PagSeguro Digital Ltd. Q1 2023 Earnings Call
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Good evening My name is <unk> and I will be your conference operator today welcome to bag of bank Webby gas to results for the first quarter 2023 at this time all lines have been placed it 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 may be access it through Baghdad Bank website at investors Dot bags Agudio dotcom, Berkshire bands May build has lied.
Many are there they wish today's conference is being recorded and will be available as an early event is concluded I would now like to turn the call over to your host Eric yearly reader head of IR ESG in market Intelligence. Please go ahead Hello, everyone.
Thanks for joining our first quarter 2023 earnings call.
After the speaker's remark.
There will be a question and answer session.
Before proceeding let me mention that any forward looking statements included in the presentation or mentioned on this conference call are based on currently available information and bike banks current assumptions expectations.
And projections about future events.
<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 banks presentation or discuss it on this conference call for a variety of reasons, including those described in the forward looking statements and risk factors sections of banks. Most recent annual report on form 20-F.
And order filings with the Securities Exchange Commission, which are available in fact banks Investor Relations website.
Finally, I would 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 prepared under any comprehensive set of accounting rules or principles.
It's not intended to be considered separately from or as a service stood for our financial information prepared and presented in accordance with I FRS as he should why the ies be.
For more details the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable <unk> 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.
Good evening for so Paulo, everyone in.
And thanks for joining our first quarter 2023 results webcast Tonight I have the company off really shouldn't in Miami, or Seo or too soon or CFO , and Eric Oliveira head of Investor Relations and ESG.
Before Alice shouldn't be in order to assure the main highlights for the quarter I would like to share some achievements during the first most of 2023 and the main drivers for profits and cash flow generation balance with quality growth for the coming quarters.
Going to slide three on the left side, we are happy to announce the convergence of our brands like your bank and legacy grew into one single brand Dogger Bank the complete bank.
We are excited about the next steps are for journey, having a unique two sided ecosystem combining payments and financial services in one single App, one single way banking, one customer care for US Bank Bank brand represents our offering beyond payments.
We're also happy to announce that bags is joining F. T. S. Erosive, Brazil list, which can impact was lower average daily volumes increased exposures to passive funds and further improve bags shares awareness.
Another milestone was the brokerage license granted by CCM.
Resilient Securities Exchange Commission and important steps that enable us to provide a complete set of investment products through our proprietary and integrated platform.
On the right side of the slide we highlight or a main drivers for 2023 financials.
Our drivers for profitability. During these years are solid and we keep committed to deliver lower losses keep our operating expense discipline and further improve our structural competitive advantage by having deposits as of May source of funding and at a lower cost when compared to peers.
In terms of drivers for cash flow generation, we are focusing on improving our cash earnings and looking for capital expenditure efficiencies with different go to market strategy and software development organization.
Finally in our drivers for quite a few growth will keep fostering piggy bank.
Securities credit portfolio products and growing volumes in key segments.
We also reaffirm our commitment to creating superior value proposition for our clients based on its transparency integration between our payments and financial services platform now opens the word solutions. Thank you.
Thank you Ricardo Hello, everyone.
After daughter initial remarks, I would like to present, how the growth profits cash generation drivers behave during the first quarter of 'twenty to 'twenty three.
Bank and bank clients reached $28 7 million accounting for more than 200 billion bragging transactions processed by yours, driven by the strong customer engagement, which is a consequence of our superior product value proposition.
Our EBITDA reached almost 800 billion Reais and ordinary income close to 400 million rise with Q1 'twenty three earnings per share of one point 13 Reais.
Our discipline in capital allocation has been driving up cash earnings momentum.
Our cash earnings accounted for 379 million Reais versus a cash burn of 70 million rise in Q1, 'twenty, two reaching 10 billion rising that cash balance, while our capital expenditure market of degrees of minus 40% year over year.
Our financial service diffusion. The main highlight was the breakeven point could reach it.
With a beta of close to 70 million Reais led by total banking volume growth and better spreads since deposits reached $18 6 billion with them and what percentage you'd of 94% of the Brazilian interbank rate.
In payments diffusion, our TPG grew 10% with our key segments micro merchants and smbs growing 50% faster than the industry growth accounting for 16% year over year with $1 2 billion rise in gross profit.
Slide five we are happy to announce the unification of bag of bank and Bugs group brands under bagged bank only.
Following our strategy to bring forth, our one stop shop solution under the Piggy Bank brand.
We expect to have a broader reach among merchants and consumers to simplify our communication strategy and client understanding and increase client awareness about our service beyond payments.
Moving to slide six we present to our client base and cashing evolution.
Our number of bank bank clients almost doubled in comparison to 'twenty or 'twenty, one moving up from 15 million to 28 7 million in two years.
Claims accounted for more than 16 million were 62% of consumers and 50% of the emergence consider spagat bank. Their primary account our growth in cashing, Richard 45 billion Reais versus Q1, 2022 led by total payment volume for merchant.
Flooring and strong growth of big inflow transactions.
As a result slide seven reviews of deposit growth of 66% on a year over year basis with nominal growth of 7.4 billion, reaching a total level of $18 6 billion Reais on the first Q 'twenty three.
Also the respective annual percentage of yields on deposits have decreased at 294% of the Brazilian interbank rate due to lower dependence on third party platforms distribution and improvement in cash flow generation.
A counterbalance to 80 Y in first Q 'twenty reached 73% of the CDI and increase in comparison to the previous quarter, which was mainly related to higher number of days our clients kept their save using bank, reflecting our successful engagement strategies in smbs.
And consumers with higher income.
Okay about our credit portfolio, we kept our strategy of reducing credit underwriting for unsecured products, while leveraging secured projects origination in comparison to first Q 'twenty. Two we were able to reach $2 7 billion Reais and outstanding credit portfolio were secured.
Product inquiries it shares from 11% in first Q 'twenty, 2% to 44% during for SKU twenty-three the diversification of our credit portfolio has played a pivotal role in our overall business strategy.
It has not only expanded our market reach but has also had a positive impact in our risk management practices. These strategic approach has resulted in a significant reduction in the provision for losses effectively lowering our exposure to high risk clients.
Furthermore, we would also like to report a substantial improvement.
