <unk> with J P. Morgan.

Thanks, guys also imports.

Great question.

First one is I guess on the operational side. So you mentioned basically 35% of your plants are not reducing principle.

What's the reason that the presentation and then I think you mentioned you know.

And the call maybe pay interest or not.

And 19% or doing a relief.

Thickness on the year, and 19% or north being either so my question is.

In between those two numbers, there were 16% of their clients or to be able to collect something.

What's happening on those guys case, so is the guy swiping.

Are they could I guess all been on relief.

Option, so, it's and they're not paying either because you're not charging or swiping such a small volume that you're only being able to project a part of that then.

If you could really elaborate with some examples like you know, we usually only go up to 10% from the sale of volume or 20% and then Linda It's Huawei ban.

That's what that's allowing.

Allowing us to to get the principal just what I have been more visibility on that and then I'll ask my second one.

Yeah.

Hi, Domingos Rafael here. Thank you for the question that's right. So you have 19%.

Outstanding balance not paying for 60 days or more and 35 not paying interest so.

I think theres two things that can happen. There. So one is clients where their cash flows were impacted so they their sales reduced significantly. So they they are being able to pay us back, but they are not being able to reduce our amortize principle and the other effect and those two effects might be correlated sometimes.

Which is.

They are shifting volumes away to other requires to try to sort of bypass the collateral so.

You you have a small percentage.

After their total sales being moved to us.

In that case. They also don't have the ability to amortize principle in its inter.

Times, because we cannot of course take all of their flows and all of their sales.

To pay us back otherwise just disarms merchants.

It's not healthy so I think that's why you have that gap in between those two numbers and I think that's an important point that we mentioned about the registry system.

<unk> began the new system when it's working properly it will be much better by the exact reason that.

When merchants, who will transact with all the acquirers.

It should we should see those flows as well and we should have the ability to withhold the amounts that those clients always.

And in that case, we would have a different scenario, but that that's sort of.

The the situation.

Between between those 54%.

Outstanding balances.

And my second question is let's assume you know it doesn't work the collateral.

It.

Does your zero or virtually zero origination and all of this means.

Don't want to be doing unsecured lending.

Or should you adjust lending rates maybe further.

Adjusted the addressable market within your client base and started migrating to these other.

This product because I would assume you'd have long enough relationships with select clients, where you would be comfortable to and evening and uncollateralized weigh in if we shouldnt read that uncollateralized is something thats just not.

A possible to do in southern Europe that star market.

Hi, Domingos juggled here. Thank you for the question.

So two things one is I believe that the industry will stabilize shortly so as we said we are following very close the discussion I think that that's a functionality of the interests, which is very good for everyone. It decreases the risk for lenders and it decreases the price of the crowded to clients. So.

<unk> by the focus that the industry is putting on this I think that it will be resolved shortly.

To your question, we don't intend to to have clean credit risk from our clients. So what we are doing is we are seeking for audio collateral and guarantees of the order of the merchant personally for example.

The owner has assets.

We are seeking for guarantees of the real estate and other type of guarantees we don't want to incur in clean credit risk, but in the end of the day, if the clients need a clean credit risk we want to be the one.

Accessing partnerships that can provide historic clients without having these type of risks.

We have a balance sheet. So our strategy is to have a collateralized products in which we can offer good rates to our clients in the aligned with their cash flow and have a very controlled Kyushu. So that we were that's the reason why we're surprised by the collateral leakage.

And now intends to have clean credit risk in our company as of today.

Very clear thank you guys.

Thank you.

Our next question comes from <unk> Agarwal with HSBC.

Okay.

Hi, Thank you for taking.

With Don.

Again, there's chances Eva thank you for the beach and because they have to have that understanding but this problem that you're having visited your chance diseases.

It could have happened previously is that right I mean before late last year, you really when you actually just giving credit at that.

My question, we did not have that it's just to see booth operating so why didn't we have this problem last year.

Earlier this year why is it happening now.

Maybe I'm missing something here.

And then I'll ask my next question.

Hi, Anyhow Thiago here.

I think two factors as we have disclosed that npls are increasing so npls are not in the level of npls that we had in the past during 2020. So in fact, when you see ability to collect cash flows decreased a lot by.

By what we have observed and so you know in the other hand.

June seven the new registry system begin to operate and the new regulation begin to operate so our expectation was since we had the collateral set contractually with our clients and we had the priorities in place we have the lock of receivable in the old regulation, we were expecting that all.

It just would be settling transactions in the right way and then we would have the priority on the cash flow of the clients in the accounts that we have set in the registry system. So we were expecting to have access to collateral that it was given to us in the past, but because of it.

Players. She was on one of other players, we would be able to access that collateral and it didn't happen.

Till now so that was the big frustration, we have in terms of expectation to recover.

The flows and that's what we are following closely to see where the situation, we will and we expect to have the.

And he starts his once all of this the situation stabilize and big part of that cash flow come back to us. So we make a reason we made the research and the vast majority of clients that would give credit. They are operating so we can see the account receivables that they have rewarded players we can make visits to them.

