Q2 2023 PagSeguro Digital Ltd Earnings Call

Speaker 1: Good evening.

Speaker 2: My name is Kyle

and I will be your conference operator today. Welcome to Pagaseguru Digital Earnings Conference call for the second quarter of 2023. At this time, all lines have been placed on mute to prevent any background noise. Should any participant need assistance during the call, please press star 0 to reach the operator. This event is also being broadcast live via webcast and may be accessed through the PagBank website at investors.pagaseguru.com. Participants may view the slides in any order they wish. Today?s conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to our host Eric Oliveira, Head of IR. Please go ahead.

Hello everyone. Thanks for joining our second quarter 2023 earnings results call.

After the speaker's remarks, 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 PAGS Segur digital's current assumptions, expectations, and projections about future events. While PAGS Segur digital believes that the assumptions, expectations, and projections are reasonable in view of currently available information, your caution not to place into reliance on these forward-looking statements. Actual results may differ materially from those included in PAGS Segur digital's earnings presentation or discussed on this conference call, for a variety of reasons including those described in the forward-looking statements and risk factor sections of PAGS Segur digital's most recent annual report on Form 20F.

and other filings with the Securities and Exchange Commission, which are available on PAGS Seguro Digital's investor relations website at investors.pagbank.com. 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 Mon GAAP measures when we believe that the additional information is useful and meaningful to investors.

The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles.

It is not intended to be considered separately from ORS as a substitute for. Our financial information prepared and presented in accordance with IFRS as issued by the IASB. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures.

are presented in the last page of this webcast presentation and earnings release. With that...

the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo.

Thank you. Hello everyone, and thanks for joining our second quarter to 2023 year in school. Tonight, I have the company of Alexandre Mayani, our CEO , Arthur Schunk, our CFO , and Eric Oliveira, head of IR.

Before I let Shandanaart to share the main highlights for the quarter, I would like to share the most recent milestones in the first half of 2023.

Going through slide three, we ended June with 29.5 million clients, which along the past years found in our comprehensive set of payments in financial services solutions, the opportunity to experience a simple, safe, semblance and digital way to manage their financial lives. By using our POS devices, our online and cross-border payment platforms, our proprietary set of softwares and our digital bank, we were able to surpass more than two trillion-reise volumes processes. Interesting to point out that it took 16 years for the company to surpass the first one trillion and only one year to surpass the second trillion.

At the same time, we have maintained our consistent and discipline throughout several scenarios such as pandemic, interest rate cycles, and changes in the competitive and regulatory landscape. Still, our strategy to combine growth with profitability since day one led to our solid financial position of 7.6 billion reais in accumulating that income and more than 10 billion in net cash balance.

We kick it off Argus with S&P Global Attributing the highest rating in the local scale. BR-3PO-A to Bank of Siguru, our subsidiary responsible for the issuance of Pagabang certificate of deposits.

one of our competitive strengths in our funding strategy.

I would like to take adventures to reinforce our commitment to our mission to make easier the financial lives of Brazilians by offering a one stop shop solution through one app.

one internet banking and one customer card center.

Now, I pass the word over to Alex for the commentaries on the second quarter, 2023 highlights. Thank you.

Thank you Ricardo. Hello everyone.

I would like to present how the growth profits and cash generation drivers behaved during the second quarter of 2023.

Our Earnings Per Share Market 1.18 REAIs 7% Higher Year-over-Year. Our strategy to grow in selected verticals resulted in higher margins with Adjust EBITDA reaching 849 million REAIs, 90 base points higher than the second quarter of 2022 resulting in net income of 415 million REAIs.

per share market 1.18 REI's, 7% higher year over year. Our strategy to grow in selected verticals resulted in higher margins with adjust EBITDA reaching 849 million REI's, 90 base points higher than the second quarter of 2022 resulting in net income of 415 million REI's in non-GAAP basis.

Our cash earnings grew 24% year over year and our capital expenditures was 8% lower than the second quarter of 2022. Our one-stop shop solution has been consistently attracting more and more clients' engagement.

Total payment volume from our payments division reached 92.7 billion REIs and PICBANK cashing of 50 billion REIs driving up deposits on platform.

In financial service division, the highlight was the sustained breakeven point despite the expected impact related to the regulatory change on prepaid and deb cards in Brazil.

adjusted B2D, improved 66 million reais versus the second quarter of 2022.

In payments division, our strategy for the last 12 months was to focus on key segments that kept us on track.