Portfolio performance, the nonperforming loans NPL above 90 days for a standard credit portfolio has significantly decreased to 17, 9% compared to the high level of 22, 4% in first Q 'twenty two.
This reduction reflects our dealer agenda, 14, managing credit risk assessment and enhancing asset quality.
The successful diversification of our credit portfolio allow us to maintain cautious yet proactive approach balanced prudent risk management with potential for long term growth.
By reducing our exposure to high risk clients, we have enhanced the overall stability overcrowded operations, while optimizing our risk return profile.
These achievements underscore.
Our commitment to prudent lending practice rigorous risk management long term stability and profitability to all of our credit operations.
As we navigate the uncertainties, we remain focused on maintaining a robust risk management framework driving sustainable growth in the future.
Before I turn it over to art I would like to give you more color on the growth Overpayment Beasley zones late night.
As shown before.
Our TPG has grown 10% compared to four Skus 22, our revenue growth can be attributed to a combination of factors diving into the specifics or M. S. N b have experienced 16% growth during the quarter.
When we exclude nano merchants, which are merchants with less than 1000 Reais monthly to PV.
This growth was 17% comparing to first Q 'twenty two.
When we compare our total active merchant space, we had a reduction of 10% comparing.
Q1, 23 versus Q1 'twenty two.
When we exclude mineral merchants, we notice a 3% growth on the active base.
These figures are a direct result of our focused efforts to address M. S. N b needs for ties into merchants with higher average PV within this segment, which demonstrates the effectiveness of our strategy to allocate our efforts into growing on SMB and overall to PV.
Therefore, we remain confident in our decision to prioritize categories with higher profitability potential.
Now I will pass the word to our tour to present, our financial results.
Thanks, Alicia Hello, everyone and thank you for joining US Tonight as we usually do you want to share the financial headlines for the quarter.
Once again bogs presented another set of records for our first quarter in the company's history TPG gross profit net income and cash earnings markets. All time has seniors.
Adjusted EBITDA grew 18% year over year. Despite revenues grew four 9% versus Q1 'twenty two.
Assuming our earnings power and cash generation that is a result of our strategy of better balance growth and profitability.
From Q1, 'twenty three onwards, we will change the managerial methodology to other keeps float between payments impacting now.
Call It financial services verticals.
100% of the float will be broken in financial services vertical similar to other financial institutions. There is no change in the revenue for our payments vertical birth increase in financial expenses since the share of search expenses offset by the float usually broken payments vary.
<unk> will no longer occur.
Sequentially gross profit and adjusted EBITDA will decrease on the other hand revenue for financial services vertical will increase seems to flow through will lead to a higher interest income Consequently, gross profit and adjusted EBITDA will increase imports.
To say.
There is no change impacts consolidated basis and for comparison reasons, we provided in the appendix.
Fourth quarters of 2022, using the same metrics applied to Q1 'twenty three 'twenty four lives our historical results by vertical.
Financial services vertical achieved a positive adjusted EBITDA of 69 million Hey is this.
This quarter.
Even considering the old managerial, Florida location, the resort closer to 123 in the positive side.
As a result of better performance of the credit portfolio with securities drove its debts demands at a lower level of delinquency provisions.
Net income non-GAAP achieved 392 million Harris and net income GAAP increases of 6% year over year totaling 370 million Reais.
This represents an earnings per share of <unk> 13 cents in the quarter.
Eight cents or 8% better than Q1 'twenty true.
In March and April we repurchased two 5 million shares under our buyback program.
Our strategy and focus continued to better balance growth and profitability targeting to improve shareholder return.
On slide 11 revenue for our payments vertical grew 10% year over year due to the positive result from the massive emergency pricing in 2000 and furniture.
As a result gross profit to reach a $1 2 billion, an increase of 2% when compared to the same period of last year with financial expenses offsetting uptrend, given the higher average interest rates versus the Q1 temperature.
The next slide financial services verticals total revenues reached 331 million in Q1 23.
1% lower than Q1 'twenty true.
Due to the shift to secured province, underwriting, which have lower <unk> and longer duration comparison to unsecured products.
On the other hand gross profit to 179 million here is an increase of 274% year over year, mainly due to the secured products portfolio. That's naturally leads to lower provisions for losses.
Not that we are creating a safe and solid path to restore a better mix of credit underwriting composite by secured and unsecured products in the coming quarters enforcing our one stop shop value proposition.
Ford's inquiries packet bank precipitously.
Moving to slide 13.
Financial expenses closing at 813 million Harris versus 621 million here is in Q1 'twenty true.
This increase is mainly explained by the higher average interest rates in the period in comparison to Q1 and it's true.
This was partially offset by the higher share of deposits and return in earnings in the period that lowered funding spreads and led to lower financial expenses in comparison to last quarter.
Total losses decreased 50% year over year.
This great performance that comes from lower expected credit losses of credit portfolio, driven by a healthy coverage ratio.
Credit underwriting mostly for security products at the same time chargeback as a percentage of TPG decreases versus Q4, <unk> and Q1 'twenty true.
Important to highlight that total losses in Q4 to ensure reduce it around 30% over Q3, 22, and this quarter, reducing more 34% over Q4 to an insurer.
Operating expenses reached 587 million in.
In Q1 'twenty three.
5% year over year. This amount represents 15, 7% of revenues.
Was 16, 4% in the same period of last year and stable when compared to last quarter.
Improvement efficiency has come from personnel and marketing expenses and leverage.
This quarter, we had the onetime expense related to the head count we sizing around tariffs.
<unk>.
Excluding this operating expenses in nominal terms were flattish versus Q1 'twenty two.
Jumping to slide 14, we present, a summary about how parks results if over during this quarter.
Revenue growth lower losses, and operating expenses discipline more than offset the increase in financial expenses and DNA plus.
Write offs.
The next slide cash earnings continued to gain momentum.
Which in a positive amount of 379 million reais.
It was a negative amount of 17 million in Q1 'twenty two.
Cash earnings represented around 10% of our revenues.
Reflecting the company's focus on maximizing LTV to CAC ratio by balancing Pos subsidies.
Client engagement.
Monetization and the dilutive process to leverage profits and cash generation.
