Q2 2023 XP Inc Earnings Call
Speaker 1: To have over the company, I'd like to thank you all for the interest and welcome you to our 2023 Second Quarter Ernie School. Today, we have here with us our CFB Bruno Constantino and our CEO , Chagel Malfa.
Speaker 1: We will all be available for the Q&A section right after the presentation. And whoever wants to ask a question can please raise your hand on the Zoom tool and we will attend you on a first-come for a serve basis. We also have the option of simultaneously translation support to these. So there's a button on the Zoom if you want to turn on the translation. And before we begin the presentation, please refer to our legal disclaimers on page two on which required five
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Speaker 2: Good evening everyone. Thank you for joining us today on our 2023 second quarter earnings call. It's a pleasure to be here with you tonight. I would like to start with a brief introduction to the squarters, operational and financial highlights. And now give you a bit of context.
Speaker 2: of where we are in terms of our long-term strategy, we talked about in the last quarter. In the second quarter of 2023, we achieved a key milestone, surpassing one trillion inclined assets.
Speaker 2: Client assets have grown at a 30% kegure since the IPO. Coupled with just high stock in milestone, we estimate we have gained approximately 30 beeps in market share investments for individuals year to date. And approximately,
Speaker 2: 60 beeps in the last 12 months, despite a very tough macro environment condition.
Speaker 2: for the second quarter
Speaker 2: Bernice before tax was 9608 million reais. Up to 12% year over year where our continued efforts to improve operation leverage resulted in a 198 beeps of additional margin expansion.
Speaker 2: 90 income was 977 mean of rights, up 7% year over year driving art 90 income margins up 91 beeps year over year.
Speaker 2: Analyzed retail tick rate was 1.3%, up 9 Bps quarter over quarter.
Speaker 2: Return on average, a key profitability measure for XP rose 334 beeps sequentially to 22%.
Speaker 2: and our diluted earnings per share of R$1.83 increased 24% over the first quarter.
Speaker 2: Rebooted earnings per share of R$1.83, increased 24% over the first quarter. Moving to page 6.
Speaker 2: We were happy to see the market trends and our profitability improving the second quarter.
Speaker 2: Following a challenging first quarter, we have started to see a recovery in capital markets activity.
Speaker 2: We are pleased with the recovery in GCR volumes and we have started to see some activity in the equity capital market as well.
Speaker 2: Specifically, we saw the follow-on offerings window opening in late June and continued to see positive trends into the third quarter.
Speaker 2: We believe stronger capital markets activity and lower the leak by the end of the year should favor our current investments business. However, the recovered may take some time as well, as it will depend on further interest rate cuts and also retain investors shifting back to riskier assets. On the proof-to-build front, EBT and net margin improvements in the second quarter reflect better market trends combined with strict cost controls.
Speaker 2: Just operating leverage resulted in my improvement in both EBT, a quarter over quarter increase of 123 basis points, and net margin, a quarter over quarter increase of 213 basis points.
Speaker 2: These improvements are in line with our focus to drive our early growth over the next years, both through earnings growth and capital distribution to shareholders. Let's move to slide 7.
Speaker 2: We are very pleased with the positive momentum in your puraging friends, such as client assets, active clients and totally a phase.
Speaker 2: In June , we hit the historical mark of $1 trillion in client assets.
Speaker 2: With less than 12% market share in investments for individuals, I believe we are still early in our growth trajectory. IFA net additions were over 1,000 in the quarter, reaching more than 14,000 in total.
Speaker 2: With less than 12% market share in investments foreign individuals, I believe you are still early in our growth trajectory. IFA net additions were over a thousand in the quarter, reaching more than four in thousand in total. This comes from several factors such as
Speaker 2: new educational partnerships helping to hire and train new investment advisers. Lower-churn in the IFA network and overall improvements in our onboarding methodology for new IFAs, reducing onboarding time from nearly one month to less than a week.