Priority <unk> majority is lightest transacting, but the flows is not coming to the bank accounts that we have set so we don't have the ability to access the collateral. So we expect that once the situation evolve maybe we can exit the collateral that we were expecting.

As long as this problem seen with any other.

I'm glad you said that because we haven't heard that from other participants.

So well.

Was it that Don was targeted by some of the other clients who were being aggressive in taking away your merchants and that resulted in losses. So you on the credit side or are there do you see this problem Michael.

The other acquirers as well and other players as well.

And in a similar manner that's yours.

I think banks, we were impacted in their credit products, but I don't see menu either acquiring players offering credit in the way that we do in Brazil, Our prepayment project is running smoothly.

We have disclosed the numbers off the prepayment project for everybody to understand that the prepayments was not impact the only impact we had.

It wasn't the credit projects. So, yes, I see that banks were impacted for dish to but when you compare to acquirers I think that the outstanding balance we had in the operation with builds.

Smoothly is different than what other players did that's why we were more impacted than others.

Okay.

Perfect.

On the change in the total G that you implemented this quarter.

Sorry, if I do the numbers for.

For the previous quarters.

Made about the.

<unk> hundred 50 million seen in the third quarter and fourth quarter 'twenty 'twenty found about that visit revenue from the credit.

What these numbers look like under the new metallurgy.

I'm trying to understand that once you start isolating credit again, what could be the impact in the revenue recognition.

Because of the Pneumococcal Chi.

Hi, Anita how far out here so I.

We have changed the accounting methodology for the new disbursements sold the the the the.

Contracts that we had until now in the portfolio. That's weird couple of calling the legacy portfolio. This.

<unk> continues to be accounted for at fair value methodology. So the accrual basis will be only for the new disbursements and I think that the fair value methodology brings complex city and the volatility that is higher than the actual volatility and complexity of the operation. So that's one of the reasons why we decided to.

<unk> wounds that methodology, but again this is only valid for the new disbursements.

The portfolio that we had until June 30th this will still be accounted for at fair value method.

Okay, but I understand why you changed it what I'm trying to estimate does that obviously now that I can I suppose.

Shane if you what do you think that 500 million during a quarter previously in <unk>.

Revenue was a much higher during that quarter now that revenue.

And we're not alone differentiation is going to be much lower because of the new methodology. So could you quantify that a bit how much good revenues from credit per.

Bulk water.

Any other look like once you start giving credit again.

So I think that the rationale.

To calculate for example revenue on an accrual method is the average outstanding balance and.

And the rates that you actually charge the client when you look at the past.

We did.

The account is the way we were doing so we don't have that number for you I think we can chat offline. If you want we can try to reconcile the numbers in <unk>.

But I think that the accrual method is actually much much simpler than the fair value methodology, which embeds. The estimates of cash flows are from clients. So on and so forth. So I think.

We can try to chat offline. So he can help you.

Terrific side of those numbers.

And under this methodology would you be recording provisions have cookie and the cost line.

Believe it or not are being netted against that everything is yes, that's right and he is so the provisions will be a separate in the cost line.

We will start off netted in the revenue as it is in the fair value method.

Okay, perfect and lastly on the credit side, you said that you could also act as a marketplace.

And giving credit for their clients. They are not comfortable so just wanted to clarify it would it be more like a marketplace, where you're just getting a fee that is a bus at the peak of the loan amount.

And what would you have more like a partner bank margin. There you can split the profit on the loan.

Hi, Neil Hi, Tiago here I think that the mindset is exactly what you just said we want to have multiple partners are in which we can rely to have.

Our balance sheet and to offered a credit to our clients and we want to split our resorts are with them. So but we are just analyzing what will be the best the best alignment with our partners. So don't have too much to disclose now seek the next quarter, we will have more color.

Well the way that.

Have the <unk> operates with third parties and in terms of the reconciliation that we just you just asked so taking into account the debt fair value, you'll have both revenues and costs and all the provisioning upfront.

Upfronts when we change to accrual basis as we just said.

We will book the provisioning upfront and it to be on the cost line and then you have the revenue coming over time as we accrual that but we will give information to investors to understand what is this revenue going forward in terms of size of disbursements rates. So it will be very easy to reconcile.

We will start to disbursement under the new methodology, and we will always have the old legacy a project with fair value and the new credit products and the new disbursements will be based on accrual basis, and we reconciled to the very simple to understand we can bring these in the next quarter for you and we can.

What's offline after the call to help you better understand.

Perfect. Thank you so much for the disclosure and I Hope you will keep giving us some of these additional disclosures that you provided this quarter.

But understanding the profitability of the credit and the prepayment business separately.

So much.

And chatted Gunia, how we will continue to count on us.

There are no further questions at this time. So this will conclude the question and answer session.

Now turning over to your host for final consideration.

Yeah.

Thank you I just would like to say thank you very much for participating on our second.

Quarter earnings call and see you next quarter. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.