Capex to revenue ratio reached 10, 9% this quarter versus 19, 9% in Q1 'twenty true.
This decrease was mainly driven by the go to market optimization.
Yes.
Being more selective and emotions acquisition to leverage private bank and sustainable growth at the same time setting a higher bar for investments optimization software and engineering teams depreciation and amortization, including Prs write offs totaling 365 million of Harris.
Representing nine 7% of bags revenue.
Keeping the ongoing conversions of Capex and DNA to unlock additional profitability.
Yes.
On this slide 16.
Our net cash balance ended the first quarter.
Harris.
<unk>, one 7 billion year over year.
At the same time, we have been improving our capital structure and diversifying funding sources to support volume growth.
With deposits now representing around 59% of our third party funding source.
Our equity position continued to increase with 54% being composite by with an earnings reinforcing our commitment to shareholders about capital allocation and returns.
To conclude our presentation.
Ill turn it back to Michelle Berrey for the final comments. Thank you.
Before ending our presentation, we would like to delve into a key point regarding to prepaid cards interchange fee cap impact on our business.
First and foremost it's important to recognize that bags ecosystems, the real boost an adaptive platform that leverages, our complementary businesses, namely acquiring cartesians. This combination creates a natural hedge for the company, allowing us to mitigate risks and capitalize on opportunities.
In the market.
By absorbing the impacts on the month of April when looking ahead to 'twenty to 'twenty three we anticipate that the match income will remain relatively stable since they impact on net income due to prepaid cards, new interchange of regulation are relatively negligible.
Before jumping into the Q&A session I would like to emphasize our focus for 'twenty or 'twenty three.
So with profitability combining optimization and expansion cycles.
Consolidated pegged bank penetration customer engagement and revenue diversification.
Developed an integrated unique and superior value proposition under a single brand.
Foster security in our operating levels to reduce losses and improve customer experience.
Invest in our human resources to keep building, a pleasant and highly productive work environment.
Now we have added 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 John Coffey Barclays.
Great. Thank you very much for taking my question.
My question was really on TPB growth, particularly some of those numbers you say it on slide nine of the deck.
I see that you know you're I know you reported 10% PPV growth, but if you were to exclude the large accounts and several choirs you'd be at 16. So I guess I was wondering what is happening with the large accounts and several quarters given the lag that six ppt magnitude between those growth rates are these just certain accounts or.
Moving off platform, so to speak to any kind of underlying factors that you're seeing in Brazil.
Hi, John Thank you for the question Yeah, you're right on slide nine if you exclude the emotions.
Conscious of acquired growth of 16%, which is higher than the industry that it was 10.7 what happened is that.
Of course, with the high interest rates and the economy some of acquirers.
Our decreasing their volumes, that's part of that but the majority of the movements here are the moving parts here is because we are looking for profitable accounts with a positive net take rates. So we as we always say we are not looking for market share as the main driver for the company market share as a consequence of what we're doing and looking for.
Positive accounts with positive genetic rates and eventually some larger columns and suba acquirers may migrate to other players that are looking for market share and that's fine. That's fine we're fine with that decision. We are looking for profitability in a sustainable way.
We're looking for clients that could also use by your bank. So that we can cross sale, we can get data.
Can eventually offer credit to them in the near future.
But that's the explanation.
Of the clients moving to someone else and and also some super cars have been decreasing in volumes because they are struggling with the high interest rates in a situation like that it is important to heavy scale.
As we have here impacts right.
Alright. Thank you I just had one quick follow up just related to that when do when does the impact of the nano merchants. So essentially go away like when do you all the ones who are going to leave your platform leave such that all the numbers starting with the growth rates started moving in the same direction again.
Well we are not.
We were we're seeing denied the motion similarly on the motions what happened is we see some mortality as.
As you May know last year, we did not focusing on emotions because it had some busy dies. The P. O S. More then why do you think is healthy and sustainable for the company. So that's why we.
We are seeing the churn is stable, but the gross adds are lower because we took this conscious decision not to accelerating in the emotions anymore.
But important to say that part of the nano motions that are not using our acquiring they keep working with us if I get bank, maybe someone got a job, but they keep using buying a bank as their bank. So.
The main focus is really the micro emotions in the Smbs.
Alright, thank you.
Thank you.
Our next question comes from Mario P Aerie Bank of America.
Hey, guys. Congratulations on the result, let me ask you two questions first one.
The market is starting to pricing lower rates in Brazil.
Later this year can you remind us of your sensitivity of your earnings to a lower rate environment.
Also how would that impact your strategy, especially on pricing would you.
Clearly you have a benefit on your financial expenses I was just wondering if you'd be willing to pass on that improvement to your clients, especially because we're seeing some of these non listed company is becoming more aggressive in market share. So just wanted to hear your thoughts on how a low rate.
Environment would impact your business and the second question I thought it was interesting that you choose.
The named Piggy Bank.
The bank today represents about 10% of your revenues. So when we look you know over like a five year time do you think that the bank clearly it can become a bigger part of your business, but just wondering how do you see that evolving is the banking revenues going to be 30%, 40%, 50% of your revs.
How do you look at that thank you.
Hi, Mario Thank you for the question.
Regarding interest rates Youre right that some people are saying that interest rates could go down in Brazil. This year of course, that's something that is very dynamic no. One knows what exactly is going to be doing interest rates and you didnt near future.
So and as you mentioned in your question as it has many moving parts here we have some.
Part of our clients are long tail that once the interest rates go down we can recover margins in the next business day, because we charge. These clients are fixes rates regardless of the sleep.
There are some other clients that we may eventually call us to negotiate because.
Probably the day you can have some information about interest rates and they may call us to negotiate with that's not going to happen immediately. So we will also take advantage of that and we have some small part of our NPV that is already Lincoln with silly. So if silicone dull day.
The <unk> and the prepayments that you had for these clients may go down with the <unk>. So we have many moving parts here. In addition to that we have competition as a nation. So.
We'd rather not to give you the exactly number but I would say you that if the or when the interest rates go down.
You'll be the company that will benefit benefit the most with that because because of the lung data that it has because of the service that we offer for our clients and the stickiness that they have in our base, but we'd rather not to give an exact number here because as you mentioned in your question. There are many moving parts here.