Speaker 2: With the potential market upswing in the coming quarters, we will keep focus on the quality and expansion of our sales force, both internally and externally.
Speaker 2: Next, choose Light 8.
Speaker 2: Dispositive momentum in operating trends coupled with our cost control discipline drives the recovery in our financial results for the quarter.
Speaker 2: As I mentioned earlier, our gross revenue has improved 3% year-over-year, totaling $3.7 billion. Our EBT has improved 12% year-over-year, totaling $906.8 million. And net income has improved 7% year-over-year.
Speaker 2: to 977 million. Moving on to slide 9.
Speaker 2: We kept making progress across our strategic initiatives.
Speaker 2: And it will already impact our results in the third quarter, but we do not foresee any material impact. We are very excited to have the Modal team join us. An integration is happening as I speak. Since day one, our teams are working together to explore XP and Modal, best practice, and enhance our service level and efficience for better serving our clients. One of our main goals is to have everything integrated, including Modal's client base.
Speaker 2: using XPs backbone and capabilities by the end of this year. We believe these will provide us revenue synergies since XPs ecosystem has a strong cross-cell capability and cost avoidance over time. We will provide on our progress in the coming quarters.
Speaker 2: On this slide 10, let me highlight where we are in terms of long-term strategy we have discussed on previous calls.
Speaker 2: You might recall that we discussed three key areas of focus.
Speaker 2: First, leadership investments. We have continued to gain market share investments throughout 2023, despite the puff macro environment reaching one pre-linear inclined assets. We also have the strongest net new way of fates signing since the IPO.
Speaker 2: Further expanding and strengthening our sales force. Second, superior product offerings.
Considering we only launched the product in May 2021, we are especially proud of this recognition and the success we have seen in the market. Also, we launched a travel platform into our card experience, where clients receive extra invest back from in-app purchase. And third, client folks, we always put our clients interest first. Jesus reflected on our NPS score that was 76.2.
one of the highest in the industry. We continue to differentiate ourselves in the market offering premium college and service levels throughout our ecosystem.
I believe this is one of our main competitive advantages over our peers and we are 100% folks on maintaining and even extending this advantage in the future.
Now, I will hand it over to Bruno to discuss this quarter's financials. Thank you.
Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again.
Moving on to slide 12. Starting with Grazravini on the left part of the slide, this quarter we reached 3.7 billion highs, 12% growth quarter over quarter and 3% growth year over year. The sequential growth in Grazravini was mainly led by retail, especially...
driving mix between segments retail has continued to gain relevance and represented 78% of total driving, benefiting from our long-term strategy to become a full financial service platform, especially through our new verticals.
Institutional and corporate and insurance services remain at 10% and 8% respectively.
Other revenue has been stable over time, representing around 4 to 5% of total revenues.
On the next cup of the lights, we are going deeper into Rikae Rivingham.
Starting with his light 13, when we look at our core, we can see we had an improvement in 16 578 million has a growth of 74% water over quarter due to higher volumes in both primary and secondary markets
and narrowing in corporate-bones-graded spreads. After a tough first quarter, we had some relevant corporate-graded events negatively impacting DCM activity. We saw a more normalized capital market in second quarter.
As expected, we also had a sequential seasonal improvement of 9% quarter recorded in the fund's platform reaching 341 million highs.
Due to the recognition of performance fees, we tend to be recognized at the end of every semester.
performance fees, which tend to be recognized at the end of every semester. Also...
We had a stabilization in equities revenue in 1.1 billion hives, flat, water over quarter, with lower-day average trades for equities and futures, but higher volumes in structure notes.
Moving to the light 14.
All of our new Vertgo products continue to grow well, reaching a total of 398 million highs in second quarter.
plus 54% year over year and 9% quarter over quarter, representing 14% of retail revenue.
