Q4 2021 StoneCo Ltd Earnings Call
Good evening, ladies and gentlemen, thank you for standing by.
Welcome to <unk> fourth quarter and fiscal year, 2020 One earnings conference call.
Now everyone should have access to our totally the.
The company also posted a presentation to go along with its call.
All material can be found at www Dot stone Darko.
On the Investor Relations section as a reminder, this conference is being recorded.
Throughout this conference call the company won't be preventive Dawn Ifr S financial information, including adjusted net income and adjusted free cash flow.
These are important financial measures for the company, but are not financial measures as defined by us or.
Reconciliations of the company's non I F Ara financial information to the I R. S financial information appear in today's press release.
Finally, before we begin 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 those.
The company's expectations. Please refer to the forward looking statements disclosure in the company's earnings press release and in <unk>.
Mission many of the risks regarding the business are disclosed in the company's form 20-F filed with the Securities and Exchange Commission.
It is available at Www Dot S E T Dot Gov.
I would now like to turn the conference over to your host Rafael Martins VP of Finance and Investor Relations Officer. Please proceed.
Thank you operator, and good evening, everyone. Joining us here today, we have geography out our CEO Lia Matos, Chief strategy Officer, and Marcelo <unk> our CFO.
They will present, our fourth quarter 2021 results discuss some recent trends and provide an updated outlook for the business I will now pass it over to John So he can share some key messages and highlights of our performance jargon.
Yeah.
Thank you Hoffa and good evening everyone.
I want to start today's call by taking a moment to reflect on our performance through 2020 one the challenge, we encountered and what do we learn from them.
And then I want to discuss the core strengths of our business that have enabled us to continue to grow and take market share. Despite all the problems we faced last year.
Mainly I will review some recent trends we have seen the business why I have such confidence in our outlook and why you think stone's pointed to benefit in 2022 and beyond.
So let's start by reflecting on 2021.
This past year was unsatisfying first stone.
We executed well in some areas, but we certainly made some mistakes.
We took an aggressive approach. This is how we built the company and how we help lead the Fintech Revolution in Brazil.
But I think at the end of the day, we've tried to do a lot last year and we simply did not execute it as we always would have liked.
We ramped our credit offering quickly, but we did not manage these expansion well.
Our execution challenges were magnified by the problems of the National Registry system.
Which we were also not well prepared to deal with.
So we meet 2021 we decided to pause our credit operation regroup learn from mistakes and go back to the drawing board.
In prepayments, we delayed the pricing of our solutions when interest rates in Brazil begin to rise we didn't want to hurt our customers with higher costs, which we felt we could absorb for a while but in the end the impact was too much on our border line and so we begin repricing in November.
Despite these issues, we did not want to slow down our expansion plan. So we continue making significant investments in the business, which increased our operating costs.
In the fourth quarter, we almost doubled our selling expenses, excluding links and continue to invest in beauty are in phone product banking ecosystem software solutions any healthy our technology and customer service, which remains a key competitive advantage for stone.
In hindsight, we should have spread out some of these investments to ease the near term pressure on our bottom line, but I think overall it was the right strategy for stone to lay the groundwork for strong growth and market share gains over the next few years and I'm already encouraged by the early results.
Ultimately I think we lost some of our focus and execution precision as we manage all of these issues why are the same time also integrating links on entirely new part of our business.
As a result, our performance suffered in our profitability decline so 'twenty to 'twenty, one was not our best year.
However to be fair. We also did some pretty good things last year.
We learned a lot from our mistakes corrected our course and despite all of our problems. We still produced very strong topline growth.
In the fourth quarter, we generated 87% revenue growth year over year, 60%, excluding links which was our best performance since the third quarter of 2019.
During the quarter. We also produced a record number of new client wins accelerated our TPG growth executed well in the M. S. M. D segment with a big win in the micro merchant space, which is new for US we continue to expand our banking system and generated double digit organic growth in our software.
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So the core growth engine over abuses remains quite strong, we're winning clients taking market share and expanding our footprint to lay the foundation for future topline and Bottomline growth.
We learned a lot from last year's challenges and we have also made some important changes in our structure and management team to strengthen our execution capabilities.
We have reorganized the company into two operating segments financial services and software, which will begin to report in 2022.
The financial services segment is the stone payments digital banking and credit business.
The softer segment grew brings together links and all our other portfolio companies.
We think this will provide greater transparency.
As Leah will explain later software is a strategic priority for us and we will continue to drive growth and expansion in this area as well.
Now, let me shift to our outlook for this year, which is quite positive with strong growth and improving margins.
I think we are well positioned for two entering to the investments we made in our projects and operations will continue to help us drive growth on top of our strong core business, which keeps taking market share. In addition, the lessons we learned and the changes we made last year have positioned us to improve profitability. This year.
Looking at both topline and Bottomline performance a few of the 'twenty to 'twenty two will be a good year for stone.
I'll discuss more of our outlook towards the end of Oracle.
I will now pass it over to Leah, who will provide more detail about our fourth quarter performance and our strategic direction Leah.
Thank you Chad good evening everyone.
I'm going to start on slide five with key performance highlights in the fourth quarter, we had very strong topline growth with weaker profitability driven by the increase in funding costs, resulting from the challenging macro scenario.
On the top line growth pro forma for Lynx accelerated to 51% year over year in the quarter compared with 26% growth in the third quarter of 'twenty. One. This performance was largely driven by an 87% year over year TPG growth and M. S N deep and by growth in our payments client base, which more than <unk>.
Doubled to $1 8 million active clients compared with our previous guidance of between $1 four and $1 5 million.
Pro forma for Lynx software revenue grew 15, 7% driven by 26% growth in our core software business a P O S and ERP solutions offset by lower lengths of acquired revenues a result of client migration to this phone platform.
Regarding profitability adjusted net income was 34 million in the quarter, which as Chad mentioned was negatively affected by higher financial expenses, resulting from a spike in CDI rates and our delay in repricing of claims, which we started in November and scaled in December and January.
As we will highlight at the end of the presentation, we expect profitability to begin to recover in the first quarter.
Let's now take a deeper dive into each of our two businesses I will talk first about the financial services businesses on page six to 11, and then moved to softer on slide 12.
In our financial services business, we serve both M. S N B's micro small and medium businesses as well as key accounts, which we separate into some acquires and platform businesses.
On slide six we show the evolution of our opinions client base and the M. S N B Sutton.
Last year, we changed our approach to serving this segment.
<unk> our sales strategy was to offer some products to micro merchants only and to offer stone and block IV solutions to our larger SMB clients. However, we discovered that some clients prefer a different mix of solutions or even a combination of solutions regardless of their size. So we changed our approach to better meet their needs.