That's the first part the second one regarding Piggy bank.
At the end of the day, what we are we are a technology company offering financial services and payments. That's one where you are that we are.
Been building all these years and we think Piggy bank represents more.
We already have today, regardless of the revenues that imation is 10%, but regardless of.
The revenues of 10% Boggy bank represents what we have today in terms of products and timber stickiness any of any number of clients, who have more clients and <unk> Bank and then advisory group and that's the future of the company. That's for sure we are going to offer more and more financial services.
And we think that's the right time to do that in addition to that we also that.
So we are sure that.
We may optimize our modest investments, but I have only one brand. When you were a multi brand company is always kind of you'll have some inefficiencies when you advertise and you may generate some confusion even in.
Some part of our clients so we'd rather take the decision at this point moved to buying a bank invest in this brand.
And of course in the future, we're going to have more and more revenues coming from from the financial services and related to that.
Yeah, No very clear let me just follow up then like.
It can be a little bit more specific on competition in the SMB segment.
I think that's where we're seeing the bulk of computation to bay and I'm hearing a few players.
I think that they should be increasing their sales force are you.
And you've done that.
An amazing job of your expenses is there something also that you could consider like.
Increasing your sales force in order to face competition.
Mario we two parts here and thank you for the follow up.
First when you have these new head country size and we we kind of.
Not.
Affected our sales force of course, it will have some sales force that is not performing but that's different. So when you have this head count. Besides what we tried to preserve a salesforce because we think it's one of the strengths that have in the company. We are executing very well the results say by by itself.
Regardless of the growth of this this team we are always evaluating there is no fix it decision here that we will not increase once you see there.
There is opportunities for growth.
With decent net take rates, we will invest but I'd say you that just to give a quick number here or productivity for salespeople.
Both in last year, because we are being more assertive in the way that you make the routes where more assertive we win the way that we send the salespeople to sales person to do right motion.
With the right pricing.
They are as time passes by they get more trained they have a better sales speech. So.
But going back to your question.
We're evaluating that very carefully we are not let's say concerned about competition increase the sales force, we keep doing our job look what we're doing our productivity and if you think there is some some opportunities to increase our sales force. So that's.
That's for sure.
Okay guys. Thank you very much.
Thank you. Our next question comes from Craig a murder Ft Partners. Please proceed.
Yes. Good afternoon, thanks for taking the question.
Just one question on the take rate in the acquiring business could you give us some thoughts on how that should trend.
Over the coming quarters, considering that it sounds like there'll be a slowing of.
Attrition in the nano merchant business and you also made a statement that.
You're shifting the focus in large merchants from share gains to profitability in terms of large merchants that you'll be taking on the platform plus you also talked about some attrition and some acquirers.
Higher volume so the take rate.
It would just be great to get some thoughts on the directionality.
Hi, Craig well always try to do dance, where we expect the take rates from the acquiring business to be stable in the following quarters of course remember that in Q4, we have a seasonality with more debit card transactions and it may go down eventually, but not because of poor pricing, but because of the mix with more debit cards.
Actions.
And we expect to be stable because we also have some some moving parts here.
At the same time that we're increasing our SMB.
<unk> and also my promotion efforts.
And as he said we lost part of her and then emotions, but he is only 2% of <unk> on the other hand, when you have this super acquire the large accounts.
Moving out.
Also helps our our net take rates because they have a lower metric right as you as you may know so.
With all these moving parts in all the execution that you've been doing you would expect genetic late in the fourth quarters to be stable.
Stable.
Okay. Thank you very much.
Thank you.
Our next question comes from Bryan Keane Deutsche Bank.
Yeah.
Hi, guys.
Just wanted to figure out if we can't get the percentage of T. P. V that comes from large accounts and also sub acquirers.
Hi, Bryan Thank you for the question, but.
To be honest. Unfortunately, we don't give this disclaimer disclosure because of.
Competitive reasons.
But I would say you that the.
SMB is the largest portion of 40 PV already.
But he didn't give any disclosure the breakdown between the other the other parts of the TPP I'm sorry.
Okay. Okay, and then just on the bigger picture question I mean, most of your investors and analysts on the call are mostly coming from the tech side of things. When you say you want to get more growing into financial services.
How much credit risk or are you guys willing to take in and look like a traditional financial back because that's a totally different investor base at a totally different kind of company.
Yes, you're right that's a <unk>.
Eventually different dynamic so as I answered the question for Mario.
We are a tech company.
But you did offer financial services and also payments, but it of course is an avoidable data we at some point, we're going to take some credit risk and.
And disappointingly they'll have this appetite, we stopped giving credit without collateral into fourth quarter 2022. Since then.
100% of the new or the underwriting is 100% secured as you can see in our deck of slides today, 44% of our credit portfolio is 100% secured and we don't think thats going to change in the following quarters.
But if some.
Sometime in the future we will start to give you some credit without collateral of course, starting with the place that you heard of that having the base.
But why now the macroeconomic scenario doesn't help to help us to have this appetite we can see even the big banks in Brazil, having some struggling to charge some of their clients seen higher npls.
Not not to say about the macroeconomic environment awards. So here we are.
The accelerating in the 100% secured.
We found a way to grow buggy banking, a sustainable way with a best in profitability through the secured products and we don't think that's going to change in the future. That's the big picture of the company.
In terms of the Investor base and the point that you brought.
I don't think that should change that much because I do you have today, we are a tech company, we have a diversified.
Product offering here. So we will not be a company that is going to rely in credits.
In the near future. So that's what we expect.
Okay. Thanks for that clarification. Thank you.
Our next question comes from Pedro Leduc Ito BBA.
Thank you guys, so much a little bit on the losses and operating expenses lines.
Lay a little more on your control first of all losses or get delivered year on producing charge backs with Wanda.
And if you think this is just the path of a startup its got to do with the cleanup of the base. If there's more to go also on the credit losses on the portfolio unless you've been adjusting and if this is maybe in your run rate here in terms of cost of risk is $40 million.
Later I'll jump on the Opex side, but first of all the losses charge backs and credit fees.
Hi, Pedro.