The moon highlight of the quarter has been card revenue.
which has grown in line with TPPV to 232 million hives, a growth of 14% water over quarter and 100% year over year. Card spinetration in total active clients has also increased 288 basis points this quarter.
to approximately 24%
Coming back to Total Retail Revenue.
We've updated the dislodging goods' second-quarter results.
Kuki Massage. One, XP is a cyclical-grower company.
or retail revenue, which is.
1 billion highs behind the peak in 2021 has potential for upside as the market recovers.
And two, new verticals have a decided role in diversifying our business.
If we compare the last 12 months revenue with 2021 revenue, new verticals have increased approximately 100 and 56% while our core has decreased 12%.
In summary, potential for growth as the market recovers plus a more resilient and diversified business model.
Total S-GN8, excluding revenues from incentives, has renamed under control, reinforcing the animal guidance of five to 5.5 billion highs leaning towards the mid to the bottom of the range. People expenses represented 72% of total S-GN2 quarter and 70% in the last 12 months. Keeping the ratio between people and non-people expenses is stable over time, 70-30%. We expect higher S-GN8 in the second semester compared to the first semester.
The two main KPIs we monitor are Lestero of months efficiency ratio defined as S-GNA X-Raven from incentives divided by net revenue and two, compensation ratio defined as people S-GNA divided by net revenue. We rather use Lestero of months than quarterly numbers to avoid seasonal impacts. Both ratios have continued its positive trend this quarter. Efficiency ratio decreasing from 40.4%
to 38.3%, and compensation ratio decreasing from 28.5% to 26.8%. This cost-controlled display has played an important role in our operating margins, which we are going to talk on next slide.
Moving on to EBT, a good product for earnings power. This quarter reached 968 million Reais, a 12% growth year over year, and a 19% growth quarter over quarter. Our EBT margin has also improved in the quarter, increasing by a quarter of a million.
On the next slide, our net income has also increased to 977 million highs this quarter. Up to 23% quarter of a quarter and 7% year over year. While our net margin has improved, 213 base points quarter over quarter and 91 base points year over year to 27.5%. These have been the result of both.
Top line growth and increase in operating average we talked about in the best few slides. Lastly, I would also like to highlight our return on average equity.
As MAPHA has stated in the beginning of the call, we are determined to gradually increase our our our our we over the next few years, both the consistent earnings growth and capital distributions to shareholders. Now both MAPHA and I would be had to take your questions. Well, thanks Bruno. So moving on to the key in a session, we have many hands raised. So as usual, we will tend you on a first come first serve basis. The first one is Mr. Jeffrey Elliott from autonomous. Hello. Thanks very much for.
used to seeing previously, can you give us a sense that you're seeing inflows continuing to recover and then can you point us to a normal rate of monthly inflows that you'd expect going forward?
Hi Jeffrey, this is Bruno.
First, when we think about the flows, I weather...
Second, inflows, as I have also mentioned in previous calls, it's a component of total inflows minus outflows. In total inflows, they have been good. We had like haltyme high in the last quarter, the second quarter. But so the outflows have also drawn as well. Bringing the net inflows to a better number than the first quarter, but still.
short compared to the boom market years. We believe that individuals, they are lagging in the process of bringing money into riskier assets. We are not there yet. We don't know when we are going to get there.
but is a cyclical part of the business. So yeah, we in the future expect inflows to grow, but in the short term, we don't have a guidance and my statement is look at total client assets more than to inflows. And just...
So, good evening, this is Thiago. Just to compliment Bruno here. One way I like to think about it is we are at the very beginning of the easing cycle in Brazil. And if you think about the next, let's say, 1, 2, 3 years, we'll...
We believe we are very well positioned with the company very organized to capture this good momentum that we have ahead. So it's hard to say if the netting flow will change just quarter, next quarter in three quarters, but we believe that at some point with this macro scenario ahead of us, at some point we'll have a good environment for investments again.
