Q2 2022 PagSeguro Digital Ltd Earnings Call
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Good evening My name is <unk> and now you will be your conference operator today welcome to Bang Bang Bang figure is webcast results for the second quarter 2022 at this time all lines have been placed on mute to prevent.
Any background noise should any participant need assistance during the call. Please press star zero to reach the operator. These event is also being broadcast live via webcast and maybe accessed true backpack bag segers website at investors dock bag Seeger dot com participating.
Mayfield is light in any order. They wish today's conference is being recorded and will be available. After the event is concluded I would now like to turn the call over to your host Aedicule E Vita Investor Relations and ESG Director. Please go ahead Sir.
Hi, everyone. Thanks for joining our second quarter 2022 earnings call.
Today, we have with us Ricardo Dutra and Alexandra My journey, our co Ceos and Artur shrunk our CFO .
After the Speakers' remarks, there will be a question and answer session.
Before proceeding let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information impact Bank <unk> current assumptions expectations and projections about future events.
While Pac bank bags, <unk> believes that their assumptions expectations and projections are reasonable in view of currently available information.
You are cautioned not to place undue reliance on these forward looking statements.
Actual results may differ materially from those included in fact bank <unk> presentation or discussed on this conference call for a variety of reasons, including those described in the forward looking statements and risk factors sections of <unk>. Most recent annual report on form 20-F.
And order filings with the Securities Exchange Commission, which are available in fact bank bags group's Investor Relations website.
Finally.
I'd like to remind you that during this conference call. The company May discuss some non-GAAP measures, including those disclosed in the presentation.
We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors.
The presentation of these non-GAAP financial information, which is not prepare owned or any comprehensive set of accounting rules of presuppose there's.
It's not intended to be considered separately from or as a substitute for <unk>.
Our financial information prepared and presented in accordance with <unk>.
F. R. S S issued by <unk>.
S P.
For more details the foregoing non-GAAP measures and a reconciliation of these non-GAAP financial measures to the most directly comparable I FRS measures.
Are presented in the last page of this webcast presentation and earnings release.
With that.
Let me turn the call over to Ricardo Thank.
Thank you.
Hi, everyone. Good evening for so Paulo, and thank you Eric.
I'd like to begin our presentation with the main messages for this quarter.
While the successful repricing with the stable churn led to a negative three six.
16 basis points higher than Q1, 2022, or eight basis points higher in frequency definition expenses.
Exiguity PV again outpaced market growth despite prices increases growing more than 60% that was in financings.
Beg Bank net ads accounted for $1 6 million new clients consolidated like Bank is the second largest digital bank in number of clients in Brazil.
Total deposits, which is more than 15 billion reais of 163% higher than the same period of 2021.
Capex per se is at 14, 7% lower by 120 basis points, when compared with Q1, 2022 and trending down moving forward.
Despite our moving upmarket strategy combining these price increases.
Hubs TPB reaches almost 30% of policy grew total TPG.
Going to slide four.
Once again, we presented record number the old main kpis why or is it remains the same.
Democratized access those financial services and payment solutions in Brazil, providing a simple safe affordable and diesel ecosystem commercial vehicle choice.
And payments platform.
It was 89 being oriented with revenues growing faster than PPV and TPG promotion growing above 50%.
Into one for dinnerware is in gross profit.
In financial services.
If you was 86 billion Reais with 314 million, realizing revenues and with a flattish gross profit when compared with Q2 2021, mainly driven by our cautious approach in credit products underwriting in such a challenging macroeconomic scenario.
Overall at the center of the slide.
Revenue and income reached $3 9 billion reais, 65% higher than Q2 2021.
Net income and non-GAAP basis, which is 403 million reais, 17% higher than the same period of 2021.
Our non-GAAP net income reached 367 million reais growing 35% year over year.
Moving to slide five.
We compare our performance relative to the whole market and conclude we have been able to keep growing with profitability, which also reinforces our successful ongoing repricing initiatives.
Chart on the left we were again, the TPP market share gaining window. This border when compare with Q4 2021, we grew 80 basis points without buying market share.
As you can see the second chart. Although every player has been increasing prices or repricing initiatives were the most successful one.
By focusing on client demand and having a stronger value proposition allow us to increase our net take rate much more than peers.
Our net take rate grew five times more than the peers.
Finally in.
In the short and the right to comparative stability in a fair and easier way to understand when they look at how much profit each company can extract net income from each real transaction and its payment solutions, which means net income divided by CTV.
Can see bank is five to seven times more profitable than peers.
And if you compare the total profit for the industry.
<unk> has almost 11% if you could share and capture the largest portion of the profit share around 45%.
Slide six we present the main highlights of <unk> Bank.
He reaches 25 million trained in June with more than 15 million active clients, which reinforces our position as the second largest digital bank in the culture.