Speaking so related to total losses.
The reductions that we are.
Having right now.
50% in comparison to Q1 'twenty two.
30% in comparison to Q4.
That was 30% better than Q3 and turning to <unk>.
And totally as a result of the shift of our credit portfolio from unsecured projects to secure products.
And we expect that we continue to having good results in terms of losses.
That as automation is the right path that we identified to move by the bank to the profitability.
Okay and on the chargeback side on the losses.
I'm sorry.
Yeah.
Inside the total losses, we have the charge backs that also improve it in comparison to 2022.
So we did a great job here in my opinion in terms of fraud prevention.
And all the systems teams and processes that we developed.
Joining in 2022.
To help our acquiring business to perform.
Good way to control charge backs and important to seek Pedro this is Eric.
Our unique value proposition that offers to merchants eastern settlement.
It does not necessarily increase charge backs and this is something that we have been improving our systems, improving our QA processes in order to further decrease charge backs as a percentage of CPC.
Alright. Thank you Eric if I may on the second question I thought the operating expenses. Our first if you could help us on the personnel side Theres, a 11% increase year over year. You mentioned there was a one off impact related to the downsizing. If you can just help us understand how this 11% about looked like without.
This one off impact and then the second there on the marketing advertising run rate for the remainder of the year do you think this lower level here is something that is more reasonable for this environment. Thank you.
Okay in personal expenses, you're right. We have this head count we're sizing and the beginning of this year in January .
And the severance cost was around 11 12 million here is that it was a non recurring item for the Q1.
And also in terms of marketing expenses, we are expecting to spend a little bit more than Q1.
Because of this.
I would say he branding of private bank, putting plexiglass to private bank.
But we will continue to apply our disciplined cost control.
Not only for Opex, plus Capex and.
The best as you can do right now is control costs as much as possible.
To keep our company healthy.
Thank you so much for the answers.
Thank you.
Our next question comes from <unk> Agarwal of HSBC.
Hi, Thank you for taking my question and apologies. This is aimed to seven Oh. My first question was on choosing the Bang Bang Bang I believe box a little created a very strong brand name in the acquiring business, especially in the long term.
And I'm sure you've done studies to understand what are the really impact of moving from Fox a good event Bang Brad I've seen them do you think would it be for your customers.
So if you could comment on that.
The next question is I understand you did not break down that people read by how much is larger columns, how much is SMB.
Could you give us some sense of what is the take rates in the larger concepts have a glass segment because from what we understand looking at NEP is well taken at a much lower for that part of the business, which probably is about 30, 40% or so this is by now so if you could give some sense about that.
It's a what kind of proportion of the juicy and that is it do you plan to increase our share in the large accounts in these sub acquirers or are you planning to reduce your share there.
Some color on how the PPV and mix should evolve.
That would be really helpful. Thank you so much.
Yeah.
Hi, Nina.
Uh huh.
Regarding the brand.
Youre right, we have a strong brand with Dragon ball Z Grill, but who also have a strong brand with staggered bank I know, we started by the sea well before bug a bank and that was the beginning of the company offering P O S as but we.
We launched <unk> bank in 2019, so we are completing now for years and it also has.
A very.
<unk> strong brand already in Brazil, many of our emotions use both of the brands they sell through the P. O S and they didn't make the transactions and they use the app and the app. They use their eastside bank already since the beginning so and of course, we will not.
<unk> the migration from one day to the other that's something that we will.
You start to use more and more Peggy bank, but the Pos as they have there is to use basically we were sort of making this transition there is this <unk>.
Indication.
Project, so that we can.
Communicator obeys that by the sequel is now like a bank and so on so we don't see there's going to be friction there because mainly because many of our clients already use yet by the bank. When do you want to cash out or use our cards and so on regarding the second question.
And yes it is.
Alexandre just to give you more color on that.
And regarding to the brand.
Today, 60% of our active customer base uses only target bank has relationship only with financial service and out of the 40% remaining we choose the merchant base that primarily uses the acquiring service.
90% of them uses baggy bank too so these customers.
They use on a daily basis or banking bank App.
Since 2019, all our Pos terminals.
Our bank branded only and all of our cards.
Since then our also packet bank branded only.
Yes, so the second question about take rates and the moving parts Knee-high Youre right. We don't give disclosure about the percent of our CPP coming from large accounts and it's about wires.
But let's say you that if you look at the market.
The other players that are more focusing on large accounts instead of acquirers or an integrated similar to them. So it was not that different senior towards other players in the market that operate in this in this type of clients hubs.
As you can see as you know it's much lower than what he had an smb's and ultimately my promotions. We will look for accounts that have a positive genetic rates that has some returns that you think is feasible for the capital of the company.
And again, we are not.
Our concern about the market share of total GPC, we will focus on the key segments that we decided last year, which is micro motions and smbs.
With all the moving parts and even some large accounts that we will get because of course, we we may lose some large accounts, but some of the clients come to us because because they want to work with us and even some of the acquired so with all these moving parts. That's why I answered in the previous question that we expect genetic wait to be stable.
The year, except Q4, because of the seasonality of debit card transactions.
Oh, Yeah, that's talking much about exposure to larger gonzo sub acquirers in the previous quarters. This is something that you know we have been talking about and in this particular quarter. So what what led to this kind of did it go and not having exposure to logic, because you're starting from the bottom of the pit already moved up to F&B, but.
Never really talked about you know gaining exposure to the larger console.
Has this been something that you've been planning for the past couple of quarters or do you see opportunities coming your way, which makes sense economically and that's why in the last one or two quarters, you're gaining more share in large accounts.
How has that come through.
Thank you so much that's my last question. Thank you Luca.
We.
We may not see that.
I'd say did exposure, but we always said you have a large accounts. We remember we started in e-commerce back there in e-commerce at the beginning we had also large accounts we bought the other company. Our current 2000 plan year and then we brought some large accounts E. Commerce. So we always had some larger accounts.
And even some acquired so we also had some soup requires we're not saying that we will not focus on this type of guidance anymore. We are just saying that we will not compete with price with.
Players that are looking for market share, we will keep working with this type of clients. Once they have the returns that you think is feasible and sustainable for the company.
So just to be clear here, we always had this type of clients.