MS and BTPV grew 10%, almost twice as much as the industry growth this quarter.

Our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channels.

we have been able to grow above the market in the MSMB segment as presented in slide 5.

During the first 45 days of 3Q23, we notice an uptrend in TPV growth to 8.5% year-over-year from 4% on the second Q23.

In an MSMB, we have improved our sales on the online channel, which we expect to contribute to the TPV growth moving forward.

Hubs presented further improvements in sales productivity and increased cross-selling of financial service through Pike Bank Business Account.

This not only allows merchants to have access to our instant prepayment product, but also settle direct deposits from different acquirers into PAG Bank.

in the case where merchants adopt more than one acquire.

This has been driving up accounts balance deposits and improving our understanding about merchants needs resulting higher share of wallet.

As a result, our consolidated TPV per merchant went up 15% year-over-year.

In large accounts, our developments in online and cross-border have been evolving, increasing our footprint in Latin American countries, expanding our set of features and fostering the omni-channel offerings.

Through our strategy of diversifying our merchants base, focusing on key segments, we expect to drive incremental volumes and gross profit contribution in the future.

Moving to slide 6, we present our client base and caching evolution.

Our number of PIC Bank clients reached almost 30 million, placing us among the most relevant Brazilian financial institutions.

From now on, we will pivot our focus on activation and principality rather than number of clients, stimulate higher usage and revenue growth per client.

Our 93 billion reais in TPV and 50 billion reais in PAG bank cashing led deposits on platform up 25% compared to the second quarter of 2022.

This represents 86% of our total deposits and kept our annual percentage yields at 94% of the CDI.

We expect further growth in our deposits in the next months, which may be boosted by our triple-way rating attribute by S&T Global, which will enhance RCD's distribution among institutional and retail investors on and off platform.

Slide 7 shows that our outstanding credit portfolio reached 2.8 billion REIs with 52% in composed by secured products such as payroll loans and credit cards.

The ongoing downtrend in NPLs over 90 days to 14.4% combined to our tax planning allowed us to write off 219 million reais.

This amount is already fully provisioned in previous quarters with no impact in P&L.

At the same time, we continue to grow our payroll book loan, which is focused on the public sector employees and retirees. This opportunity remains extremely attractive to us as our developments to provide.

End-to-end digital underwriting allows us to give very competitive price with incremental gross profit contribution which will continue to open new growth avenues.

Now I turn over to Arthur for the financial highlights of the second quarter, 2023.

Arthur, please. Thanks, Alessandro. Hello, everyone, and thank you for joining us tonight.

Once again, PAGS presented another set of records for a second quarter in the company's history. TPV, gross profit, net income and cash earnings marked all-time high figures.

Total revenue income grew 2% quarter over quarter, possibly impacted by TPD growth and financial income, partially offsetting the impacts in top line related to the regulatory change in Interchange Cap on prepaid and deb cards that came before us in April 1st.

Our winning funding strategy has let down for the third consecutive quarter the financial expenses, despite no change in Brazilian interest rate in the second quarter 2023.

Our additional leverage coming from lower losses and operating expenses led to EBITDA growth of 8% QoQ with significant improvement in our EBITDA from payment units, which grew 18% vs. first quarter, led by lower transactional costs used and also related to the regulatory change on prepaid and debit cards.

neutralizing potential effects in bottom line from lower revenues. Earning before tax also presented a strong growth of 13% quarter over quarter and 7% year over year due to the sustained adjusted bidet breakeven in financial services division.

Better than expected financial services results led to a higher tax income rate which did not imply headwinds for profitability.

Net margin on a non-GAAP basis grew 60 basis points versus second quarter 2022 resulting in $415 million in net income. Times per share increased again and achieved $0.0118 in the quarter, 5% better than Q1-23.

Going to the next slide, we would like to deep dive in our revenue performance. This quarter we had several moving parts.

In financial services, we lost 74 million Reais versus second quarter 2022 due to interchange cap on prepaid and debt cards with an edgeable impact in bottom line giving the natural offset in transaction costs and financial expenses.

mixed change towards secure credit products which have lower yields and longer durations. However, this short-term negative effect is expected to disappear as the portfolio grows and mature.

In payments, TPV growth led to revenue incremental of 141 million REI offset by lower gross take rate mainly driven by shorter duration on TPV of credit card installments and faster growth in SMB over the other segments.

In other financial income, we had a positive contribution related to the higher average interest rate in comparison to the same period of last year.