We now focus on the offering fold into the client base rather than focusing on just the size of the clients volume.
During the quarter, we reached $1 7 million M. S. N b clients by achieving record. Net addition of 367000 clients compared to 290000 in Q3.
Of these new additions 312000 are using tongs solution and $56 7000 are using stone and Pant Army products.
As a result.
We grew the average TPG your phone in the quarter almost threefold versus last year, and we increased average stone in Calgary TPG by 22% over the same period.
We believe that this new balance between pump installed product yields a better value proposition for our clients and better returns for our company.
On slide seven we show that the TPB for Msnb's has grown 87% year on year, reaching $66 7 billion highs accelerating over the third quarter when it grew 81%.
<unk> continued to accelerate growth roughly in line with last quarter at a 21 fold year over year increase while growth accelerated in stone and plug army with TPG growing almost 72% year over year compared to roughly 70% in the third quarter, although our competitors don't disclose their main growth metrics broken.
Down by segment, we believe we had strong market share gain within the M. S. N B segment in the fourth quarter.
On the right side of the page we show that we have been increasing take rates and MSNBC from 166% in the third quarter to 171% in the fourth quarter and $2 one 2% in January of 'twenty to <unk>.
January was take rate figures reflect the positive results from scaling the waves of clients with pricing that started in November.
Bind with the repricing MSNBC PB growth both in January and February remained very strong above 80%.
On slide eight we show in more detail the initial recovery from higher interest rates. After we started making pricing adjustments as you can see the average monthly interest rate increase fast during 2021, raising our funding costs, especially in our prepayment business as Doug mentioned, we decided not to pass along.
Higher cost of clients right away and started to do so in November with that in the first quarter of 2022, we already see positive results and expect higher take rates combined with better margins.
Given the still expected CDI increase along 2022 we will have a more dynamic pricing strategy throughout the year to achieve a healthy balance between growth and profitability.
Moving to slide nine we have continued to drive the expansion of <unk> banking ecosystem, which is an important part of our strategy banker.
Banking services for small businesses in Brazil are still largely dominated by incumbent banks and we see a huge opportunity to offer those merchants a one stop shop solution for all their financial needs in an affordable way.
The number of clients, who actively use our banking solutions.
Has increased almost three fold year over year to 492000 clients the usage of our card as well as the total outstanding deposit that clients have with US have also increased significantly both year over year and sequentially from last quarter.
Most importantly, we have been growing our banking client base, while also increasing our pool, which reached 25. He is in the fourth quarter growing 39% sequentially driven by increasing outstanding volume of deposits car T V growth and the initial scaling of our insurance solutions.
Shifting to slide 10, I want to update you on our credit business and where we are in terms of resuming disbursements for clients.
We're implementing five major fixes and improvements.
First we have completely revamped the product you works for them.
More simplified experience based on monthly installments paid to automatic retention using this phone accounts caching we.
We believe this revamped U S preserves the strength of our original product to auto retention, but in truth clients understanding of their payment schedules more in line with the traditional credit products.
Second to decrease our reliance on the registry system.
We have added personal guarantees to enhance protection against that borers with focus on maintaining a simple and frictionless onboarding process.
Third we will implement a new sales process and scoring system based on enhanced data ingestion from multiple sources, including a more rigorous assessment and detailed data input from our hub sales personnel.
Fourth so that we can improve client lifecycle management and enhanced recovery, we're rebuilding systems to improve client communication has more flexible renegotiation analysis and agreements.
The execution of warranties and better integrate with collection partners.
Lastly, as effective risk monitoring is one of the cornerstones of the successful credit business, we're implementing an improved risk monitoring system to effectively resumed disbursements with a more robust risk management.
We will begin testing these improvements with clients in the second quarter of 2022, we will take a conservative approach to scale in order to observe client behavior in more detail.
In addition, we also expect to launch a business credit card for Smbs in the second half of 2022.
Despite the initial challenges we faced with the legacy credit portfolio in operation, we are committed to resuming credit offering to our best SMB clients. As this is such an important solution for them. The opportunity is huge and we're confident we will be better prepared to have a compelling offer that is great for our clients and at the same time profitable for us.
Updating you on our legacy credit portfolio. It is performing in line with our expectations. This quarter, we had a cash inflow of 430 million highs from clients paying us back and we are close to receiving all the amounts have disbursed since inception de risking principal capital.
Given this performance and collections the portfolio decreased to $1 2 billion has by December 10, roughly one 6 billion. He is at the end of the third quarter and is recognized at a fair value of 511 million has on our balance sheet.
Our coverage ratio decreased slightly to 98% in December which is a natural evolution of our portfolio being phased out in January we sold the distress portion of the portfolio to a third party for 12 million highs above its fair value.
We continue to collect payments on the remaining portfolio and have reduced its size to 850 million highs at the end of January 2022.
Finally, moving to slide 11, we show some kpis for our key accounts business within financial services.
<unk>, excluding Corona voucher was roughly stable in the quarter compared to last year at 22 billion House.
There are two different dynamics in our key accounts business, we continue to de prioritize sub acquirers, and which we had a volume decline of 28% year over year, while our platform services business continues to grow fast up.
Up 93% year over year.
Our sub acquire volumes should continue to decline significantly in 2022 with a very limited impact in our bottom line.
As we penetrate the bullets PPV within the links client base, we expect this to drive overall TPG growth in key accounts.
Great for key account was 0.82% in the quarter higher than third quarter levels, mainly as a result of higher prepayment rates and the mix shift towards platform services, which have higher take rates as compared to sub acquirers.
On slide 12, I would like to recap important advancements we've made on the softer front.
Since the closing of the link acquisition, we have taken an important step to integrate links and the portfolio of stone software investments into a unified software Division, we will focus execution of our enhanced software strategy along three main fronts.
The first one is of course software, which is the driving force of our software strategy.
Sure of course off to business comprises P O S and ERP solutions for multiple retail and service verticals.
Our tap and QR code gateways that enable payments and fix integration to the Pos and ERP. Our reconciliation solution, which enables reconciliation of all payment methods within the P. O S in ERP and our CRM solutions.
Our focus in the core will be on driving organic growth through new locations and cross sell as well as inorganic growth through selective strategic acquisitions. In 2022. This fund should represent approximately 85% of softer revenues and should grow approximately 20% we expect this.
Part of the business to have a 20% plus EBITDA margin level.
The second front is digital solutions, where we will focus on enabling our core clients digitize digital comprises the Oems our omnichannel solution for physical stores and our E. Commerce platform engagement tools that help retailers to better reach consumers online our marketplace hub that helps merchants sell.