We are very well positioned with the company very organized to capture this good momentum that we have ahead. So it's hard to say if the netting flow will change just quarter, next quarter and in three quarters. But we believe that at some point with this macro scenario ahead of us, at some point we'll have a good environment for investments again. Thank you very much.
Next one in line, next one in line is Eduardo Haudenosa from BTG. Hi, can you hear me? Yes, please.
Next one in line, things that next one in line is Eduardo Haudenosa from BTG. Hi, can you hear me? Yes, again. Yes, again.
So congrats on the numbers. I have two questions. The first one is regarding your market share growth. The company has expressed the goal of doubling. It's a UC. But when we look to your market share in the core high-income segment, you have almost 20%.
market share of individuals. And 8% if you consider companies. It always is the leader in the market with more than double that we have. And when you look at the different segments, if you look
high net worth clients we have I would say about 5 to 6% in the middle closer to the 20 that you mentioned and if you go to the retail clients we have 2% okay and the way of serving these clients
in these different segments, they are completely different. Okay, one easy way to think about it, if you go to high-navver clients, you'll have an account load of 20 in the middle 100 to 200 at the bottom, almost 2000. Okay, so the strategy that we have for the different segments are completely different. Okay, we start...
value added, so different strategies and we believe we have the right path for these three different segments, okay, completely different financials, KPIs, completely different ways of serving costs and so on, okay.
And the second part about the new business.
There, we call the new verticals, okay, and we mentioned pension, credit, insurance, and banking basically, but we have a lot more than that that are new verticals inside the company, okay? Our asset management is growing very rapidly, we have the effects, business, we have corporate, we have.
many other business that we don't give a highlight for them, but they are new. Okay, so if you look the percentage of the new verticals that GDNX is three years ago, now they represent 11% okay and growing 50% year over year.
So we believe we can continue to space for a longer period of time because the penetration is still very low. If you look insurance, for example, 1% penetration because we just launched the product. If you look credit, 1%, if you look checking accounts but looking the principal accounts, it's close to 1%.
The product that's most penetrated is credit cards, 19%. Okay, so we have cross-salmetric here that we look very close. Imagine that we have classified from one to seven products. Okay, it's the way we look with the sales.
people have faced internal diversions and so on. These numbers is 1.55 today. So it's too very low because these new verticals are new. Okay. So in our opinion here we have a lot of room like to continue to penetrate the current customers we have. Okay.
If I just may add my freedom to your point, the way we like to think of them, so to your question about our ambitions, we have strong ambitions for the long term. That's for sure.
But we also believe a lot in execution and focus. And as Mafra pointed, many new products and services that we have launched in the past two to three years.
total clients with that low penetration number that Mafra just mentioned. So I think it's, there is a strong ambition, but we need to go brick by brick executing. Great. Thanks a lot guys. Thanks Cosmo. Next one in line is Chago Bachista from UBS. Hi guys. Hello.
with that low penetration number that MAPF adjusts mentioned. So I think it's, there is a strong ambitions, but we need to go brick by brick executing. Great, thanks a lot guys. Thanks, Cosmo. Next one in line is Jagobachista from UBS. Hi guys. Hello.
I have two questions and sorry for the issue. The first one, I'm trying to understand the dynamics for the earnings for next year for Xt and do you see room for further improvement in the efficiency ratio?
of the company next year, probably next year we'll see a better pipeline. So my question is, we will see this operating leverage in the company.
And the second one about Modal, I think Mafre already mentioned that Modal should be zero impact in the earnings in the short term. But do you believe that Modal should be attractive for EPS in 2024 or because of all the changes that we saw in the market?
This should take a little bit longer to see a really positive impact on the model on the X-T-RDs.