And 60% of the new consumer cohorts used by bank of their main bank.
Also.
Deposits grew by 163% year over year, reaching $15 5 billion, reais and growing faster than our credit portfolio, which helps our funding diversification.
Moving to slide seven we are happy to announce our security credit carful over our clients consumers and merchants.
It has been noticing that clients want to have a higher credit card limits and at the same time, we aim to manage the asset quality.
Addressing both demands or secured credit card and forward motions and consumers.
Their credit card limits to Bugger bank cities, which has the highest users in the market.
This product has zero npls and wholesale deposits, which helps to manage our cost of funding and increase the upselling and cross selling opportunities for us to become more and more the primary bank for our clients also pulling our mission to be simple and safe oral clients can manage their credit card limits yet.
Finally in slide eight.
The cash and process and Peggy Bank and help mix headwinds and then in boosting cash and makes it easier to Nicolas into the Twenty's payments.
Ashish, excluding acquired grew 149% year over year, reaching almost 32 video ads.
Also <unk> has been boosting our deposits while diversifying from these sources.
Leveraging wounded sizable cash-out consolidations like bank of the final one of this initial flight since our market share it peaks transaction, which is 10% this quarter.
He also helps to collect additional data from our clients.
We are not unaware of what the evolution of the sector and we see several opportunities exploring not only prior statements below political statements includes wire transfers big OLED payments and cross border, while providing business integration and management solutions, and Upselling and cross selling banking based financial services.
Through a single interface.
One at one platform.
One I banking, one customer support and a complete integrated solution.
Now I'll pass the word while extended to show some views of motor business units. Thank you.
<unk>.
Hello, everyone and thank you regard before the initial remarks moving to slide nine I will start the segment highlights with bugs gurus overview during the quarter Bucks of Google's total revenue and income grew 68% year over year, reaching $3 6 billion reais faster than PPV, which grew.
58% year over year totaling $8 9 billion Reais as a result, our market share in payments reached almost 11% growing 150 bps over <unk> 'twenty one.
10 bps over <unk> 22.
In the next slide we show how we have been working with our merchants to combine growth and profitability.
We have the lions share of active merchants in the Brazilian market, we have been more selective in our acquisition strategy.
<unk> 2022, reducing subsidies and focusing on the best sales channels to improve new worse since acquisition quality.
As a result, we grew the new merchants average TPG by 53% through our online channel and we also increased by 56%. The overall average TPG for merchant on a year over year basis.
Our numbers of active merchants, excluding wipe reached seven 4 million in June 2022 in terms of Mike we have been prioritizing worsens with a strong online operation and cleaning up the base of Nen Marine active resellers of some marketplace.
Tivoli affecting PPV revenue and net income trends when we exclude wipes motions and then abortions from bags, we observe I, 11% year over year growth.
Drew marsh and face.
This strategy results in a higher activation of <unk> device higher TPG per merchant and higher Upselling and cross selling opportunities for Baidu bank as none of Martians represents only 2% of bags at Gucci BV.
Consequently, the positive results to be expected, our lower capex per sale lower P. O S depreciation per sale and higher LTV over CAC ratio for new Marshalls cohort, which will contribute to margins rebound and cash flow generation.
In the future.
Slide 12, I want to share some updates about bank bank operation.
Total revenue grew 62% year over year, ending the quarter at 314 million Reais, representing 8% of bags total revenue and income.
Total payment volume reached 86 billion growing eight 7% year over year with engagement to PV, gaining traction driven by cashing Bill payments card spending among others.
Moving to slide 12, I would like to recap our milestones and credit products.
Total credit portfolio reached $2 3 billion Reais up 104% year over year, mainly driven by the increase of payroll loans and F. GTS. The early prepayment which are consumer focused products.
Asset quality remains a top priority for our company, we understood that for navigating such a challenging macroeconomic scenario, we had to increase our exposure to secured products, which went up from 5% to 23%.
<unk> 22 versus <unk> 21.
Also as Dutra mentioned.
We just launched our secured credit card basket by Bank Bank Cds, which you contribute dry even faster share growth of collateralized products in our portfolio.
Have a disease strive to jump track.
We expect to keep growing our portfolio gradually but also doing important investments to develop our policies models and the overall credit cycle fundamentals, we are preparing back bank to scale and diversify credit offerings for most all of our clients in the future with a proper balance between risk and <unk>.
Return.
Finally, before I turn it over to Arturo I would like to review our guidance for Q2, 'twenty, two and establish a ballpark for the Q3 22.
Total revenue in Q2, 'twenty two was $3 9 billion Reais 300 million rise higher than the guidance midpoint.
For Q3, 'twenty, two we expect a ballpark between four and $4 1 billion.
Bugs sick with TPG in <unk> 'twenty to reach at eight 9 billion Reais, almost 5 billion rise higher than the guidance midpoint.