In multiple marketplaces through a single integration and our AD solution. This part of the business should represent 15% of Hawk to revenues in 2022 and grow approximately 20%.
We still expect negative margins in digital in 2022 as the business continues to mature.
The third front is integration and cross selling financial services. This used to be the links of acquiring business, which is nearly shut down because we have migrated the majority of clients to the strong platform. We will focus the strategy on cross selling strong financial services to our software client base in 2022 we expect.
To have positive contribution margins from this part of the business as we execute our cross selling strategy.
Now, let's talk a little bit about softer performance in the fourth quarter of 'twenty one.
Our revenue from software solutions reached 328 million has in the quarter up eight fold compared to last year or 15, 7% pro forma for Lynx. When we look more closely at the growth trends across the different software. So we see very different growth dynamics.
Of course software had a strong growth of 26% year over year.
As we show in more detail in our earnings release, the number of locations using links D. O S and ERP solutions increased 11, 7% year over year, reaching 109000 locations links digital solutions grew revenue by 20% year over year and links are acquiring business had a revenue decline.
A 53% as we discontinued this operation and transition it to the stone famous platform as I. Just described overall given the early stage of many of the software solutions and the work we still have to do in cost management integration of companies and synergies with our financial services business.
Software is still dilutive to margins. However in 2022 we expect margins to improve as our business scales and we advanced in these fronts.
On slide 14, we show some encouraging initial results or penetration of stone financial services into the links client base.
PV from Linksys clients process by stone has increased 116% year over year in the fourth quarter 2021 to $5 9 billion. This.
This was largely driven by the migration of links the volumes, but also by the cross sell of stone solutions and links client base as well as a natural overlap as Tom continues to grow organically.
Compared to the second quarter, which was our latest quarter before the closing of the deal with links volumes grew 47%.
In the fourth quarter, we estimate that our TPB represents approximately 13% of overall PPV of billings client base up from 8% in the fourth quarter of 2020, we there's still huge opportunity ahead.
Now I will pass it over to Rafael So he can discuss in more detail some of our key financial metrics Hoffa.
Thanks, Leah starting on slide 16, I will highlight some aspects of our 2021 performance, while our adjusted net income decreased to 203 million Reais, our adjusted cash flow from operations increased by 40% compared with 2020, reaching $1 1 billion Reais that increase is mainly because some of the fac.
<unk> that affected our P&L in 2021 are noncash items, such as the fair value adjustments related to our credit business.
Cash net income, which grew 20% year over year was the main growth driver in our cash flow from operations.
Our adjusted free cash flow for the year was negative 214 million reais impacted by two decisions, we made that although very accretive to the business generated additional cash outflows in the year first we decided to significantly increase our capex in the fourth quarter to 548 million Reais compared with 50 million Reais last.
Year to make advanced purchases of P. O S terminals de risking 2022 growth amid supply chain uncertainty and microchip shortages. This proactive investment resulted in significant reductions in our P. O S lead time.
Second we prepaid 230 million Reais of marketing expenses in the first quarter 2021, which was fully funded by cash received from Grupo Globo and is still mostly available for us to use.
We believe that those two measures where appropriate and necessary decisions for our business strengthening our value proposition and our ability to grow at a strong pace and of course, when we look at capex for the coming quarters, It should decrease substantially compared to the fourth quarter.
Excluding the cash outflow from those too preemptive investments full year adjusted free cash flow would have been positive and had a similar level as full year 2020, despite the negative headwinds and challenges we have highlighted throughout 2021. Excluding these investments we are continuing to generate solid adjusted free cash flow while driving.
Strong growth and investing in existing and new solutions in.
In the following slides I will provide more detail about costs and expenses that drove our bottom line results.
On slide 17, and 18, we show our P&L for the quarter as reported on page 17, and pro forma for links on page 18.
In order to provide more transparency and help investors better understand our results. We have included this quarter, our adjusted P&L, where we allocate the same adjustments we do for our adjusted net income metric into each line item in our P&L.
As we provide a detailed analysis of each line item in our earnings release, including a discussion of the items, excluding links and have already talked extensively about topline I will move directly to slide 19 to focus on our costs and expenses pro forma for links.
Although we continue to increase investments in our business. We are implementing and will continue to implement in 2022 more measures to better rationalize costs and expenses.
We believe this is healthy for the business and for our culture of ownership.
Paired with last quarter, we realized operating leverage and cost of services administrative and selling expenses, which were all lower as a percentage of revenue compared to the third quarter financial expenses as a percentage of revenue continued to increase this quarter as a direct result of the substantial increase in CDI, while we only started our waivers of repricing.
Remember.
Starting with cost of services, we saw a 96% year over year increase in the fourth quarter growing from 329 million reais to $646 million.
As a percentage of revenue cost of services increased from 26, 4% in the fourth quarter 2020 to 34, 5% in the fourth quarter of 2021 and eight one percentage points increase within that increased three seven percentage points was a result of the lack of credit revenue and two seven percentage points increase.
Was driven by costs related to our registry business, which is a very early stage business. It started operating June 'twenty, and 'twenty, one and they're forced to negatively impact our margins.
We also increased investments in technology customer service and logistics.
Most of our costs tend to increase with the growth in our client base.
We expect that as our registry business matures in the coming quarters, it should breakeven and start contributing positively to our pretax earnings also we believe we can improve efficiency and costs related to data center cloud costs and other overall costs.
Looking at administrative expenses, we have gain operational leverage both year on year and on a quarter over quarter basis administrative expenses grew 41, 7% year over year to 235 million Reais decreasing from 13, 1% of revenue in the fourth quarter 2020 to 12, 3% of revs.
This quarter main drivers of growth in this line are personnel expenses and third party services.
We are already seeing operational leverage here, we will seek additional efficiency as the business scales and we rationalized back office expenses, both in financial services and software.
Our selling expenses increased 73, 4% to $318 4 million Reais going from 14, 8% of revenue in the fourth quarter of 2020% to 17% this quarter.
This increase was mainly due to higher marketing expenses and investments in salespeople, we have been expanding our sales team into hubs with a focus on increasing coverage density in existing regions.
Compared with last quarter selling expenses as a percentage of revenue decreased four percentage points, mainly due to operational leverage and slightly lower marketing expenses, we're constantly measuring the unit economics and payback of our cock and selling expenses is an important part of the calculation.
Following the November and December repricing wave is our cockpit back up 8% to 13, Memphis remain highly accretive and the reason why we continue to increase our selling investments compared to last year.
Financial expenses were $610 six memory is in the quarter roughly eight times last year levels. This increase was mainly led by higher funding costs combined with strong growth of our prepayment operations higher cost of funds is the result of a combination of several factors.