We're working with them some of them come to us because they wanted to work with them with US silver requires some came to work with us because they like <unk>. So this type of clients that you always had in the base and it was not the main focus of the company and it won't be the main focus of the company I guess, what youre, saying here in this slide when you say the growth of <unk> six.
6% is that we did not make too much efforts to keep accounts with.
Net take rates that are not sustainable or not in.
And the level that the company expect to have.
Okay.
Understood. Thank you so much.
Thank you.
Our next question comes from Sue Mac data New Street research.
Yeah. Thanks, very much couple of questions. Please.
Just first of all on pipe.
<unk> merchant base versus the acquiring merchant base. The two are kind of moving in sync.
Or alternatively put the merchants.
So as a percent of acquiring merchants is pretty stable at around 90% I guess, given you're losing.
Not as much in where you're willing to lose not as much as I would've thought youll kind of percent of acquiring merchants, which are packed bank.
Would be going up and up but it seems to be stable. So just curious as you kind of move up the pyramid why not that sort of percentage increasing.
That's the first question. Please and then secondly, I'm wondering what I hold it there and then if we could go with that with US. Please.
Sumit. This is Eric just just to recap here, you're asking about the merchants engaged impact bank that we basically had a slightly decreasing this number am I right.
Yes exactly.
Exactly so as you know as you lose your acquiring.
So that's typically the kind of low or no kind of TPP and other merchants, who are the thought would not be necessarily pipeline customers perfect. Thank you. Thank you. So just to answer your question I think it's important to highlight that for the long tail clients base that we have which is composed by nano merge.
<unk> and micro merchants.
I would say to you that probably 100% of them are engaged in fact.
So necessarily as we run off and deep prioritize none of merchants, which are barely profitable we necessarily tends to lose these clients at first glance impacted bank, but if you take a look closer to the target bank clients.
Merchants. This decrease is lower than the decrease in the active merchants because we have several nano merchants that for example got back to the formal economy.
SKU works with us, but they receive a monthly paycheck and used back bank as their primary bank. So this doesn't concern us in fact, we have an opportunity to further cross sell other products for them and as we keep moving up market.
Our concern here is not anymore growing very rapidly our number of clients because we already have 13% of the Brazilian population, having a relationship with US our focus is increase the cross sell of financial services increased deposits for clients and necessarily increase profit.
Ability for our clients this is oracle.
Okay. That's clear. Thank you and then maybe a quick follow up if that's okay. Just all again, so financial services profitability.
Are either on the old or the new EBIT dollar basis, if we could pro forma that EBITDA for the interchange cap is it fair to say that financial services is.
Now EBITDA positive and those no.
The reason to think it won't stay that way going forward. Thank you.
Thanks for the question. So this is Eric again naturally as the interchange cap came in four six April 1st of this year as we disclosed previously in our material effects, we expect a negligible impact in our bottom line.
In financial services vertical necessarily revenues should decrease but the gross profit and EBITDA evolution should decrease not in the same magnitude.
So investors should expect a lower revenue in 2023 versus 2022 in the financial services vertical but to be completely offset by the savings in the merchant acquiring business.
And is it is it possible to say in absolute BRL terms, what the what the sort of run rate to use on a quarterly basis for that.
Correct.
I take your point and six neutral at the group, but just in terms of modeling out the splits between the two parts of the business.
I think at this time, we're not giving any kind of ballpark of disease back we can evaluate here, but I think the main message is it's a negligible impact for bottomline, so any potential revenue and gross profit reduction in financial services vertical.
Analysts can assume should be completely offset by the savings in the merchant acquiring for Scott.
Okay. Thank you.
Thank you.
Our next question comes from Josh Seigler Cantor Fitzgerald.
Yeah, Hi, guys. Good evening. Thanks for taking my question I think to start with can you discuss how competition has trended specifically in the payment space.
Are you still seeing rational pricing from some of your peers.
Hi, Josh Thanks for the question, Yes, we are seeing rational pricing from the peers that we compete with mainly in the micro motions as smbs.
We cannot say about the guys are looking for larger clients because you see some changes in market share in Q1 between D D.
The big acquirers, but in the markets that are competing Delaware focus which is <unk>.
Michael Motioned Smbs, we're seeing very rational prices, everyone looking for profitability as you could see the quarterly core results from Lowe's and for all other players.
So yeah, that's the rational pricing at this point.
And we don't think is going to change because.
Interest rates are high in Brazil. So everyone is looking for profitability of course, not only in Brazil, but around the world and not only famous English, but also in all the industries. So everyone looking for profitability. So we don't think there is rationale do change.
In the near future.
Okay.
Okay, Great I appreciate that and then.
You know you guys have been repurchasing some shares recently I'm curious, how you're thinking about your capital allocation strategy moving forward.
Oh, yes, sorry.
Speaking again.
So the capital allocation strategy that we have today is based on the results that we have.
We are reinvesting in the business all the results that we have right now.
Or even using the good results that we are achieving to repay the expansive.
Depth that we have are also reducing the Cds that we our insurance to finding the operation.
At this point.
14% around 14% interest rate and the accounting not makes sense distribute dividends.
And it's something that we can rethink.
Going forward, depending on the interest rate the LIFO.
And the strategy that we are using to repurchase shares is based on the price of shares if it's a good opportunity for the company are not the shares that we have in treasury is use it to.
To distribute for the long term incentive plan for employees.
And at the <unk>.
I have two.
Just point, we're using the buyback program that we launched in 2018, we achieve at around 50% of this buyback program and for now we are thinking that we need to use the money too.
So we'll fund operation.
Okay.
Great. Thank you very much.
Thank you Josh.
Our next question comes from Guy you've brought to UBS.
Hi, Jim.
For the opportunity to ask questions I have two on my side.
On the bus like bank.
<unk>.
We saw a quarter over quarter drop it decreased by 10% quarter over quarter I understand that the GPU and bell.
But the drop in deposits was actually higher so just wondering if you can provide some details behind that lease and Moreover, what do you expect in terms of deposits growth going forward.
And my second question is related to Capex.
Just wonder if you could help us understand the moving parts on Capex this quarter, both related to <unk> intangibles and what can we expect going forward in terms of growth for these two lines on a consolidated basis as well.