For the Q3, we expect something around 91 to 92 billion.
Net income non-GAAP was almost 30 million reais higher than the guidance midpoint for the Q3, we expect a ballpark between 400 and 410 million mainly due to the higher average interest rate of the period and higher marketing investments to promote the launch.
Of new products.
Having said that I pass the word to our to our CFO .
Thank you.
Thanks for machinery, and Hello, everyone I will continue the presentation in the slide 14 with Q2 turning to financial results.
On the left side total revenue net income reached a record of $3 9 billion.
Growing 65% year over year net take rate achieved in 275% this quarter.
Creasing 16 basis points versus Q1, <unk> as shown in the bottom right side of these lines.
Gross profit nature of FX impact grew 28% year over year impacted by financial expenses growth and higher charge backs, despite being stable as a percentage of plexiglas CPG Arthur will require the owner who is your pricing strategy in acquiring and credit products.
<unk> has been helping to offset those impacts.
Adjusted EBITDA close it at 831.
32% in comparison to Q2 of 'twenty one.
25% versus Q1 'twenty two.
Net income non-GAAP achieved a die record of 403 million here is for all second quarters in our history net income GAAP increase of 35%, reaching $367 million versus.
Versus the same period of last year.
This represents an earnings per share of one <unk> in the second quarter of 2022, 28, or 35% better than Q2, 'twenty, one box continues to better balance growth and profitability focusing on improving shareholders' return.
Moving to slide 15 in the left side Opex reach at 603 million Reais in Q2 'twenty Q.
22% year over year.
These amounts represent 50% of <unk> revenue versus 21% in the same period of last year.
Improved efficiency has come from personnel and marketing expenses leverage as well as Patti banking hubs revenue growth.
Yeah.
In the right chart financial expenses close it at 756 million versus 134 million the highest in Q2 'twenty one.
Almost 87% of this increase is explained by the high cost civic and the remaining portion of 13 was related to higher TPG volume prepayment of receivables solutions and credit card mix. These effects were partially offset by ongoing pricing.
Brian <unk> increase on credit underwriting and lower cost of funding to deposits growth combined into a better spreads negotiated this market.
The focus is on improving funding processes.
We're sick time sources and extending terms to leverage all of our banking license and support the company growth.
In the next slide Capex spear revenue reached 14, seven percentages acquired versus 16, 8% in 2021 and 19, 9% in Q1 10-Q. This.
This decrease reflects part of the strategy of being more selective merchant acquisition to leverage pocket Bank.
This year, we expect to reduce capex, rather than the ratio moving forward.
The second chart adjusted EBITDA minus Capex, Richard a positive amount of 256 one.
187% versus Q4, 'twenty, one with a better trend compared to previous quarters.
It reflects finances throughout tissue to foreclose on maximize LTV to CAC ratio by reducing.
Subsidies and adding more valuable merchants.
Cash position on slide 17 ended the second quarter at $8 6 billion has improving 300 medium has acquired required.
This was driven by TPG growth higher share of credit card transaction and larger penetration of same day prepayment two motions at the same time, we have been improving our capital structure.
And in this quarter with 71% or financing position funded by third party capital.
On top of that boxes, diversifying funding sources to support volume growth.
Additionally, on July 22 base it on the shelf price opportunity the company bought back one 7 million shares.
<unk> treasury position to be distributed in the long term incentive plan.
Diluting shareholders.
To conclude our presentation I will turn it back to <unk> for the final remarks.
Thanks Art with before we move to the Q&A I would like to remind our key milestones for our business.
In the slide 18, we recap our achievements in terms of growth. Our company continues to maintain a consistent and growing faster than the industry, but in a profitable way, which reviews that we do have a superior value proposition and we do not rely on prices to grow our business.
Terms of profitability, we continue to boast one of the highest levels of EPS, among acquirers and feedbacks Latam.
In Brazil, we remain with 45% of the acquiring industry profit pool and presenting profit margins over to preview that are five to seven times higher than competitors.
Even with all the macroeconomic kind of weaned scenario, we were capable to grow our EPS by 35%.
Finally, this is what we expect for the next quarters.
We are focused on consolidating back bank as the second largest digital bank in Brazil by providing a superior banking and payments experience through our multichannel single interface.
Wasn't that one night banking and one customer support.
Differently from Cubans that operating bank came and acquire through segregate lots of forms we deliver both solutions and integrated way to our customers.
We also intend to increase exposure through secured credit products, which will continue to help us to explore a safeguard entry point you in consumer Atlantic reinforcing that our strategy of growing fast with profitability.
We ended our presentation and we will open the Q&A session.
Operator please.
Thank you we will now begin the question and answer session. If you have a question. Please press star one our first question comes from Merry up here at Bank of America. Please proceed.
Hi, guys. Good afternoon, congratulations on the results.
Let me ask you two questions.
One is related to your.