On slide 10, relevance from payment to unity grew 4% QoC due to carry effect from the massive motions repricing done last year.

partial offset by client me exchange towards larger merchants with lower take rates but incremental gross profit contribution.

As a result, gross profit reached 1.3 billion REI and increase of 11% when compared to the same period of last year, with transaction costs and financial expenses performances being the main operating leverage drivers.

In the next slide, Financial Services Verticals Total Revenues reached 242 million REI in the second quarter 2023.

27% lower than first quarter.

impacted by the regulatory change on prepaid and debt cards interchange fee and settlement term and higher share of secured credit products with lower APRs but longer duration as payroll loans

On the other hand, gross profit reached 111 million REI's up 57% year over year, led by better asset quality in the credit portfolio, requiring lower provisions for expected credit losses.

Moving to slide 12 financial expenses closed at 796 million Reais versus 756 million Reais in second quarter 2022. This year-over-year increase is mainly explained by the higher average Brazilian interest rate in the period and TPC growth.

On the other hand, financial expenses fell in comparison to first quarter 2023, driven by our unique funding mix strategy backed by deposits and return on earnings, rising more than 70% of our working capital needs at a lower cost than market average.

Total losses decreased 55% year-over-year, accounting 122 million reais, driven by lower provision for expected credit losses of credit portfolio, healthier coverage ratio, and credit underwriting mostly on secured products.

Operating expenses reached 589 million Reais, down 5% year-over-year and flattish quarter-over-quarter.

This amount represents 15.4% of total revenue income, similar to the level of second quarter 2022, despite of lower revenue levels derived from the regulatory change.

Our headcount resizing and market optimization led to the leverage. Our cash earnings continued to gain momentum, reaching a positive amount of 390 million Reais, up 24% versus second quarter 2022.

CAPEX marked 530 million REI's down 8% year over year but higher quarter over quarter due to the upbeat trends in merchants gross ads that required additional POS inventory levels.

Still, our discipline in capital allocation and efficiencies in IT investment

which we expect to result in a similar or lower capital expense towards disbursement versus last year.

Depreciation and amortization, including POS write-off.

Total 374 million AIs.

representing close to 10% of total revenue and income, keeping the pace to conversion to CAPEX levels in the coming quarters to unlock additional profitability in the future.

On the final slide, our net cash balance ended the second quarter surpassing 10 billion REI's.

from 8.6 billion horizon comparison to second quarter 2022.

In the past 12 months, our cash generation amounted 3.5 billion REI's, which we disbursed at 1.8 billion REI's in investments and 200 million REI's in our share buyback program. Our equity position continues to increase.

with 56% being composed of return on earnings, reinforcing our commitment to shareholders on capital allocation and returns. Now, we have ended the presentation and we will open the Q&A section. Operator, please. Thank you. Ladies and gentlemen, we'll now begin our question and answer session. To ask a question, please press star one on your touch tone phone. If you would like to remove yourself from the question queue, please press star two.

For people using speaker equipment, it may be necessary to pick up your handset before pressing the keys. Our first question comes from Mario Pieri with Bank of America. Please go ahead. Hey, guys. Good afternoon. Congratulations on the results. Let me ask you a question focused on your headcount reduction, right? We talked about operating expenses declining year over year due to some changes in headcount that you made. However,

We are hearing some of your competitors talking about expanding headcounts going forward, especially Salesforce. So can you give us an idea of where your headcount reductions, which areas they impacted, and how do you think about headcount going forward? Thank you.

Thank you for your question. Related to headcount reduction that we did, there is only one department that we didn't change anything that is related to commercial team. As you know, we have a little bit more than 300 hubs, 3,000 people in the streets and there is no intention to increase any people in the Salesforce at this point. What we did is relocate some hubs from one side to another side when we identified that there are many opportunities in other places that we don't have the hubs.

at this point. The reduction was related to other departments, including IT, BECO, and CPO departments.

and looking ahead we do not understand that there is a need to hire more people neither for commercial team so the the true downside that we did this year is enough to to our intention to going continue to grow in the company for the future

Okay, that's clear. And then if I may ask a second question related to volume growth, CPZ growth of 4% year on year.

We do see that the industry is decelerating, but can you give us a little bit more of a color on why?

We've seen this slowdown in growth overall. Always and because.

Card penetration in Brazil is already reaching a mature level. Is it because we're seeing disruption from picks? How should we think about volume growth going forward? Hi, Mario. Thank you. This is Ricardo.