You very much.
Thank you for clarifying question.
Regarding the first point related to deposits it showed that reduce it from Q4.
The main impact comes from the seasonality.
As you May know in Brazil, there are a lot of our.
Used to pay in the beginning of the year.
People use this money to pay those bills.
One point that we are we have pension closely is.
To change the deposits that we are the cities that we are an issue with third party platforms.
And and try to towards unit internally in our own platform. So we are trying to change the third party to our plan.
Form internally impact bank.
The second point is related to Capex.
We achieved this quarter 400.
Oh wait mid on Hey is so much lower than.
Q1 'twenty two.
That impacted our cash earnings in a positive way last year. Our cash earnings was 17 million has negative in this year.
Rose to 400 million of Harris positive.
Terms of Capex going forward, we are expecting to have.
A lower capex per revenue in comparison to 2000 and furniture.
And more related to technology investments around 60% of the technology investments versus 40% <unk>.
Acquisition.
And we continue to invest in Capex for this in the same strategy that we launched last year focusing on client selection, we've behind engagement and companion paybacks combine it to eventually some promotions that we we can offer to the clients.
Okay.
Okay. Thank you very much just a quick follow up on the past question.
Just wondering if you have any type of target in terms of the Pos growth.
For this year that you could share with us.
What I can say about the pause related to these questions that all of our management is forecast to increase deposits deposits. As you know is the cheapest funding source that we have.
After return in earnings.
And we have all of the management focus to increase those deposits.
Okay. Thank you Doctor.
Thank you.
Our next question comes from wastewater, though Horace Mann BTG Pactual.
Hi, Hi, everyone. Good evening I have a question here regarding all these noise related to the revolving credit card theme.
I think the sector as a whole has been a little bit more under pressure recently I think on concerns that.
Something might happen with the sell out of those with no interest rate, so which which in theory. If that happens you know that would be potentially bad for the prepayment business. So can you share your thoughts on what's being discussed or being part of the working group you know what's your.
Our belief here I think I think I'll Ashanti I saw I don't know.
Some comments.
To broadcast so just want to make sure everybody's in the same page here. Thanks, Thanks a lot.
So I'd like to thank you for the question.
We know there has been some discussions with the Brazilian authorities about the possibility of implementing a cap.
On interest rates for our revolving credit cards.
As you May know this discussion is not new and is being carefully evaluated by regulators.
Of course nickel, they just stop it to everyone.
What he may say from the government or from the regulators in the past years.
The.
Brazilian government, both Brazilian government and regulators they have been playing a very relevant role to promote competition in financial inclusion in Brazil.
Of course, they listen to everyone.
So just before I go straight to your question some of the players.
Linked this.
Kept in interest rates.
With changes in installments.
As you May know as well interchange in Brazil was one of the highest in the awards.
Credit card business in Brazil is very profitable but.
But as I said some of the players try to link the discussion with the change in installments.
In our view is very unlikely to have or to happen.
Any change in installments because of many reasons, but the main two I would say.
Changing installment is not the way to decrease behind just rates in revolving credit lines.
By changing installments withholding lines will not decrease so that's not.
Not link it with one topics to the order and the other one is that.
Installments are very important for the economy in Brazil.
50% of the total volume of credit cards. The total volume that we have transaction in Brazil, 50% just made some installments.
In 2022 that number was one 3 million reais, 10% of Brazilian GDP is largely accepted by motions by by motions from Wayne sizes and of course, it gives us the power of consumption for consumers, mainly low income people that don't have the money to buy.
Without installments.
It is also the cheapest working capital for motion so.
We think that any change in your stomach it very unlikely to happen because he doesn't solve the duration of the discussion and is very important for the economy. So that's our view at this point.
No great Super clear, Thanks, a lot.
Thank you.
Our next question comes from Geoffrey Elliott with Autonomous. Please proceed.
Hello, Thanks, very much for taking the question.
I know you've introduced some new.
Offers on the.
On the website.
B stab multi maximize which look quite a bit more competitive in terms of pricing than what your advertising previously.
Who you're marketing those at and what are you doing to mitigate the risk of cannibalization of clients from the old.
Offers with higher pricing.
We don't see the newer cheaper ones. Thank you.
Hi, Jeffrey we thank you for the question, we always make promotions.
Similar to promotions, we do through online targeting sometime some type of motion some of the promotional side.
<unk> targeted some some type of consumers.
And we also make some tests in our website.
Of course, we.
A large part of our overall demand comes from paid media and from media that we buy from third parties and part of the demand comes from the website.
Promotional Daddy, we are making websites day required emotion to have a minimum to PV of 3000 Reais per month. So it is not for everyone.
And we are always of course looking in terms of attrition with the clients that you have in debates that's not an issue at this point that something very very common for companies like us when you have millions of clients right. It's very common when you have a telecom company and then eventually you see a promotion.
From a telecom company that you are a client in any of our having a better condition there for the new clients than the older one, but that's part of the dynamic of the business, we try to control that.
Eventually in the call centre in more reactive way, but I don't think Thats initial disappointed because we are requiring a minimal PPV and there are some other requirements as well. So it's part of the dynamic of the business to make promotions and turn off and tried to cohorts you what's going on if theyre going to have.
Typically that is much larger than the 2000, if theyre going to use <unk> bank, so, but it's part of the promotion is not.
Something that you are changing the way that the company operates.
Thank you and then may be just to clarify on some of the comments from earlier on you talked about the prepaid interchange cap and then you talked about <unk>.
<unk> net income.
Similar to what you delivered in the first quarter.
Was that just the statement, saying interchange cap is not going to have a significant bottom line impact or was that more all encompassing statement, saying that.
<unk> net income plus or minus is going to look similar to the first quarter. Thank you.
Hi, Geoffrey well. Thank you for the question because it's an opportunity to clarify that what youre, saying is that.
With the changing.
The captain interchange for prepaid cards that you started in April 1st.
Didn't change.
The net income of the company as a whole because the benefit that you had in acquiring business by having a lower interchange.
It's very similar in absolute terms.
And then the losses that he had in D revenue strong the Piggy bank as a card issuer.