First a higher base CDI rate in the country, which increased from one 9% at the start of the year to over 90% by year end.
Also there was some change in our capital structure with a higher percentage of third party capital being used to fund our prepayment business and finally, we had approximately 19 million reais of financial expenses in the quarter arising from the sale of receivables to our new Phoenix as we assigned longer duration receivables to this fund the result was a higher than usual.
Impact in the quarter.
As we started to reprice our clients in mid November we are already seeing a recovering profitability and in the first quarter of 2022 that will be translated into higher overall margins for the business when compared with the fourth quarter.
Now I would like to pass it back to juggle. So he can close the presentation with our 2022 priorities and outlook Gi walk back to you.
Thank you offer as I mentioned earlier, and we announced this today in a separate press release, we have taken important steps to reorganize the business and bringing new seasoned and talented people to strengthen our team.
We believe this change will help us simplify the management of our operations.
Enable our team to focus and a manager of bigger and evolving mission more effectively and create greater strength and depth of expertise across our management structure.
To highlight a few of these new appointments curfew was who is the head of our micro merchant gives the stone was appointed CEO of our financial platform Division.
Use of the Hudson previously the head of link score was appointed CEO of our software Division, which encompasses our links business and the stones portfolio of software solutions.
<unk> been a former board member of several retail companies in Brazil, and founder of <unk> has joined the company as Chief Information Officer, leading our efforts in product technology and data with greater focus in the financial platform Division.
So is it about healy former VP of people of our hoist and Busch Inbev is our chief people and management officer, leading a big part of our organizational and management system changes as well as maintaining a focus on talent attraction development and retention a hallmark of digital culture.
Jim So God, former executive director in London debt capital markets team at J P. Morgan has joined our team in 2021 as head of Treasury.
In terms of the business reorganization from the first quarter 2022 onwards, when we report our financial results in three reportable segments financial services software and other segments. We believe this will also provide more transparency to the market help investors better understand the drivers behind our performed.
Yes.
Our 'twenty to 'twenty two priorities for each business are presented on slide 20.
In financial services, given the expected ongoing increases in the CDI in 'twenty to 'twenty, two a key priority will be balancing profitability and growth through a more dynamic repricing strategy.
We will continue to execute on our product roadmap to become the one stop shop financial services solution for our Msnb clients and in this rising interest rate environment. The bank strategy becomes even more compelling as shown in our recent ARPA evolution.
For these reasons it will be our banking offering we will also be a key focus this year.
On top of this we're obviously focused on Relaunching our credit offering in 2022, we are certain that credit is one of the most pressing needs of our clients and a huge opportunity for us.
We also believe that we are well positioned to win in this segment given the precedency with clients built into our business model and the expertise we have through our over 100000 clients to whom we have previously extended credit.
In addition to Relaunching, our working capital solution in the second half of 2022, we're also building a business credit card and overdraft product for Smbs.
In softer most efforts will be concentrated on driving organic growth and margin improvement in the core and continue to pursue selective strategic inorganic opportunities are an important part of our software growth playbook.
We will also focus on digitizing the core client base and as we have discussed we see an attractive opportunity to increase penetration of financial services across our software client base with our initial focus be on payments and banking.
We will also begin to explore different models by which to leverage our distribution to scale our software solutions to smbs.
Finally, three elements will be key to a successful execution of these priorities.
First the evolution of our management structure and a strong team, which is underway as they have nation.
Second our continued investments in technology to advance our multi product strategy and lastly, the disciplined to maintain a strong balance sheet and liquidity levels.
I would like to close with some specifics on our first quarter 2020 to outlook for the business.
We expect revenue growth to accelerate in the first quarter of 2022 with total revenue and income between $1 85, and $1 9 billion reais representing year over year growth of between 113, and 119% or 67% and 72% pro forma for links.
We expect revenue growth to be driven substantially by the growth of our MSP business.
Projected to reach CPD between $58, five and 60 billion reais representing year over year growth between 79 and 83%.
The net effect of the repricing we've initiated in the fourth quarter is expected to be a lower pace of net client addition in the first quarter.
We expect to see an improvement in profitability, we've adjusted pretax, earning above 140 million reais in the first quarter, coupled with ongoing have investments in our business.
In summary for 2022, we'll continue to invest in our growth avenues any strategic priorities, while improving our margins with that said operator can you. Please open the call up to crashes.
Thank you at this time, we're going to open it up for question and answers.
If you would like to ask a question. Please press Star then one on your Touchtone phone.
If you would like to withdraw from the question queue. Please press Star then two.
Please on mute your phone before asking a question one moment. Please for the first question.
Our first question comes from Jorge Kuri with Morgan Stanley. Please go ahead.
Hi, good morning, everyone.
<unk> on the quarterly results nice improvements across the board.
I have two questions. If I may the first one is on the <unk>.
Lending business.
I recall back in August September of last year.
<unk> Street, and some of the management team talked about moving the lending business to a distribution model, where you were going to use partners too.
Provide the balance sheet the risk assessment.
And you would do the distribution exclusively.
It seems to me in listening to the call today.
Not the case that you actually.
One two.
Just on your own on your own risk on your own balance sheet.
So I just want to make sure.
If that.
As has been this correct in and if not please let me know how that's going to work out.
My My second question is on your.
Guidance for the first quarter.
Particularly on the pre tax income of over 100.
$40 million.
I'm.
Just using the regular seasonality for for the year.
That number is.
You know it ends up being roughly around 600 million or so which is nicely above consensus.
As you think about consensus for 2022, what do you think the market is underestimating what you could do for the year. What do you think are the number one or two areas of your business that you think the markets on the rescue making thank you.
Hello, Jorge Thiago here speaking thank you very much for your question. So regarding the credit operation actually we want to implement both models Jorge but we have to start in Nevada, which we have the origination in house, we assess the credit risk.
We sell to partners. So that's the first model because we want to make sure that in terms of the credit risk assessment the way that we handle clients. The full lifecycle of the clients. We are executing within our plans and then we have the ability to sell that client that portfolio to partners that can be.
Where the risks up towards so in both models, we help to make sure that the risk assessment is in the right track, but we will move to a model in which would distribute crowded thrown towards quite astute. So we intend to execute both but to make sure that the operation is working well it's important to start with origination originating in our own balance sheet and then sell.
The outstanding balance to total body partner I think that that's the best way to begin regarding the guidance I will pass it over to <unk> I think that hopper can be helpful. Here.
Hi, Jorge Rafael here. Thank you for the question.
I think that the.
The feedback we had received from investors Jorge over the last few months I think there was two main elements.
The concern about CDI increase and our ability to re price and I think that what our guidance shows is that we have been able to reprice clients successfully.