So your ability to continue to reprice your products.
How are you seeing the environment have we seen the full benefits of all the price increases that you have implemented.
And then the second question is related to your guidance.
When we look at revenue growth in PPV grew.
We're seeing a slow downturn the growth that you provided that you showed in the second quarter in particular here, we're talking about revenue growth of about 46% on your guidance can you give me. Your explain this slowdown is it just because of tougher comps given that the first half of last year, we still saw the impact.
Covid and then it's just like you.
Youre seeing more difficult comps.
In the second half of the year. Thank you.
Yeah.
Yeah.
Hi, Mario this is Ricardo Thank you for the question look to talk to you.
Of course talking about re pricing as we said before I mean pricing is an ongoing process. It's a I would not say you that it's over because all the time and we are evaluating our or net take rate after financial expenses and if necessary, we will make adjustments we will increase prices again.
We never do that massively for all the clients, we always see some clusters that we believe we can increase prices here and there to always to manage the client relationship and the profitability that you have for for this each cluster so.
We did this with pricing again in.
In Q3, because we knew that silly towards increase again.
If necessary, we'll increase one more time, what I can see you at this point is that the genetic rates in Q3, so far is higher than Q2, so let's see how it's going to be before.
Q3, but so far genetic rate, it's a little bit better than Q2. When you finish expenses is likely is stable. So that's why we I say to you that is never it never ends we are always evaluating some opportunities that we can.
Make a better profitability for specific clusters and regarding the growth Youre right that is as a percentage is growing less but in Q3 as you said in your in your question. We are seeing hard comps from 2021, because it was really when we had the reopening of the economy in 2000.
When you won the economies started opening let's say in Q2 2000 and Youll get the full open. It was in Q3 2010, you. All so it's just a hard comps we still see.
Strong numbers as you can see more than 19 billion reais. That's the guidance that <unk> given so I would say the main reason is it's a hard comps from previous year.
Perfect.
And a follow up on the pricing can you talk about your pricing on the different segments and then micro merchants in the SMB segment.
Well for the for the micro motions, we have the same pricing the website. Its intended upside you can just take a look there we didnt change the price for the long tail. We just made some adjustment of the promotions, we had some clients and debate with promotions and we put this clients as do.
As a regular price in the regular price and for Smbs, who are always fully what's going on with the margins what went on with the net take rate after financial expenses for one specific person as smbs.
Because you know you have these motions category codes, depending on the type of the motion we have different costs. So that's why we are always evaluating different clusters in terms of merchant category codes. The profile of this motion some of them. They have more credit card was installment some of them, who do you have more debit cards.
Transactions. So we are always evaluating this type of profile to increase the prices.
So that's already do we have someone many clusters you.
And that's what he did when always of course looking at the churn and leveraging the client relationship and the profitability for four specific cluster.
Perfect very clear, thank you and congratulations once again.
Mario.
Our next question comes from Pedro Leduc Ethyl BBA. Please proceed.
Thank you all so much for hosting the call and taking the question first.
<unk> financial results Slash financial income no.
Evidently there's a repricing effect to your financial results starting to outpace.
<unk> expenses and nominal amount a lot more.
We're seeing deposits at the bank now nearly $15 billion.
Can you elaborate a little bit and how does this helping you. If you can help us maybe quantify and definitely if this can help you going forward, even if people vehicles as I've discussed before to continue improving profitability, but definitely on the financial.
Thank you.
Hi, Peter This is Ricardo again, I will start the question and then our two or else you can help me here with more specific numbers, but conceptually the D of <unk>.
Course deposed helps us because as we have the banking license. We can use these deposits as a source for funding all the operations that we have here and impacts the groups.
PPV.
Not to say that of its cooling off is just is growing is going to be higher than Q2 is just the deceleration in the growth, but it's still very strong growth, we're talking about more than almost 50% year over year and as we can see in the first quarter as we are growing.
Between 60% to 70% more than the industry. So just to rephrase here <unk> Com is strong we have this around 16 billion rise in deposits that we can use and help us in our funding sources and we in fact that he has begged bank growing steadily it helps us in this.
This initiative because of course, we expect to have more and more deposits. So it isn't allergic and art.
I guess I don't know if it's clear.
Sure. Thank you.
To elaborate more.
No that's clear I do have one more just a technical question on the POS right off that much appreciate the disclosure.
Explanation around it this this value the $93 million just to understand if it's a second linear right off the full amount that we assessed on engagement et cetera, or if it's just this one number and for next quarter should be smaller depending on how you reassessed all saw.
Those values. Thank you.
Pedro Thank you for the question <unk> speaking.
And evaluation that we we had in this quarter and the impact of 93 million Hey, ice is an adjustment at this level ingesting in Q2.
But we will continue to evaluating our relationship with our clients and the write off of POS is will be a recruitment process in the coming quarters, we are expecting something.