Thank you, Bacchist for the question. So about your point on efficiency ratio, the way I like to see is, as we mentioned, we believe we have a better macro outlook for the future, okay? Again, it will take some time because it's not a 50 bibs cut that will make.
this positive cycle for the future, we believe we can have higher revenue growth rates in the future. We will have the company ready to capture this growth. On the other part, we spent the last, I would say, two years, one year and a half inside the company, improving the level of governance, the way we manage the company, we have created the XP management system. So we have
create a lot of tools and controls that we didn't have in the past to manage the company. So I believe we are better prepared today for the new cycle than we were a few years back.
and we have done a cost control. So when you put together like a good cycle that we probably will have ahead, combine it with cost control and better management and governance tools in the company.
I believe we can have a very high operational leverage in the future. So that's what we have been talking about with investors. We believe we can increase our EBT margins close to the high part of the guidance in the next years. We believe we can increase our ROE close to the high part of the guidance in the next years. So that's what we have been talking about with investors. We believe we can increase our ROE close to the high part of the guidance in the next years.
I would say 30 in the next years, but again, it's something that will take time. One year, two years, three years. That's the time frame that we are looking here.
About Modal, yes, we believe it's going to be a creative for our EPS on 2024. We have been executing the integration that started last month. And our goal here is to finalize
all the integration until the end of this year. So we're gonna give updates in the next quarters. But yeah, it's a creative and the momentum of the market getting better. Again, individuals take longer, so it's gonna be a gradual improvement over time. But Modal integrated with XP should benefit from that. And just to give you...
One example to make it tangible what my forexplain about the operating leverage of our business, I like to use the funds platform as an example.
had a total of 175 billion hens of client assets. We all know that this year has been a tough year for the funds industry as a whole. Our funds platform has reached at the end of second quarter, 2322 billion hens of client assets. The form is key, so we have more client assets in the funds platform. As of today, then we had one year ago.
So that's one example of the potential of the operating leverage that this business has. As the market recovers, if we get, for example, performance fees in the next semesters to come, we have more client assets and this, it's just the tax and it's straight to the bottom line. We don't have to hire one single individual to make it happen. We have to make enough money in the middle of our head in order for reached existedTHERNland- blown-
That's one example of the potential of the operating leverage that these business has. As the market recovers, if we get, for example, performance fees in the next semesters to come, we have more client assets and it's just the tax and it's straight to the bottom line. We don't have to hire one single individual to make it happen. And we have more client assets.
looking at the other revenue line in particular, 167 million, although upmodestly compared to 1Q, but 1Q was impacted, I think almost 70 million from Americana. So it's a little surprised that that line did not maybe improve potentially more, it was actually lower if you factor in the Americana's impact. So if you can give any color what would happen there and how that should have all come here. And second question, Bruno Mafre talked about increasing RLE from here, the main drivers, but also how much can you potentially increase that RLE? And what are your latest thoughts on the capital returns, whether buybacks, dividends and curious, what you're thinking there? Thank you.
Specifically in the second quarter, we did have a negative impact in revenues because of this pack that we had in our balance sheet. It didn't happen and there was a negative impact, a little bit more than 40 million reais that it's a financial instrument so impacted other revenue because it was not related to any of the other segments. So it can happen from time to time.
different types of impacts either positive or negative. So that's what happened in the second quarter. Yeah and about the capture, about the RUE, I believe as Bruno mentioned on the presentation before, we have a mix of two things. We already mentioned the positive cycle, the cost control and so on that will...
more than 5 billion and we have a Vaseline X of I would say close to 24% okay, so it's a combination of
earnings growth and adjust in the capital structure for the future. Okay, so that's that's the combination that we'll bring us from, let's say the current 22 to something close or two 30.
Thanks, Mahfouh. That's helpful. Any color, just on when you could return some of that capital and the form of returning it again through buybacks or dividends?
Second semester, we already mentioned in the first water that we would return shareholders either to share by back or dividends or both.
at least 50% of payout ratio that we did last year. We have already returned 916 million highs in the first semester of this year. And we are gonna return more in the second semester, but we have not decided yet.
the number so whenever we do we're gonna announce to the market. Thank you Bruno, thanks Marvel!