I think this is one one relevant sector and the other one was maybe last quarter investors didn't have.
Our view on our costs and expenses in a lot of details and one of the reasons why we brought in this call here a little more details about that.
Mainly because some of those expenses and costs are related to investments, we are making and that of course, when those investments mature and we have the results.
We have more profitability. So I think those were the two main elements that we see and if you look at the guidance and top line that we gave at despite the weak seasonality in first quarter, you don't see a big change compared to fourth quarter revenue right. So.
And we have also provided details about take rates. So I think maybe we have de risked part of those concerns are in the guidance that we gave and that's the.
Our our impressions.
Thanks.
And congrats again.
Thank you Jorge.
Our next question comes from Tito about.
With Goldman Sachs. Please go ahead.
Hi, good evening, thanks for the call and taking my questions and all the additional disclosure as well.
One follow up on the margin guidance.
And.
Any color on how do you think that evolves from here as you continue to reprice a.
Merchant.
And can you talk a little bit about the competitive environment. It to reprice those merchants I mean, you mentioned a little bit net adds this should be a bit weaker next quarter perhaps.
Because of that and Andy are you seeing a big difference between repricing SMB and micro merchants.
And then I have a second question on links that maybe you can start with that one.
Hi, Tito juggle here speaking thank you very much for your question.
So regarding the guidance we are focused now on providing guidance for the quarter, but what I can say is that we expect the margins continue to increase.
The year, so we expect to improve our bottom line results.
Along the year, we are implementing much more discipline in the way, we manage costs and expenses. We will be we will continue to invest heavily on our growth will continue to provide lots of resource to the team dedicated to our banking platform to the credit platform to the softer <unk>.
Unit that we're building.
But more disciplined here and the way that we allocate capital into the way, we think about costs and expenses. So I expect that this trend will continue along 2022, which is important to comment here is that we are trying to balance profitability with growth. So more than the guidance. We are giving in the bottom line of the company I think that with.
Decided to show.
Resorts Rehabbing the M. S N B in January February so if you've seen the presentation is like seven in January and February you already have growth of PPV indium SMB above 80%, so I'm pretty confident with the guidance. We gave in our pre confidence in the ability of the team to deliver the results we expect.
Thanks, Cabo that's helpful. Maybe one follow up on that and on the take rate at which you mentioned in January was already above 2%.
As you reprice that any color.
How high do you think that can get.
Yeah.
Yeah, I mean, I guess, that's the main question can how much more can that increases your continuing to reprice.
We are seeing two things here one is that we see competitors are talking more about repricing in their own strategy. So I think that this is a trend in the market and it's a positive trends.
The second thing is that we are focused to use not only the repricing, but offering itself. So we have created an offering in tone, we adjust automatically with the sleep improvements here in Brazil. Once we scale banking and we have more extended in Dallas for our clients that money received receives interest.
It's because we put the capital in the in the in the investments.
In the Central Bank, and we received interest rates on debt outstanding balance. So I think that more than only repricing. The existing offerings. We are thinking more offerings to our clients better aligned what we are doing.
With what is best for them. So we expect that we will continue to drive more profitability for the business, but with the mindset of align aligning the strategy of the company with what is best for.
For our clients and regarding competition as you said I think that everybody is being more rational.
In this challenging environment regarding interest rates. So I think that that's what we have seen.
Okay, Great. Thanks, and then my question on links you gave some good color there. Thank you have.
About $5 9 billion in PPV from their clients you.
Continue to highlight around 200 billion.
Addressable market.
How much of that links as PPV of their client base do you think you could potentially penetrate.
Any color on the take rate you get on and Linksys clients and any update on when you think if it becomes accretive.
Yes, as you have to leave that last time.
Yeah.
Yes, two two or so regarding links they think that we are in the early beginnings of our ability to penetrate financial services in that client base, we decided to show here. Some numbers of our initial work the take rates more in line with the key accounts take rates that you show here separately those are larger clients or Maureen.
With that segment Mark more close to the platinum serviced in the soup acquiring ones with more in line with the key accounts take rate I think there is more than only penetrating payments in the first steps really providing the payment solution. We have thrown the clients had already use the best gateway.
Within links we have focus in additional services using the banking platform because I think that is a great opportunity for link so the combination of peaks or bank accounts with the the front end of links the checkout of links in the stores I think the debt.
Can be a big opportunity for us. So we are focused on creating the projects and the integration between the checkouts and to the point of sale of links before our banking and our financial platform in the right way. So there are good encouraging results in the beginning and we expect this to increase so we will provide more information to you and to investors as we evolve.
We expect this business to be accretive as we said, we still have investments to do in the digital part we are finishing to the shutdown process of the Super quiet platform that they had there, but I think that we are holding well.
That's great. Thanks.
And sorry for follow up questions. Just one quick follow up on the margin just to understand that that would be the pre tax margin that you guided for in and one key you think that continues to increase throughout the year.
Yes, that's what we are aiming here.
Okay perfect great. Thank you for myself.
So very much to you too.
Our next question comes from Sherry Schumacher.
And their corner ISI. Please go ahead.
Hey, Hi, Thanks for taking my question I have a question on the financial expenses, we just wanted to get a sense as to how to think about for 2022 like wood.
For Q2, and do you want to be like a good jumping off point like assuming the rates kind of continue to grind higher.
Because here only 12 plus percent or something and I do have a follow up after that thank you.
Hi, Shari Rafael here.
Thank you for your question.
When you look at financial expenses I think that there are two two main drivers that drive that deadline. There one is CDI evolution and the other one is the growth in our prepayment business. So when you look at our TPG for 2022 that we expect to continue to grow and the CDI evolution that you see I think.
If you look at fourth quarter. This is a good base point with one exception that we mentioned in our earnings release and also we mentioned in our call here at which is in the fourth quarter. We had around 90 million Reais of finished expenses related.
Two the sale of receivables to two hours fatigue, right and from that amount around 60 million reais there related to longer durations receivables that that so I think that as sort of a.
One element that you should not like project going forward for the full year calculation, but apart from that you can.
Go from the fourth quarter levels.
And look at CDI, increasing our TPG growth as well.
Thank you so much.
That's super helpful.
My second question is on the because on the loan origination.
I just wanted to get a sense on the timing and mix and.
And the magnitude of how you would want to ramp up in 2022, and how much of that is incorporated in yard wanted to 'twenty to 'twenty two guidance as to what would be the revenue contribution if there's anything that's going to be in the first quarter.
Hello generic Thiago here speaking thank you very much for the question. So so first comment is that there's no credit origination incorporating in our first quarter guidance, we expect to start test the product between the second quarter into third quarter, and then we will vote. This.