And I'll, let her off.
Marty you made on <unk>.
260 million ASP acquired.
Related to those write offs.
Super clear. Thanks, so much again, it's already contemplated.
Contemplated in the guidance that you gave schedule district.
For the following quarter right, Yes Joanna.
Alright.
Okay. That's.
That's clear thank you I've got four disclosed that so clearly and flowing it through so I appreciate it. Thank you.
Our next question comes from Domingos <unk> Jpmorgan.
Thank you guys for hosting the call and taking my question as well.
What's your more congrats I guess on the ability to pass through this.
He's writing Selic is good to see the only integrated will be up.
Two quick questions actually adding to yours. So like you mentioned you know its evolving nicely. Thank you versus second Q.
So in order of magnitude the number to look at that take rate is it like a similar movement, we saw in second Q or something more pronounced.
As far as margin improvement.
And second one.
<unk>.
Any any like if you could differentiate a little bit sort of like the opening.
Net financial result evolution was it predominantly driven by the acquired or do you actually had some savings on the bank side like being lower.
Baas Apis and things like that then is there more you can do on the bank side too. Thank you.
Hi, Domingos D did not degrade for Q3.
Compared to Q2.
As we've seen so far and of course, we still have half of the quarter two to be to be gone, but as we've seen so far we see increases but not at the same level that you saw in Q2, it is growing but not at the same level that is thank you too.
But it's still growing and as I said before we are always evaluating and doing the repricing in terms of funding we used the funding for the bank and when you use the bank funding.
The cost for us is lower than 100% CDI. So it's it's I would not say that it's cheap, but it is lower than the CDI, which is good for US is our ability that you have by the fact that we have the banking license.
Looking forward to just want to increase more and more of our deposits. We are all the time low she new products that insinuate clients to leap day.
Monty here that Peggy banks to be defined out money this nation.
But that's that's what they've been doing so far I mean, there is no.
Silver bullets here, we just need to increase deposits more and more and of course deposits tends to be a cheaper source of funding when compared with other sources that he used in the company.
Very clear thank you guys.
Thank you Domingos.
Our next question comes fro knee hard go Walla HSBC.
Okay.
Hi, everyone. Thank you for taking my question and congratulations on the results.
Can you talk a little bit about bank.
The revenues and the gross profit that was only a small increase in revenues and monetization seems to be a bit more challenging above bank.
The gross profit increase is much better than it ever yet so could you.
You must understand the dynamics of a bank that we can see going forward.
How should we think about that.
At the bank.
And then do you foresee a breakeven.
But thank you so much.
Thank you for the question good to talk to you.
<unk> Bank is based on three I would say to a source of revenues. One is the transactional do other one is related to interchange of the cars and the third one is related to credits province that interest bearing province, so while we have seen so far in Q2, the increase that you had.
Was almost 100% in collateralize it products.
More in these projects relates to salary payroll.
So what happens with this project is that it has longer duration when compared to other projects that you have in the in the credit portfolio. So we are.
<unk> seen this change or this mix shift from.
Non collateralized products with shorter duration.
To collateralize it products is longer duration. So we are at the beginning of this process adequate seniors lied one year ago, we had 5% of our credit portfolio in collateralize. It product in today's 23. So we did I think Hawaii Ford these revenues to be stacked at each cohort each grades in the rides for each month.
For us to see the impact of this cohort in the following quarters, but we are finding is that because it's a conscious decision that we just need to change the mix to have a more balanced credit portfolio, but it takes a while for the revenues to come because they have a high.
Io duration regarding breakeven I don't have here on the top of my mind I guess, Eric can help me here. Thank you Neil.
Hello, Nicole.
Thanks for the question.
<unk> breakeven is strictly correlated to the evolution of bag being clients engagements.
More appetite on credit underwriting, which seems that we are getting a safe interim point rolling out this secured loans for both merchants and consumers in terms of cost and expenses, we do not see much.
A lot of growth over the next quarters.
But we do expect to see a stronger revenue growth as do termination with this waterfall effect on the payroll loans given the newer cohorts.
Cooperating for a positive outlook in terms of revenues grow to reach back bank breakeven.
In the next quarters, we prefer at this time since we have a lot of volatility in terms of the macroeconomics to not set exactly updates, but I think we are getting closer and closer as we scale the products, especially the secured loans.
Okay.
Yeah, I can ask one more question on the SMB segment.
Are you pretty much done with your hub expansion and hiring of personnel.
Do you expect to.
Can you provide a bit more since you've got good traction in the SME segment and what about some big Epidaurus BBB is now coming from the SMB segment and if you have any.
A sort of a number in mind that you would be by the end of this year or next year. If you can share that that would be great. Thank you so much.
Okay.
Hi, Nina.
Alexander.
Thank you for the question actually we have been very successful in.