We saw that Q2 was a we saw some decrease in card volumes in the overall economy. I think it's more related to market economic variables than to the penetration of cards and things like that. Of course if you look at peaks and if you look at the ABEX report you see that debit is not growing year over year. If you sum debit and prepaid you're going to see there's going to be some increase there but probably peaks.

is cannibalizing the growth of debit. We don't see the cannibalization of credit. But if you look at our numbers, and we had some numbers in the slide here, in the first 45 days in Q3, we grew 8.5% TPV. So we are seeing some acceleration in our TPV. In the first half of the quarter was 8.5%, and it seems that the worst was in Q2, 2023 for the industry as a whole. So again, going back to our question, it seems to be more related to macroeconomic scenarios, people without credit card limits and things like that, than to.

saturation or other variables. And going forward how should we work? Do you think we could see double-digit growth going forward in volumes? Well we're seeing 8.5 in the first 45 days. I think in Q3 it's going to be close to that. Let's see what we're going to have in Q4. As far as you know from the industry people are more optimistic about the second half.

So probably in Q4 we're going to see acceleration again. I mean maybe it's too early to say, but the signs that are having in Q3 are encouraging with 8.5% growth year over year in the first 45 days of Q3.

Okay guys, thank you very much. Our next question comes from Pedro Leduc with ItaubBA. Please go ahead. Thank you guys so much. Good evening. The question is on the expenses or losses front. Your expected credit losses with some of the Greece are close to zero. I understand you shrunk your loan book but I don't know if it has anything to do with the lower expected losses, lower origination. Just really looking to review what the underlying driver for this meal credit losses. And then also on the same line chargebacks. Again rose this quarter. I thought maybe one Q levels were...

had more sustained. So just two questions on this side. Thank you. It's Artem speaking. Thank you, Pedro, for your question. Regarding to provisions for credit losses, as you may know, last year we decided to shift our originations and the portfolio to secure products. Also, last year we increased a lot of provisions to cover the NPLs, the forms that we...

identify with the legacy and all the legacy is 100% provisioned. So the new underwriting is related to a secure product that requires less provisions than unsecure products.

This is the reason that we have this almost no impact in the provisions because it's not necessarily to increase provisions for credit. Regarding the chargebacks, Pedro, you are right that we see a small increase compared to Q1. There were some implications to the actual savings for the

It's not a one-time event, but it's something that is not going to be in this level for the future. It's going to be around 10 bits, 11 bits, that's what it's packed for the future. So there's going to be some small increase here and there, but overall it's going to be between 10 and 11 bits for the whole year. So that's what you expect. There might be some quarter that you have.

to beeps more, to beeps less because you can receive chargebacks up to six months after the transaction. Sometimes you have this time mismatch between the date of the transaction and the date of the chargeback, but it's not something that is.

is crucial here and it's not a problem that we have regarding chargebacks. It's more variation to be honest.

Thank you, Arshad.

are next.

Our next question comes from George Cudi with Morgan Stanley . Please go ahead.

Hi, good evening everyone. Thanks for taking my question. I wanted to ask about the take rate contraction during the quarter. If you can walk us through what exactly drove the contraction and how is third quarter moving along.

relative to that second quarter print that we saw today. And then the second part of my question is, what are you seeing in terms ofrius,

price changes for prepayment rates now that the central bank started the easing cycle. You were a bit guarded in the first quarter conference call saying that you would benefit from falling rates, but that the elasticity would probably be tested by aggressive price competition. I'm so curious to see if you are seeing anything positive or negative so far. Thank you.

Hi Jorge, thank you for the question, good to hear you. I will start with the second question and then Artur can answer the first one. Regarding prepayments, we didn't see any pressure in terms of prepayment rates at this point. Of course we have a very small part of our TPV where prepayments are related to the basic interest rate of the economy. It's related to CDI, so once CDI goes down for this client rates goes down automatically but there is a very very small part of our TPV.

For the other part, we didn't change our price. We don't see movements from competition decreasing in price at this point. Remember that we had this decrease from 13.75 to 13.25.

although it's 50 bits is not something that I think is not a structure for people to start changing the price at this point so we don't see if the rate keeps falling down some competitors will start decreasing prices

As we said before, we don't plan to be the first one to keep decreasing prices. We try to keep the prices alive that we have.

as long as we can. But of course we're going to evaluate and look what the competitors are doing. But at this point we didn't see pressure. Looking to the end of the year the basic interest rates expect to come to around 1175 or 12%.