Thank you. So now we have Daniel Vastroom credit, so it's... it's fucking at ease.
So now we have Daniel Vast from Credit Suisse. Hi guys, can you hear me?
Yes, we can. Yes, thank you. So first congrats on the results. I would like to go on the revenues or the results part. We talked to some of my faiths last month, so which point is strong recovery in revenues in June , right? So I'm trying to do a quarter breakdown in months. So how strong?
could June be compared to April , right? So it could help us to understand how results could reach already in the second quarter considering like a full potential from June results or any details you could share with us in relative terms it would be good as well. And our second question, SBC expenses came in 30 to 40 million below Q4 or Q3, right? So this should this
130 million reais from Q2 be a more normalized levels considering the right size Right sizing you did in people or it had some Still
cancellation effects from T1. Thank you.
Regarding your question about the month, we don't think it's the best way to analyze our business. There is a lot of volatility between months, even between quarters. So to take June compared to May or May compared to April and extrapolate that,
it can be misleading. So I would not recommend that. To your question about the share-based compensation, we don't have a guidance, but I would say that the pattern around 130 to 150 per quarter in other words,
500 to 600 million per year, it sounds reasonable. It depends on the price action as well because there is a component of the share based compensation that is related to the price action. The other part is hedged. So it's hard to state an exact number.
But yeah, second quarter was a more normalized level than first quarter, which we announced that it had like one-off positive effects reducing the share-based compensation and should not be extrapolated for the rest of the year.
Thank you. Thank you, Daniel. Now we have the last question from Nia from HSBC. Hi, Nia. Hi, thank you for taking my question.
Very quickly on the impact from lower rates, should we expect any negative impacts as policy rates go down, especially on the financial in-comparse of the revenues? And second question is on competition. Any change in competitive dynamics, either more aggressive or the competition softening, any trends that you could highlight? Thank you so much.
Regarding the lower rates, we're more than welcome. It's a good macro environment and it...
probably will generate a positive tailwind in our core business. Reminding that it is a gradual effect because individual investors tend to be lagging in that process. But it's positive. I don't...
I don't see financial revenues being jeopardized by lower interest rates because more architectivity probably will enhance, so we're gonna have a very good environment as we had in the last positive cycle. Hello, Nihah. And about the second part of her question competition, as we like to mention in Brazil, the concentration is still...
very high, 80% of the investments is still inside the same five big banks. Okay. And when you look the macro environment that we had in the past 12 to 24 months, they were very positive for these banks because they can offer some products that we don't have here as
LCIs, LCAs, free of tax and paying 13.75%. So it's a very, very good macro environment for just kind of products. The banks, they issued more than a trillion in the last 12 months. Okay, so, but this money is
it starts to go down, but again, there's not 50 bibs that will make a difference. At some point, the individual investors, they will realize that they are not making 1% a month anymore with a very low risk with daily liquid, then they will change the products, change the portfolio, reallocate the money. So it happens in all the other cycles and will happen again. We have today more than 2 trillion REI's on this bank, CGS, LCI's, LCAs and so on. And we believe we can benefit once the interest rates are lower. So that's for me the biggest.
point about competition in the last 12 to 14 months, okay, the level of interest rates and the bank products. Perfect. If I can ask, at what level of rates do you see money moving back into equities or new interest coming in?
Maybe at around 8, 9% or even 10% would be sufficient to see the move in the audience. It's hard to say, it's hard to say any, but again, today, imagine that you are a Brazilian investor. You can invest at 13.25 with very low risk daily liquidity.
So you can make 1.7% a month doing nothing. So it will take some time for people to say, okay, I don't have this level of interest rate anymore, so I have to take some more risk. I have to buy longer projects.
kind of stuff so at some point they will move.
Perfect. Thank you so much. Thank you. Thank you for your question. It was the last one. So we would like to thank you all for participating in the call. We will be available. The IR team to discuss the results with you with you later and have a good night.