The evolution.
As we see build the the lifecycle of our clients how the risk performs so we would take a more conservative approach.
So I think that between second quarter and third quarter, we'll have much more data to provide you about the tests.
We will execute in our client base, but we would take a more conservative approach in the way we scale. The business. One think which is important is that once we start to disburse credit to our clients. We will account. This in the new methodologies, we're not used to fair value anymore. So it will help the accrual methodology.
For the new credit disbursements as we said before so that's what we have in mind and therefore, we don't have expectations of disbursement for the first quarter and we are not completely contemplated that on our guidance.
Got it. Thanks, so much I'm, sorry, I just wanted to squeeze squeezing one more can.
Can you give a sense of high school, how the attrition has tracked so far in this quarter given all the price increases that you have done and also like I know you kind of talked about the incentives of banking products, but is there any kind of incremental cost that you would have to generate because.
Kind of maintaining those clients on your platform why did you increase your prices.
Thank you Sir shall week for this our last question is Lia here. So regarding attrition are we gave some color on on net adds trends for for the first quarter naturally as we ran several repricing waves between November and January we expect.
A we had a slightly higher level of churn in this period and this is a natural effect of of of this repricing decided repricing wave. So the biggest chunk of repricing waves, where it in fact done within this period.
So we do expect almost like a one time higher impact from from a churn in the first quarter. So I think that's the overall picture here regarding churn trends.
Thank you so much I appreciate it.
As a follow up yes go ahead, yes, hi, Sherri Jaguar here, let me add some comments on that part so when we think about repricing.
Actually two components. So we're moving prices for new sales and we are repricing the outstanding client base. What we're seeing is that although we are pressing lower higher levels of pricing our ability to sell our products and the interest we have over our clients. It hasnt changed so I think that we keep the pace.
Adding clients and we are seeing that the performance in the way that we invest in our channels. We are really doing well, we expect and we are seeing some additional churn in the client base, but what makes me.
B here more positively.
When we see that the TPB in the M. S N b clients from January.
In February are above 80% and that's why we have confidence with the guidance, we're giving that the trends that youre seeing I think that we are keeping the best part of our client base and.
The very small part of the client base that we can lose because of the the decision we made.
I think we are okay with that we're not see a big impact.
In a company and I think that the offer we gave in terms of service the products everything we delivered to our clients. It worth it to make this movement. So I'm happy to see that the company is balancing.
This repricing with the relationship we have we were clients with the most important part of the client base, which are the best clients. That's why we have seen this <unk> increase in the first quarter and we are confident with the guidance for the quarter. So I'm happy with that with both new sales and the way that we are dealing with the client base.
Thank you that's really helpful.
Thank you very much <unk>.
Your next question comes from Jason <unk> with Scotiabank. Please go ahead.
Hi, Thank you for the opportunity to ask questions.
My first questions are on the credit side, I mean, I guess I understood. The answer to the question that we should be waiting till the second or third quarter.
To get more of a sense of the timing and magnitude of the disbursement, but maybe you could give us some color on the sale of the distressed portfolio that was sold for I guess the data shows or what your release was that the price was over two and a half times the fair value.
If you can give some comments on that.
Is that reflective.
The portfolio fair pricing in general.
And my second question will be a general question on the software business, particularly the core business. If you could talk about.
Growing 20% if you can talk about where you think you are in the market share there and where you think youre going with that 20%.
The growth profile for 2022.
Very much.
Thank you Jayson Rafael here I get your first question and then I'll pass it over to Leah outrigger.
Regarding the legacy credit I think the legacy credit is performing as we expected as we mentioned that we did that sale of that distressed portion of the portfolio.
To our collection company here in Brazil. It was above fair value I don't think that if we looked at the ratio we should apply to same ratio to the whole portfolio. So the fair value that we have there in our balance sheet is a little over 100 500 million Reais.
But what I can tell you is that the legacy portfolio is performing as expected as we mentioned in our call we are almost.
Having a cash flow a payback of the oldest disbursed amounts we had since inception so I.
I think that what you'll see over time is that the legacy portfolio will continue to go down in terms of outstanding balance and as we collect the cash inflows from clients. So in the fourth quarter. It was a little over 400 million Reais.
We expect this to phase out.
Over this year.
Great.
Jason I'm, taking the question on on sell through so we tried to provide a little bit more color disaggregated.
The software business and showing the core digital in the financial services parts separately and regarding your question on market share and how we see growth in the core I think there's two big messages here. So.
We're softer position right now is very strong in the mid to large clients. So we do have relevant market share in many different verticals in retail and services, we do see opportunity to continue to gain that market share within the mid to large client base, both organically and also inorganically.
Either within the verticals that we are or in new verticals that are strategic for us, but there's also a second part of this which is the big opportunity, we see to grow softer within the SMB and that's where we believe a lot in leveraging our business model and distribution capabilities. This because we think that the.
After market overall in the SMB space in Brazil is still a.
Very fragmented and Underpenetrated and Theres, a big opportunity. There. So those are the two areas, where we really see opportunity to grow and gain market share in 2022 and beyond so we gave color on.
How we see growth ahead.
We will focus a lot on those.
Two movements this year and we do see a lot of opportunity to continue to gain market share both in mid to large clients and also smbs.
Thank you Barry Kenneth Kennedy or the comment Jason.
Jason He has chagas Yankee.
Just to put a softer one one of the things we see here is that when you think about links in the position that links house in the middle of the pyramid.
In terms of client phases into links has a very good market share when you go to a shopping center here.
In Brazil, the main cities of Brazil, the market share of links is very big but much more than that as Leah said the opportunity in the Smbs is very big in Brazil, Jason I strongly believe that every merchant should use software to improve productivity to manage their numbers batter to self.
Channels. This is a need in Brazil, we don't have a big champion hearing in Brazil, We think that in the retail segment links was the champion here in Brazil. So there is a big untapped market are helping dose merchants to use simple solutions to drive productivity and that's our goal that's our commitment to continue to invest.
Our distributions and our project people village implementation capability I think that this opportunity in Brazil is still very big and we will pursue this for the longer term.
Yeah.
Thank you very much for the additional color.
Our next question comes from Antonio Reale with Bank of America. Please go ahead.
Hi, Tim Good evening can you hear me well.
Yes, Hi, it's Jordan Alright, those who can give you. Thank you for taking my question and thank you for your time, so I have a more specific follow up and I have a second broader question.
So on the follow up from a previous question how is your churn going in respect to the prepaying the refreshing of the premium product.
Broken down issue code.
And it'll be by segment, so how heavier multiple segments have responded to this repricing.