For the next year, around 9%, 9.5%. We will keep following the movement of competitors. But going back to the question, at this point we don't see pressures for prepayment rates decrease.

So, let's see. And Artur, would you like to take the first one? Yeah. Jorge, good to talk to you. Thank you for your question. And related to this take rate, there are many moving parts and we decided to include a slide, slide nine in the presentation that shows everyone what is the most clear way to show to everyone that there are moving parts and those moving parts related to financial services division and also payments.

In financial divisions, as you know, in April 1st, we started the interchange cap on prepaid cards and debt cards that affected our revenues in financial services division. On top of that, we decided to change the underwriting and also the portfolio from unsecure products to secure products that present a lower yield.

but longer durations, better for engagement to the clients when we move our originations to payroll loans. That also reduces the level of revenue that we have in financial service, but with lower expected credit losses.

In terms of payments, we have a positive effect of our TPV growing 4% year over year. That resulted in 141 million reais of revenues. However, we saw that in the second quarter we had shorter duration on TPV credit card installments reducing the number of installments that affected our take rates because as we have last.

Installments, we have less take rate. And also, we continue to change the client mix in payments to SMB clients that has lower take rates but good contribution in terms of gross profit and EBITDA. On top of that, we have this 22 million reais and other financial income that also contributed a little bit because of interest rate in the country that was higher than before. All right, folks. Here we go. Thanks for listening and we'll see you next time. Hey, everyone, thanks again for being with us here.

Thank you, that was very clear. Thank you both. And just the last part of my question was how is that take rates trending so far in the third quarter relative to the second quarter?

We are expecting a tick rate reducing a little bit, not too much, but reducing because of this client shift mix.

Thank you, Arturo and thank you, Ricardo. Our next question comes from John Coffey with Barclays. Go ahead.

Great. Thank you very much for taking my call. I just had two short questions which were somewhat overlap with the last caller. My first question was on page nine which I thought was a great slide and I find it to be very clear. As far as at 74 which is a result of the prepaid interchange caps, I understand that and I see that that will I would presume continue to some level for the next three quarters before it laps. But regarding the 171 which you are getting from the shorter duration on TPV for credit card installments, could you give me some thoughts about when that laps? Is that something that we should also expect for three quarters or have we seen this already in the past couple of quarters and we should see that impact diminish? My second question is if we do see three 50 basis points declines in the sleek over the course of 2023, how should we think about the different puts and takes on your P&L? Because you already seem able to mitigate the effects of sleek increases just due to your strong balance sheet. How can you take advantage of this if you start to see these interest rate declines?

for taking my call. I just had two short questions which were somewhat overlap with the the last caller. My first question was on page 9 which I thought was a great slide and I find it to be very clear. As far as at 74 which is a result of the prepaid interchange caps I understand that and I see that that will I would presume continue to some level for the next three quarters before it laps but regarding the 171 which you're getting from the shorter duration on TPV for credit card installments could you give me some thoughts about when that laps? Is that something that we should also expect for three quarters or have we seen this already in the past couple quarters and we should see that that impact diminish? And the my second question is is if we do see 50 base 3 bit 350 basis points declines in the sleek over the course of 2023 how should we think about the different puts and takes on your P&L because you already seem able to to mitigate the effects of silicon increases just due to your strong balance sheet how can you take advantage of you know of this if you start to see these interest rate declines? Thank you.

Hi John , thank you for the question. I'll start backwards here. Just to give a sensitivity analysis here, for every 100 BIPs decrease in CELIX, if we did not change the price and keep the same capture structure and client mix and all variables equal, we're going to have something like close to 1200 million REIs EBT and benefit for every 100 BIPs for one year. If everything else keeps the same. So of course we cannot predict how it's going to be the other variables because you cannot control and let's say if the client mix changes a little bit or if competitors start decreasing price then you may respond a little bit. We don't know how it's going to be the size of our response and things like that. But everything else equal, it's going to be around 200 million REIs EBT for every 100 BIPs. So that's the sensitivity to give a sense.

How is the P&L related to the CILIC? Regarding the other 171, that's something that may happen in some quarter. Maybe the next quarter is going to be better. What we saw here is that the duration went down a little bit. But let's say in Q4 when you have some people using more debit, but we also have some people buy holiday gifts and things like that. The duration could go up.