Executing on our expansion on the SMB segment, we have attributed right at 20% of our PPV.
In this segment.
We do not intend to grow.
Our hubs Sydney.
Currently moving forward.
We are pretty well stable in terms of hiring of salespeople.
Working the hubs, but we still.
Enjoy.
An increase in productivity of our team.
Given all the.
Taligent tools, we are using.
Two to operate.
Our sales team in the hubs.
And these tools enables our team.
Two cell activates qos.
And activate bagged bank account instantly through to margins and that makes a real difference for us in terms of productivity and generation of new revenues revenues coming from all the problem.
On the acquiring side, but also coming from the digital bank.
Yeah.
And regarding the number and I do ask it anyhow about how much is going to be PPV.
We don't have this let's say specific number to give to at this time, what I can tell you that what <unk> seen so far as you could see in Q1 Q2, and what we've seen so far in Q3 of course DPP four hubs is growing faster than the rest of the company because these clients they have a higher average DPP when compared to the whole company. So.
They are five six times larger than our micro merchant clients. So PPV from hubs will keep growing.
And as Alex Andre.
Nation, we still are seeing improvements in productivity and optimization of the Salesforce did it have on the street. So if you had some growth is going to is going to be marginal.
So just to confirm you mentioned, 20% of your BBB right now coming from the SMB segment.
In this slide 28.
In Q2.
Perfect makes it thank.
Thank you.
Yes.
Our next question comes from James Friedman Susquehanna.
Hi, Thank you for taking my question, it's Jamie at Susquehanna.
So to.
Here's a previous question did you how are you thinking about the profitability of the bank is it still consistent.
Had contemplated at the analyst day.
Hi, James we.
Quick recap here just for those who are not familiar with but we launched Piggy bank. He may 2019, we expect to start giving credit in 2020.
Mainly in the second half of 2020, but relaunched it back in <unk> thousand 19, and any March 2020.
All the award was impacted by Covid in Q.
Last year. So of course, we kind of we're kind of postpone and plans of in terms of credit for two years. Because there was there was a lot of noise and a lot of volatility it was hard for the models too.
Stand into capture all the variables related to this COVID-19 and Lockdowns and so on so we kind of forced upon the credit.
For these two years and we are finding that we are now balance on our credit portfolio.
In security products, and all security products, the breakeven is going to happen soon.
We just don't want to set you today I'd say its going to be.
Specific Q, because otherwise someone who say okay. It was not in specific Q. It was a little bit later, a little bit earlier, but theres going to be soon.
The bank is doing well as you could see revenues growing even the gross profit with our cautious approach in credit in the world right and the gross profit was stable year over year. So.
Breakeven is going to happen.
And most of that happens we can give you more color about the profitability record.
Return on assets within our language and so on but so far we are more focused on creating these new products collateralize it products, an imbalance or credit portfolio.
Okay. Thank you Ricardo and then just one more about the bank on slide.
Fix.
It's the one that has 15 million active quiet, 60% used as the primary bank I'm just wondering.
Do you happen to know how many.
Use it as their only bank like what percentage of that 60% 61.
Let me have pegged Guinea data.
Whether they have a second bank.
James We had this number but I don't have it top of my mind to give it to you here, but I would say you are a huge part of declines in Brazil, they have more than one bank.
Even though our clients we get many clients from other banks for incumbent banks and of course some of them came to us at the beginning just to test by the bank or to make an investment in our CD and after time passes by they see that it works very well the experience is good. The UX. This is awesome and then they started using us more and more.
You did point to reach.
Reached the point that we are the main bank, but yeah. Some of the clients they do have.
More than one account they don't have this number to give you too right now why do we are following us in this this chart in the right the new cohorts.
You look at the lines the new cohorts are using more target bank as their main bank when we compare the older cohorts. So we are around 60.
60%, which is a very good number very good index for us a percentage for us because remember we are not giving credit to non collateralized credit. So if you think that is kind of a transactional bank transaction on the east Bank and people are using as a primary bank is because we are doing very well in terms of.
And the all the Onboarding and so on.
Thank you.
Thank you James.
Our next question comes from Sherrick Sumer Evercore.
Hi, Thanks.
For taking my question. My main question is around the actor margins I know, we saw a decline in this quarter I'm and I do understand that it's like a shift after management towards more high yielding clients, but.
I just wanted to get a sense as to how much more downside can we see it from here because I understand that these numbers are like 12 month, Rolling and you increase price and you already do your price changes in the beginning of the yard and then the and then the fourth quarter. You also shifted your focus towards high yielding clients. So.
Should the decline accelerate from here or would it stay stable in terms of the active merchants. Thank you.
Hi.
Thank you for the question this other foundry.
Well, we took the strategic conscious decision to decelerate draws that by reducing subsidies and focusing on the best sales channels in order to improve our LTV over CAC ratio.
We think that measure.