Hi, Antonio Thiago here. So as we said we saw churn a little bit higher and not something that we are somewhat worried about in the segment that disorder.
The churn, increasing a little bit where the clients with TPG from zero to 5000 Reais them up so that was the segment that we experience.
A as needle.
Bigger increasing churn, but it's not not something that we're really worried if it happens when you do this type of reprice in the client base.
We do not expect the chin, who will be on high levels.
And actually what we have seen now in February March the churned already cut back.
So the levels, we were used to so there was a big movement now as pricing has a much more dynamic.
Component in our operations with pricing and repricing.
I think that this will not be something that we.
We will impact too much our ability to grow.
Alright, Thank you Super clear.
No on a broader question.
You have the very tough year. So you had an effect on your credit product.
On January the register of receivables.
I would ask you what were your learnings from nuclear.
I do believe it is wrong or what it is you're right.
And that's where all of this what are the main issues roofing. So it has to be addressed in 2000 and furniture.
Hmm.
Great question until I knew I tried to talk about this at the beginning of the call. When I wrote about these are in the later myself with the team, but I think that we've tried to do too much last year, we took an aggressive approach towards the growth of the business and Dominion initiatives that we had at the same time and in the end of the day I think that.
We lost a little bit to focus and our execution. So we regroup with the team we brought more experienced people close to us where we can learn for all we are very focused on the core strength for our business and I really believe in what we are executing here and I think that the team is focused to a very different year. In 2022. This type of years that are.
The company's past and we have our in 2021 which is difficult I think that it changes the way you said the business and you learn a lot from them. So in wound way I'm happy that we learned.
A good experience now we have to move on execute what we believe and built this business, which is an amazing business that we are.
That we love in the and we are putting all of our efforts here. So we learned.
We change and let's move forward for 2022.
Yeah, Yeah, all right and just a follow up on the roofing.
<unk> structural here that should the stupid changes are to ground base for your credit program and your financial other financial products and we are a software product.
As all in place and now it's a matter of execution.
The only still to report we are seeing is microenvironment. So we know that the environment in Brazil and actually across the globe is not very easy environment. We are seeing interest rates moving up faster than we were expecting we're not expecting these new impact that we're seeing but.
We learn to be more dynamic in the way that we see the environment and the way that we act on the environment. We have in front of us. So I think that they are much stronger.
Let me strict roofing receives macro environments and the interest rates. The other part I think that we have the execution now on track good leaders in place we have the assets and the team. We wanted to have notes are married to execute and deliver on our results.
Alright Super clear.
As you all the best guys. Thank you.
Thank you very much on tour and a great questions. Thank you.
Our next question comes from <unk> with HSBC. Please go ahead.
Hi team. Thank you so much for taking my question and congratulation on visa.
The question was on the heap guys, taking effect or is there any good to see the numbers about 2%.
But John Lee clean kind of James how do you think will go to reprice and thoughts on all of the Hyatt Boston got too much maybe only a part of this we're kicking into higher thankful.
This segment has been easier to replace.
Market.
SMB market and then I'll ask my second question.
Jaime has so I think thank you for the question.
Regarding the pricing the way that we actually conduct the processes and ways right and we don't do a standard process across the client base right. So we select different clusters of clients and define the level the appropriate level of repricing, depending on that specific cluster.
And there's a lot of testing before we decide to scale any pricing a wave. So I don't think that theres, one straight answer as to which clients are easier or more difficult to reprice I think it's a matter of really are not doing the process. All at once which is why we started in November and we took all the way up to.
January two to really do the repricing ways at what we felt were necessary at this stage. So I think it's really a like Charles said, a very dynamic process. The biggest chunk of of a repricing waves.
We're done in this period, but we do expect a much more dynamic process moving ahead as we continue to see the interest rate environment pretty much in the same way throughout 2022.
And then you know you place on average how much of the higher funding costs have you been able to pass along to the customer that how much are you have to go beyond that maybe from a margin perspective.
It doesn't have a similar effect.
But just trying to understand how much of the half basis Easter maybe have to bet on average.
Hi, near Rafael here. So we are we are now pass that along the CDI increase of clients and I think one important element is what we focus on what we look when we do repricing is we look the unit economics of clients and we try to balance this with a healthy level of growth. So in some cases, when we look at pay.
Back returns, sometimes it doesn't mean necessarily that we passing along 100% is the best outcome. So in many clients. We are doing that but what I can tell you is we are balancing the unit economics are.
To have a healthy payback level, but also a healthy level of growth. So I think this is the way, we think internally and how we are dealing with that.
Dynamic environment as Jim mentioned.
Hoffa Chuckle here, Ken a compliment.
Just one additional point about both.
Both pricing on a very high level.
Think the company should not focus only on pricing the prepayment on the or the payment solution I think that once we have the ability to create more engagement over our clients who for a banking platform and we have more outstanding balance they use our ketchup methods. They use our cards to purchase goods.
We are focused now on beauty or credit cards for Smbs. Once we have the ability to improve our distribution of software to smbs.
The conversation with clients changed completely or not only repricing. A current product you have you are trying to offer a better deal for them in terms of what you can offer. So that's where we are really focused for the longer term to have a completely different type of relationship with clients not be only focused on the machine.
The prepayments so for the longer term that's what we are trying to implement here in the U S. We are repricing, we are passing along the CVI, but in a way that we balance and we do not break the relationship with our clients.
And this does make you. My next question is on the on the module that we should expect getting deal.
Not having to put in chaos.
Could you give us some numbers or some sort of range.
I understand how much of the margin expansion that we're talking about are the hill unless youre looking it all up.
Adjusted pretax margin level on an adjusted net income margin level, because if I look at the adjusted net income margin.
For the phone.
So what should we look at.
2022 if you can just clarify that.
And then lastly, any update on that and you might want to do a partnership.
Our stake in.
And Doug.
Do you have data on that would be very helpful. Thank you so much.
Hi, Neil Hi, Thank you for the question so just to be clear the guidance that we gave for the first quarter was pretax earnings. So this compares with 17 million Reais of pretax adjusted pretax earnings in the fourth quarter, which was a 0.9% margins. So if you look at the 140.
Millinery is with the guidance of topline that we gave you will see that is roughly 7%.
So this was the guidance for the first quarter, we do believe that given pretax earnings provides a better view on operations and.
That's why we didn't give like adjusted net income which has a tax rate also in there, but that's just to make it clear what the number really means.
And I want to talk to margin of around 7% for the year.
And maybe residents.
Uh huh.
So as Thiago mentioned, we are not providing guidance for the full year at this moment.
What Thiago mentioned is that we expect to continue improving our margins.