It's hard for us to predict to say to you that 171 will keep going down in Q3 and Q4. We are just putting here what happened in this quarter. It doesn't mean it's going to happen in the following quarters. It's important to say that

For the whole analysis for the P&L, so to say, we should look at the financial expenses and also the financial income. By the end of the day, what matters is the net of these two lines, the financial income minus financial expenses. Here we are just talking about the financial income in this slide 9. We are explaining only the revenue part of the P&L. I don't know if it's clear for you or if you need any clarification. No, that was very helpful. I appreciate it. Thanks for listening live.

Thank you. Our next question comes from Gabriel Guzian with Citi. Please go ahead.

Hey guys, good evening. So a couple of questions. So maybe just a different way to ask this point about competition. So do you see any signs that competition or any other financial aspects, to be more broader here, could make Fags not enjoy the full benefit or the bulk of the benefit of the lower sea lakes in its bottom line? And a second question is, CapEx increased by a quarter of a quarter. So kind of expecting that first quarter level to be more of a trend. And so what's the background there? Why we are not seeing a...

lower level here given the lower additions. Thank you. Hi Gabriel, I will start with the first one and then I can talk about the capital expenditures. To be honest we are not seeing big changes in competition in the segments that we decide to play which are which is essentially MSMB.

We know there is some competition happening in the key accounts, but we are not part of that game so we are more focused on the game.

most of our focus is in MS and Bs. And the competition, the competitive environment we've seen in the past quarter is similar to what we've seen in the last years, in the past years. So we don't see big changes. I know some players say they're gonna increase sales force and things like that, but to be honest, we don't see that hurting us in such a way that we need to change our strategy or to change the way they work here. So competition seems to be similar to levels that we had before.

And answer your question about how we can benefit about the selling going down, as I was saying before, we don't plan to be the first ones to pull the trigger and decrease prices.

We try to offer better services for our clients in such a way they can use us and they are not that price sensitive.

to offer better services for our clients in such a way they can use us and they are not that price sensitive.

much more we can see that much more in the long tail and micro clients and we try to do that with the same for the SMBs by offering pack bank to them so I mean it's hard to predict to you if selling goes down if some competitors start to decrease prepayment rates if you do the same but we don't plan to be the first one we'll keep following the competitors I guess

After these two years of pandemic and this leak with 1375, companies are not looking for growth at any price as they used to do in 2021. So everyone is more rational looking for profitability. So I don't think there's going to be irrational movements.

if we keep seeing Celine going down. But we are going to be close to our clients to understand what's going on. That's pretty much the way that we think here.

Thank you for your question. Nice to talk to you again. Regarding to CAPEX, it's true it was higher than Q1-23, but it was lower than Q2-22. But the good point is the CAPEX that we are having right now is under control, in line with our annual budget.

The reason that the CAPEX was higher in this quarter was because we need to increase inventory levels because of higher POS sales. Looking ahead, what we are expecting is to have a similar or slightly lower than 2022 CAPEX.

Perfect. Thanks a lot. Thank you. Thank you, Gograj. Our next question comes from Neha Agarwala with HSBC. Please go ahead. Hi. Thank you for taking my question. Can we just talk about the dynamics of the SMB segment? You posted stronger growth around 10% for the SMB segment versus the entire TPD. But should we expect a stronger acceleration for the SMB segment? Is that your focus and how are the dynamics that you're seeing in that particular segment? And then can we talk a bit about the long tail segment? Your active merchants continue to decline as you're probably being more selective and focusing on profitability. Thank you so much.

When can we see this stabilized and do you see an impact from some new players who got their full acquiring license? Have you seen any change in competition or with tone going down market? Do you see more aggressive price subsidies for the POS or any other change in dynamics which is worth highlighting? Thank you so much.

Hi, Neha. I'm going to answer a question in two parts, first about SMBs and then we can talk a little bit about long tail.

Well, what we're seeing in SMBs is similar to what we've been seeing in the past quarters. We understand that we have a very powerful combination here. We have a very clear value proposition for the SMBs.

similar to what we've been seeing in the past quarters, we understand that we have a very powerful combination here. We have a very clear value proposition for the SMBs.

To be honest, I don't see any other company in the market with the same combination of payments and digital bank that we have here. And also we have this...

instant settlement that other players don't offer for the SMB. If you are an SMB and you use PicoBank you can have D plus zero right after a transaction receiver money. You don't have PicoBank with high LCD.

For the SMBs to understand the value proposition, we have this advantage. Some of them prefer to work with the banks they already work.