Could see an improvement of 53%.
The average PPV of numerous acquisitions in the loan sales.
We believe that.
We have stabilized at the level of <unk>.
And we are also working on new projects new channels.
We've increased our sales but.
Having in mind that the primary focus.
To add.
Numerous since with quality with higher average LTV Roger.
Then.
A lot of mental merchants.
Into our system. So what we can expect moving forward.
He is to keep base stability is likely growth.
<unk> active base.
Yes.
Got it and just one one question on the financial expense I I heard previously and the first question that financial expenses expected to be stable is there a sense that you could provide as to the dollar amount given that we are basically more than halfway through the quarter as to what that number would be.
Considering the fact the increase in the yield increase in the rates and the level off volumes that would be let's see.
Hi, Gerrick I don't know if I if I got your question correctly. This is ricardo.
Financial expenses will not be stable.
In Q3 finish expenses will be higher and we expect to be higher because of course more volumes.
Second reason selic in Brazil, when we have the average selic or CDI base interest rate of the economy in Q2 compared to Q3, and Q3 is going to be something around 110 basis points higher than Q2. So also that an increase in financial expenses and why do we do in the other hand is to increase price.
To offset that increase but finished expenses I expect to be higher in Q3, when compared to Q2 because of these two reasons.
<unk> and higher higher volume regarding D. D. D. D. Net adds you're your previous questions. Just Alexandre correct me here that is not as likely growth, but when we when you look at the.
In this slide 10.
When we look at the active motions without knowing the motions, which is the motions that are really really bring in TPG. We grew 11% year over year. So that's the kind of the core of the merchants that are looking for growth and that's why Alexandre said, it's slightly growth in is more specific segment. If you look at the whole base.
It could decrease a little bit but at the end of the day as you mentioned in your question.
The net adds are measured in the last 12 months base MTV. We are looking in this specific quarter. So there's this time mismatch between these two information and for US more important things to look at more important kpis to look at R&D at.
<unk> as a whole and TPG promotion, that's that's important because that is the at the end of the day as the TPP that brings the revenues and the profitability of the company.
Okay.
Got it thank.
Thank you so much and I'm, sorry, I might have misunderstood the point earlier. Thank you.
Our next question comes from Josh Seigler character feature out. Please proceed.
Yes, hi, Thanks for taking my question and congratulations on the strong execution. This quarter I wanted to touch on the competitive environment have you seen any shift in terms of rationality of competitors over the last quarter.
Hi, Josh. Thank you for the question I know, we didn't see any irrational movements so far.
Maybe one player here and there indeed, none immersion is already very very small emotions. Some some companies trying to bring.
Net adds of the none the emotions that at the end of the day most of them don't have payback, depending on the size of the TP field. This motion, but overall market is very very rational. If you look at the number of strong mainly from the large companies from the banks. They all increase at prices that we could show you in the slide at the beginning of a.
<unk>, we grew 16 bps other players were three bps or beeps they.
They don't have the same ability that we have to increase prices because we have this huge base, but at the end of the day, everyone is increasing prices and not only <unk>, but also in prepayments. So.
Rationality is D is the name of the industry, which is very good news for everyone.
Thank you that's very helpful. And then I'd love to dive a little bit deeper into your pack bank products, which products are experiencing the most uptake from end users right now thank you.
Well, we see some.
Strong engagement in the credit card that the launches that I mentioned in the presentation because it addresses.
It's good for everyone is a win win situation because our clients want to have more credit card limits. They want to increase the credit card limits and we want to take care of the asset quality. So the way that we offer described to invest in SCD.
And with that they can have a higher credit card limit in a very simple and simple use through the app. That's something that you are seeing some engagement and of course it helps in our in our deposit. So it's a win win situation. That's one of the products that we've seen engagement so far.
And there's a whole everyone is using the vehicles more and more so we see strong engagement and bill payments and other.
Other products that you have so I mean, the company as a whole is growing if you look at the PPV for buying a bank you'll see that the activities is increasing there.
And once you launch new products as we have a strong this large base. If there is a good product people stick with that so we see some.
Good engagement of the new products have been launched so far.
Yeah.
Great I appreciate the color around that thank you and congratulations again.
Thank you.
Our next question comes from Alex My graph Keybanc.
Thank you Tim just one question around <unk> and then one around the credit portfolio first time depicts historically I think you've referred to fix largely is replacing.
Transfers I'm just curious do you see those changing in the future and displacing more card activity, particularly when you think about fixed products that look more like credit or installment offerings.
Hi, Alex.
We don't see peaks.
Rising card's transaction peak.
Peaks is replacing.
Cash transaction.
And peaks is also replacing a bank's leaps in ecommerce. So those are the two.
That piece is really replacing at this time, so we don't see peaks, replacing the cards because of many reasons the way people use cards, all the charge backs and aldi.