So we are just saying that did change and indeed, the cap interchange for prepaid cards is neutral for the company as a whole.
We're not saying that the net income is going to be the same in Q2 versus Q1 or or things like that are just saying that.
This capping inter change did not impact the.
We expected net income of the company because the impact of these.
Moving parts and puts and takes it's zero is neutral. So that's why we tried to say that and let me know if this is not that clear it's not clear.
It was totally cleared the second time.
Thanks very much. Thank you. Thank you.
Our next question comes from one heck of Scotia.
Scotia Bank.
Hello, Thank you for the opportunity to ask questions. My question is related to the NPL rate deal.
Noticed the.
Decline from around 30% or more than 30% in the fourth quarter to 18%. This quarter. So can you talk about what drove this improvement whether there were some sales of loans or write offs.
And also can you comment on how you see asset quality evolving.
And how do you think that the great portfolio can grow in the rest of 2023. Thank you.
Okay.
Speaking again, thank you for your question, it's important to clarify that.
The numbers that you have in the income statement is related to past two so all the calculations there in terms of percentage of our portfolio is the best tool when the installment is not paid so you have this pass through.
This quarter, we decided to give this information more clear and there is like eight.
The webcast presentation.
And the Npls for 90 days in Q1, 'twenty to achieve a 22, 4%.
The worst moment wasn't in Q2, 'twenty true and next quarter, you see that and now we have 17, 9% and since June we have a reduction in this NPL 90 days and also it's important to mention that.
Our secured credit portfolio presented 1% of NPL, So our whole portfolio is moving down.
Pretty fast and quarter over quarter and the main impact related to that is because our credit underwriting now is 100% focus on security products and the same page in the webcast you can see that our total portfolio now.
Is split and 44% secured products, 66% unsecured products and the strategy going forward is continue to underwriting.
Oh secure products related to payroll loans and also credit card beckoned by Cds or balance account reserve.
It is important to mention that most of financial institutions. The write down their nonperforming loans. After 360 days and we did not write down yet for exclusively tax planning reasons, okay for the coming quarters, we do expect that to start to rise.
Now these npls over 360 days and this is why there is a mismatch between <unk> nine days that we provide in our presentation in comparison to the financial statements that disclosed the full nonperforming loans over 90 days considering the.
Npls over 360 basis, we are very comfortable about the lab provision levels. So necessarily a downtrend in npls is something natural moving forward.
That's very helpful. Thank you for the comments.
Thank you.
Our next question comes from William Stein Susquehanna.
Hi, guys. Thanks for taking my question here.
I wanted to ask about Npls.
Npls as well so.
I noticed I noticed on slide eight it looks like you know your 90 day, plus NPL ratio has been going down.
Can you say a few words about the status of the Brazilian consumer.
I imagine.
Some of that decrease that you see is perhaps due to the shift towards more secured lending but.
Any commentary on consumer credit quality would be helpful. Thank you.
Hi, This is Eric I think since we make some changes in our management team in terms of risk management, we have been delivering.
Lots of improvements on the creditor risk assessment processes empty YC.
So necessarily this implies to say that as we keep underwriting secured products in the short term and keep improving our.
Our risk assessment models.
The economy improves theres, a natural path to restore unsecured credit products in the future.
Based travel for the credit industry in Brazil are the main questions relate to when the asset quality will improve and in our case is the opposite because since we took the decision in early 'twenty two to focus exclusively on secured products. Our Npls peaked in June .
<unk> 22, and they have trending down since then so the asset quality concerns around the Brazilian credit industry. It does not affect us because we already changed our credit underwriting focus on secured products in early 'twenty two.
Got it no that's super helpful. That's clear and I guess one.
Quick follow up I'll have is.
Can you talk briefly about carnival and how the timing of the holiday may impact year over year Comparables, then from the second quarter.
Hi, This is Eric again.
You're right, we had last year, a very strong.
First half.
Driven by the reopening of the economy.
And a number a higher number of work days.
This year, we have a lot of holidays in Brazil, which necessarily.
Brink's.
PV.
BV.
Hey viewer.
Similar to weakens, especially Sundays that we have and the industry have lowered ppv's in comparison to the work days, so necessarily the first half tends to affect the industry.
Since the first half 'twenty three have more holidays in comparison to the first half of 2022.
Okay.
Got it okay. Thank you.
Okay.
Our next question comes from Alex Mark Graf Keybanc capital market.
Yeah, Hey, guys. Thanks for taking the question.
Just wanted to maybe pile on the credit questions asking about secured credit mix I think last quarter, you had mentioned that 60% mix target in the near term. So just first question is whether or not that is kind of still in the plan for the year that 60% mix and then secondarily just pairing that with.
What you just mentioned around an eventual restoration of unsecured credit and your earlier comments around general credit risk appetite.
Wanting to understand what the right long term next few think is between secured and unsecured is it above or below that 60% level.
Hi, Alex well the.
The plan to keep growing and secured products as.
As Ronnie is on the way so we've been growing.
The participation of secured products in the total mix quarter after quarter.
And we will keep growing the following quarters.
If we don't reach 60% this year is going to be close to that or is it a little bit lower to that because in short term, we will keep offering only secret products. So he's going to be close to that we expect to be close to that by the end of the year. When you ask about the.
Credit with without collateral in the future.
I'd say, we don't have the exact number here to give to you because there are many products. When you think about unsecured projects. There are many products that are overdrafts credit cards. They are.
Working capital for motion. So that there are many products here I would say you that we will keep looking at the the risk and return.
To have a balanced portfolio. So that we can navigate in times of expansion in times of a contraction.
Honestly I don't have authority adhere to say to you is going to be 50, 50 or things like that but it's going to be something that we're gonna be budesonide vessels by looking at the risk and return looking at the demand for the products because of course, we offer the products you've got to we need to price. The product you may have demand or not so I mean, that's the best way to answer it as well.
Building these unsecured products to control the risk and return.
Quarter after quarter, but in short term, we will keep doing keep your offering secured product and this mix is 44% will keep growing in the fall importance.
Makes sense. Thank you.
Thank you.
Thank you <expletive> back Bank Conference call is now concluded that we wish you a very good night. Thank you.
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