But at the end of the day we think we have a strong value proposition with a very powerful combination That's what we try to leverage and to use our sales force to sell for the SMBs And we are doing very well to be honest and as you can see we are growing 10% EPV

we think we have a strong value proposition with a very powerful combination that's what we try to leverage and to use our Salesforce to sell for the SMBs and we are doing very well to be honest as you could see we are going 10% TPV

twice as much as the industry has been growing in SMB. So that's the first part. Second one about Long Tail. We know we've seen some net head losses in Long Tail. Part of that is churn that happened one year ago, so we are not seeing this TPV for the past 11 months because they stopped working with us one year ago and then we are seeing churn right now. So we try to...

always balance the subsidies that we have, the acquisition costs, with the value that we understand the long day is going to bring to us.

We try not to do, I would say, rational movements. Always looking for this equation, CAC, divided CAC versus LTV. But to be honest, in Q3 now we are seeing an increase in our gross ads.

We are seeing better response for the market. We are getting more gross ads and as I said before, in the first 45 days of the Q3, we are seeing 8.5% growth overall for the company.

better response for the market. We are getting more gross ads and as I said before in the first 45 days of the Q3 we are seeing 8.5% growth overall for the company.

No new player in the market, no new kid in the block, try to disrupt the market. Things like that. I think it is similar to what you have been seeing so far.

That's pretty much what we are seeing. The other thing that

We are always discussing here the way that we are going to measure how it's going to be long tail and the long tail TpV is growing. It's very common here in the bays that companies start with us as a long tail and after a while it goes to SMB because his or her business is growing and then it starts with one TpV and after one year there's like 50% more, 60% more and then we consider an SMB. So that's why long tail at the end of the day is I would say it's losing clients because or they are churning or they are going up for the SMB. So that's why it's hard to give you the exact number of how long tail is performing.

It keeps in a very healthy way with new clients. Activation is at very decent levels. If you look at the whole, MSNB is growing 10% in the second quarter, which is very impressive if you think that the market is growing 5%.

That's pretty much, I mean, many moving parts here. I'll try to answer your questions. If it's not clear, let me know. No, that's very helpful, Ricardo. Thank you so much. Our next question is from Caio Prato with UBS. Please go ahead. Hey, everyone. Good evening. Thanks for the opportunity. I have just one question here related to your mix shift strategy on payments. I understand when you mentioned that you were moving towards larger merchants and this is positive in terms of growth, but what we are seeing is that actually...

Your KTV is growing slightly below industry, at least on a year-over-year basis, and more importantly, total revenues excluding transaction costs are declining year-over-year. So your EBITDA did increase, but seems to be much more related to expenses control rather than revenue. So having said that, just would like to understand your view about this dynamic, if we are missing anything here, and what is the strategy going forward in order to reaccelerate revenue tax transaction costs, please. Thank you.

Hi, Caio. This is Vallejo. Thank you for your question. I think we are going through an optimization cycle since second semester last year where we started an important repricing movement going up our price.

and also we implemented very strict risk management policies in order to control and reduce our charted back losses.

Going over this cycle from at the end of last year to the beginning of this year, this slowed down our growth in the acquiring business in general, affecting long-tail and affecting large accounts especially.

Obviously, moving forward, as we have out this risk management program in place and better balance, as we have went through the repricing cycle and now we see opportunities right away.

to further grow in the future as we have been experiencing this in the beginning of the third quarter. So moving forward we see an acceleration, we didn't lose focus.

keep growing long tail segment even though we grow SMB faster right now and we see opportunity to keep growing faster to the end of the year our TPV and consequently our revenues.

Thank you very much.

Thank you, Kyle. Our next question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.

Yeah, hi guys. Thanks for taking my question today. First of all, I'd like to talk a little bit about the potential long-term expansion on the payroll loan side of things. How are you thinking about that total growth opportunity?

Hi Josh, the market is very big, our market share is very, very small. If you look what's going on in our credit portfolio, we are growing like...

In terms of mix shift, we are shifting like 8 percentage points.

from unsecured to secured credit portfolio every quarter. And of course part of that is because we are growing in this payroll. It's a huge market and our, to be honest, our market share is very, very, very small. So we see lots of room to grow. We found a way to bring these clients to us.

Also through our app, through digital. And that's definitely going to be a...

credit portfolio or credit product that we're going to increase in the future. But it's huge. The total address for market is huge.