Over time right. So this is sort of the message we are convenient at this moment.
Thank you Neil.
And he had thiago here speaking so just a comment on that I think that the margins. We are guiding for the first quarter. They are far away from the stabilized margins that we expect to have in the business. So these margins should improve by the way that we execute them and work as the business matures. So we continue to.
Invest heavily in our growth and the strategy that we believe.
But now you will see those margins, increasing so we decided to give the guidance for the first quarter I think that that's the first step.
And then we will help you to frame batter once in the first quarter, we provide more numbers on the two business segments. We have the two business units I think that the levers will be much more clear and we are planning a session to be helpful to the market to frame the levers in our forecasts.
Our forecast the business better.
On your own regarding dog, what I believe is that the infrastructure of the registry system is really important for crowded for Smbs, we are a little bit frustrated that that didnt evolved well nationally in Brazil last year, but we still believe that this can be a big change in the way that smbs can access.
Crowded in Brazil, and they really need at those clients, they're not accessing crowded in big banks or or or or their players do they really need a crowded but in order to decrease the risk. The system has to be working well. So I think that theres a good value in what the team builds I think that the.
I'll, let you that we built is a very good tech knowledge, we still see problems in terms of govs between the registries and how the environment is working so youre assessing strategic options here, we have regarding the financial impact we expect the tag achieved breakeven this year.
So I think I think the from 'twenty to 'twenty two onwards, the financial impact intact will not be a burden.
But we will continue to provide our efforts to make the national registry system works and I believe that the team is doing pretty good work in terms of tech knowledge. So we will keep improving our work on the registry front.
Thank you so much.
They have.
Thank you very much anyhow.
Thanks Neil.
Our next question comes from Geoffrey Elliott with.
Please go ahead.
Hello, Thanks, very much for taking the taking.
Taking the question.
In terms of the repricing.
Can you give a sense is it.
<unk> re price smaller clients to say than that.
<unk> business it is easier to reprice larger clients was without repricing happening faster and wasn't happening more slowly.
Hi, Jeffrey Thiago here speaking, it's difficult to talk too much about the strategy in terms of repricing because in the end of the day, we do have a competitive environment here in Brazil, but what I can tell you is that.
It's easier to reprise clients that have more used elements in their operations. So I think the debt.
That's what I can see here.
Okay, and who who would typically have more installments, what sort of a retailer would that be what sort of merchant would that be.
All verticals use.
It's the elements with the bigger B provide morris elements to dos clients. So I think that's not a mirror of the difference between a fashion type of store or a bakery, it's much more a matter of the size of the merchant, but Jeffrey I'm, sorry, when taken not to we're trying not to talk too much about the commercial.
Our strategy here I think that this is a very sensitive information of the company. So what I would say is more focus on bigger merchants bigger smbs more focus on smbs. They use more salmon's. So that's that's the color I can provide here.
That is very helpful and understood on the commercial strategy. Thank you.
Thank you very much Jeffrey.
Our next question comes from Kyle Packer with UBS. Please go ahead.
Okay.
Hello, everyone. Good evening. Thank you for the opportunity for asking question I have two here if I may start with the <unk>.
First one.
If you could detail a little bit what are the impacts that you are seeing in terms of mix in Brazil. Currently if the volumes come from Houston is becoming more meaningful for you or not to do so if you could share with us any kpis related to these would be great.
Regulation, if those new capital requirements and offered by the Brazilian Central Bank last week.
I'd like to understand better if you already have any estimate about the potential impact in the company and two different limitation. Please and then I will follow up with the second one if I may.
Hi, Kyle Thank you for the question I'm going to take the first part and then pass the second part to have file so regarding peaks.
Yes, we did see picks grow significantly within our base in 2021, but mostly substituting wire transfers bold letters in cash. So there was little cannibalization of the debit volumes. When we look at the peaks have users within our base, we estimate that with cannibalization.
<unk> to be less than 5%. So the overall impact to the base is very very low. These trends. We believe are very much in line with the market, but we do see peaks growing significantly within our base and we do see picks as an important part of our banking strategy because it increases engagements of our banking.
We actually do see that our clients that use peaks. They they have a higher average outstanding deposits. So we see picks very positively so maybe how far you can take the second part of the question.
Sure Hi, Cai. Thank you for the question. So when we look at the new regulation about the initial impression we have is that so first the capital requirements were lowered than the initially indicated by the public consultation 78, and also look into our business both today and to the future.
We do have much more capitalization than what is required by the regulation. So I think that that shouldnt be meaningful for us in terms of impact.
The company is very well capitalized and even when we look at the growth that we expect going forward. So this is the.
What we have to comment about those capture requirements.
Okay, great. Thanks, a lot and just a final one if I may is related to the investment in Bunkering carefully.
When we look to your adjustments to net income we see that you are taking out the cost of funding related to divestments. So just would like to better understand your view on does affect these.
These expenses is expected to continue going forward at these levels and if you could see that as recurring and finally, what are the improvements related to the partnership which buckwalter expected for 2022.
Sure Cai. Thank you for the question I'll start and then maybe Trevor can complement so yes. When you look at the adjustments. We made the reason why we made it is because when you when we look the inter investment in our asset.
It doesn't flow through our P&L right into results. So what we thought is we have the asset as an investment we do mark to market that investment in our balance sheet, So youll see that moving up and down.
So if we only bear that cost in the many gyro view, we would have a cost that wouldn't have the counterpart of the asset right. So that's why we adjusted many Julian we show the adjustment in our P&L just for us to better understand the underlying performance of our business, excluding that that part and that investment so.
This is why.
While we do adjust that in our financial expenses item as we have shown in this time I think it helps investors understand we provided the full P&L adjusted so allocating to each line item and where the investment goes so people can understand better.
In which line item there just in the scope of flow through do you want to to complement chunghwa.
Yes, Hi, Coyote Chug, where he is speaking regarding the partnership with bunk Queens that I have no relevant update here, we strongly admire the team and what we're doing with the business, but our forecast East war or core and our goals for 2022, we have to relaunch the crowded expand the Arab banking offering and continue to execute.
<unk> on the core strength of stone and our software business units. So we're much more focused on the core we have so no relevant update in the partnership with Intel So far.
Okay. Thank you very much guys.
Thank you Kai.
There are no questions at this time. This concludes our question and answer session.
Now I'll turn it over to your host for final considerations.
Hello, everyone in Chicago, He had just final comments here.
We are now in a high energy momentum with the changes that we are doing in the business and we learn it and with the learnings we had from last year.
Really focused on the frontline of the business or clients or product roadmap. We're really passionate about what we are building our ambition and thank you very much for your time for follow to follow or call and see you next quarter Bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.