Warranties that you have when you use cards.
And remember picks going straight to a balance so even.
Even if you speaks English street to about Ensign is similar to a debit card so.
When you think about credit debt in Brazil, we have this grace period that people use it as a funding source because they make a transaction today and they may pay the bill 30 days from now so people don't have this.
Kind of feature so so far peaks is helping us in Peggy bank opening accounts peaks is making the caching easily.
<unk> is making this movement of cash between different accounts easily and in a cheaper way.
So replacing wire transfer. So those are the three things that peaks as cannibalizing wire transfers cash transactions and our bank slips in equivalents.
That's helpful. Thank you and then just on the credit portfolio. It sounds like a lot of the growth in the short term will come from secured products.
I'm just curious what you see as kind of the appropriate mix of secured versus unsecured credit in the portfolio. As you would think about the kind of mid to long term. Thank you.
Well, that's something that is going to be dynamic Alex as you can imagine in the if you look at the bank's credit portfolio. It's.
It changes a little bit depending on the macroeconomic scenario banks have more appetite for credit and increased non collateralized products in a situation like today with all this these macroeconomic scenario not only Brazil, but all over the world everyone is looking for more quality of our laser products I would say you did a 100% of the credits on the right.
And we are doing we did in Q2, when we are doing Q3 its collateralize. It so in the following quarter on the next conference call Quarterly conference call Youll see how much it grew in collateralized products and Thats something that we plan to keep doing more authorized it broadens to demark.
Scenario helped us and give us more confidence to have known cauterize apart. So.
To be serious do there is no specific go to reach same some percentage of for each each portfolio. It depends on the macro scenario and as you can imagine in collateralized products, who have lower spreads.
Non quadro as you'll have a higher spread so it's going to we're going to kind of balance. These two.
Portfolios based on the micro scenario and the profitability. We are looking for for a buggy bank. So I'm, sorry, but I don't have a specific number to give it to you at this point.
No that's very helpful. Thank you.
Thank you Alex.
Our next question comes from Jeff Cantwell Wells Fargo.
Hey, Thanks, very much congrats on the results.
I wanted to ask you specifically on your net margins.
And you can see that they are.
Coming in at about 10% to 11% this year and that includes next quarter and so I wanted to ask if you can help us think a little bit beyond that.
Terms of the motivation and.
Ability to expand margins from here understanding.
But theres a lot of moving parts with TPP and pricing and operating leverage and so forth well need to get appeal, especially can.
In terms of what Youre thinking as far as expanding margins.
Thank you.
Oh, Hi, Jeff as you could see in Q3 with the guidance that we gave our margins will be flattish in Q3, when compared to Q2.
But just to too.
To share with you our thoughts here and how we see the.
The company ended situation that do you have any covenants point and all the growth opportunities and so on.
Today, we have 45% of the profit of this industry of the payments industry with only 11% market share in CPC.
We are five to seven times more profitable than our theaters.
We did a repricing that is five times more success for 455 times higher than our competitors, we increased 16 bps Seattle four stores three in and get that even decrease in warrant.
We went to market share winner in the first semester 80 basis points, while others almost all of them. They just lost market share.
As important as all these points, we are seeing EPS accretion consistently quarter over quarter year over year. So.
It's kind of and let's say you that we are not looking for margins of course look for margin, but at this point with all the accomplishment has been we've been having so far did I just.
That you are now.
EPS accretion as a key metric for us and we're still growing getting market share and has a very low market share in PPV, we have almost half percent of the profit pool of the industry. So.
Fact that they are having increasing sleek and other stuff and even with that margin.
Stable with EPS accretion for US is a very very good accomplishment so I.
<unk>.
We don't we don't.
Pursue here to look for margin expansion in this short.
Short term, we are growing the company with EPS accretion and building Piggy bank in parallel at same time so.
We all we always said right growth with profitability. That's why you've seen that we are trying to pursue a quarter after quarter end.
And Jeff This is Eric let me remind you that the interest rates in Brazil increased seven times in 12 to 15 months, which always is a challenge for every company in Brazil, not only for us So we understand the markets.
We take the decisions to preserve profitability and naturally as time passes by interest rates finds an inflection points all the opex leverage that we expected personnel.
Marketing and also do revenues growth, reaching the breakeven should contribute positively to margins in a natural way, but in the short term given the higher interest rates, we are preserving and looking for the EPS growth.
Thank you for all the color much appreciated and congrats again on the results.
Thank you very much Jeff Thank you.
Thank you we now conclude the Q&A session I pass the floor over to Mr. Dutra for his closing statements.
Hi, everyone. Thank you very much for the time, thank you for listening to us and for those who made the questions look forward to talk to in person in the following weeks and see you in the following conference call next quarter. Thank you very much.
Okay.
Thank you the bank bag figure a conference call is now and that we wish you a good night. Thank you.
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