Mm-hmm understood looking forward to tracking that progress over time

And then secondly, how are you thinking about capital allocation as we progress to the back half of 2023? Do you expect to continue buying back shares at the rate that you've been buying it back or perhaps accelerate it moving forward? Hey Josh, it's Atri speaking. Related to capital allocation, we have three things that we are doing because we are generating a positive cash flow. The first one is reinvesting in the company so we are not planning at this point to have any dividends or other type of firms to back to shareholders this money in that way. The other point is changing to funding lines cheaper so we can use part of this money to move from here and there and reduce the financial expenses that we have. And in terms of buy back, yes, we are doing every quarter some buybacks.

Now we have 7.5 million shares in the treasury. The plan is to continue doing that because of the low price that we are seeing in comparison to what we expect to have in the company. So we believe a lot that this company is a great company, especially for the future, because it's a solid company, solid balance sheet, and we are growing this company for the future, not just for one quarter.

Understood. Thanks very much for taking my question. Thank you.

Our next question comes from Alberto with Goldman Sachs. Please. Thank you.

Hi, good evening. Thank you for the call and taking my question. A couple questions also. Maybe just think a little bit high level on 2024. Maybe how are you thinking about revenue growth? You mentioned your TPD growth, you know, maybe has bottomed and can begin to accelerate, but maybe take rates are coming down a little bit as you're shifting the mix.

Just, you know, maybe PAG Bank starts to contribute more as you get past some of the impacts in the prepaid interchange. Just high-level thoughts on revenue growth for 2024 would be helpful. And then my second question, just following up on the take rate impact from the shorter duration of the receivables, are you seeing any pressure from the banks there? You know, a lot of talks about ending revolving cards and banks maybe pushing for doing less interest-free installments. Any colors on how you think that can evolve? Are you seeing any pressure from the banks already offering less installment periods than in the past? Thank you. Hi, Tito. This is Ricardo. I'm going to start backwards again and then someone can answer the first part. We're having this discussion about the revolving credit card interest rates in Brazil, which is around 15% per month and compounded is going to be like 440% per year.

you know, maybe PAG Bank starts to contribute more as also as you get past some of the impacts from the prepaid interchange. Just high level thoughts on revenue growth for 2024 would be helpful. And then my second question, just following up on the take rate impact from the shorter duration of the receivables, are you seeing any pressure from the banks there? You know, a lot of talks about ending, you know, revolving cards and banks maybe pushing for doing less interest free installments. Any colors on how you think that can evolve? Are you seeing any pressure from the banks already offering less installment period than in the past? Thank you. Hi Tito, this is Ricardo. I'm gonna start backwards again and then someone can answer the first part. Regarding this discussion about the revolving credit card interest rates in Brazil, which is around 15% per month and compound is gonna be like 440% per year.

There are many discussions at this point with Congress and politicians and so on. As a matter of fact, the text for the law that is under discussion about this credit card was published today afternoon. There is no relationship or no mention in this law about installments or things like that. So we are not seeing any pressure at this point. We are a credit card issuer as well and then we are following the discussion. We are part of the discussions with the government and regulators. But at this point, the text of the law is focused on decreasing the revolving credit cards, which again in Brazil is close to 440% per year.

but no updates at this point. I mean everything is just being under discussion how it is possible to decrease this 440% to a lower level.

Hi, this is Eric. I will break down the question related to revenues growth in two parts.

Starting with the acquiring businesses, we do see an acceleration of TPV growth towards the second half, 23, like we shared our guidance for the first 45 days of Q3. And we do expect to keep gaining market share over the next quarters and years. But we understand that as larger market share we have.

The bigger markets are the markets where we have SMBs in large accounts, so lower take rates.

But the combination with the financial expenses, potential decrease backed by lower interest rates and our funding strategy, the incremental gross profit tends to be very compelling in 24 owners.

For the financial services, we will have this interchange cap effect enduring until Q124. So this will create potentially easy costs for second quarter 24 owners. We also have the compounding effect on the payroll load as we disperse up front the cost to on the right, but we have the compounding effect over the years.

And as we keep growing our deposits base, naturally we also have additional float revenues and we also expect to grow our credit portfolio in the short term in secured products. In mid-term, I think we are working here to further improve our onboarding and to end processing credit underwriting, onboarding, risk assessment, underwriting and collection to restore and accelerate the underwriting of unsecured products.

So these would be the main revenue streams for the both verticals. Great, that's very helpful. Eric and Ricardo, thank you for the call.

Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, that concludes our question and answer session. I would now like to turn the floor over to Mr. Ricardo Dutra for closing remarks. Please sir, go ahead.