PagSeguro Digital Ltd. Q4 FY2021 Earnings Call

Good evening. My name is Nihuge, and I will be your conference operator today. At this time, I would like to welcome everyone to PagBank PagSeguro's Webcast Results for the fourth quarter 2021. This event is being recorded. This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro's website at investors.pagseguro.com. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagBank PagSeguro's website. Before proceeding, let me mention that any forward-looking statements included in this presentation or mentioned on this conference call are based on currently available information, and PagBank PagSeguro's current assumptions, expectations, and projections about future events. While PagBank PagSeguro 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 PagBank PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of PagBank PagSeguro's registration statements on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank PagSeguro's Investor Relations website. Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented on the last page of this webcast presentation. Now I will turn the conference over to Mr. Ricardo Dutra, Co-Chief Executive Officer. Please proceed.

Hello, everyone, and thanks for joining our fourth-quarter results conference call. Tonight, I have here with me Alexandre Magnani, our co-CEO; Artur Schunck, our CFO; and Eric Oliveira, our Head of Investor Relations and ESG. Before I start, we will break this call into three presentation sections followed by a Q&A. First, I'll share a brief overview of PAGS milestones in the past years. Then, Alexandre will share the 2021 achievements by segments and 2022 outlook. Wrapping up, Artur will comment on our 2021 financial results. Well, we have been living in unprecedented times in Brazil and around the world. After two years of COVID-19, the global pandemic starts to phase out as vaccination levels continue to grow. However, the consequences are everywhere. The government's financial aid programs are being reduced or removed around the world, and inflation levels are skyrocketing in many countries like the United States and Brazil, forcing central banks to raise interest rates. Additionally, in Brazil, households' indebtedness reached a historical peak, raising concerns about credit offerings and delinquency rates. The political turmoil around the world and the war in Ukraine raised additional uncertainties for the future. After more than 20 years working for UOL Group, the last six as PAGS's CEO, I know that an unprecedented crisis like the current one will be just another for us. PAGS's track record shows that our performance has not depended primarily on the macroeconomic scenario. Remember that PAGS has been profitable since 2015, 2016, the worst years ever for the Brazilian economy. Furthermore, we have been fast and flexible to expand and adapt, exploring opportunities that arise, always prioritizing businesses with the best balance between growth and profitability. We also know that user experience and technology, combined with efficient execution, are the core for tech businesses, especially in a digital world where fintechs are pursuing tactics to increase their clients' lifetime value. Our last four years revealed how powerful and disruptive PAGS's business model is. Since our IPO, we have grown fourfold our revenues, becoming much bigger, profitable, and relevant. Moving to Slide 5, I would like to start with our main message. Our profitability remained resilient, with unbeatable underlying fundamentals despite a tough 2021. PagSeguro, our acquiring business, captured 45% of Payment's profits, although we invested BRL 300 million in PagBank in 2021. Our ongoing repricing increased our take rates by 15 basis points in Q1 2022 compared with Q4 2021, and the price increase that we planned will be fully implemented in April 2022. Our bank is much more complete today for merchants and consumers so that we can address the banking profit pool, which is 30 times larger than payments. For 2022, we have a positive outlook with growing volumes and keeping profitability while we pave the road for PagBank monetization. Moving to Slide 6, after four years of our IPO, although the market has become more competitive, PAGS was able to capture a record lion's share of 45% in the Brazilian payments profit pool, 27% of revenues, and 9% of TPV market share. We ended 2021 with BRL 1.8 billion in net income excluding PagBank. We are the most profitable company among payments companies and digital banks. Therefore, we are very well positioned to scale up our banking strategy, diversify our revenues and profits in our banking industry, which is still highly concentrated among incumbents and 35% larger than payments profits. Moving to Slide 8, we see that in less than three years, we built up a very complete ecosystem that combines payments, day-to-day banking services, complete card offering, and loans. On the next slide, we can see that we have launched additional features to enhance our ecosystem such as investments, insurance, marketplace, and other partnerships. We became a complete bank offering the best user experience for consumers, micro-merchants, and SMBs in Brazil. And to finish this first part of the presentation, I would like to say that I have been working for the past seven years with the new CEO, Alexandre Magnani. He is the most prepared person to run our day-to-day operations, to motivate our team, and to get the best of them. I will dedicate my time to build our vision of the future and participate in our Board of Directors and our Executive Committee. Before I pass the word to Alexandre, I would like to thank our clients, suppliers, shareholders, stakeholders, and especially our PagBank PagSeguro team for all the confidence and support. Alexandre, go ahead, please.

Thank you, Ricardo. Hello, everyone. Before I start, I would like to share a little bit of my experience and some thoughts. I have built my career in payments and financial services in Latin America for almost 30 years, seven of them in senior positions at PAGS. Here, I saw things evolve very quickly, transforming our company from a startup to one of the most relevant fintechs in Latin America. Besides the great achievements in payments, there is a huge opportunity to be captured in Brazil. The banking industry continues to be highly concentrated. The top six financial institutions' net income reached more than BRL 105 billion in 2021, approximately 90% of the banking industry's profits. I'm really excited about this opportunity and count on the next steps to come. I would like to start with the 2021 highlights, which are shown on Slide 11. We ended the year with almost BRL 0.5 trillion in financial transactions, composed of BRL 252 billion in payments and BRL 204 billion in PagBank transactions. Our total revenue and income grew 53% year-over-year, reaching BRL 10.4 billion. The number of bank accounts totaled 22 million, with 13 million active clients, positioning our company as the second largest digital bank in Brazil. Total deposits accounted for almost BRL 8 billion, up 66% year-over-year, and our book loan increased threefold, reaching almost BRL 2 billion. Net income on a non-GAAP basis grew 12% to BRL 1.5 billion, resulting in earnings per share of BRL 4.68, while capital expenditures decreased by 15%, reaching BRL 1.8 billion. After the great achievements in payments, we will focus our strategy and decision process on the following: increase and diversify our revenues and profits by consolidating PagBank; grow above the market in payments with efficiency and profitability; develop our two-sided ecosystem to gain client preference; execute everything with a 360-degree security approach; and invest in our most valuable resource, our people. Moving to Slide 12, I want to share some financial and operating highlights of PagSeguro, our payments vertical. Total revenue reached BRL 9.2 billion, up 54% year-over-year, led by a net take rate of 2.19%, which is much higher than the industry. The accelerated growth in other segments such as SMBs, larger merchants, and cross-border has significantly contributed to the solid revenue growth with a healthy net take rate. PagSeguro TPV ended 2021 with more than BRL 250 billion in payments processed, 60% higher than 2020 while excluding the coronavoucher impact, ending the year reaching almost 10% of the Brazilian market share. Our CAGR from 2017 to 2021 was 60%, while the industry was 18%. We also have improved customer satisfaction, which was confirmed by the awards from iBest and Reclame Aqui. Price increase, operational leverage, and new market expansions are our main priorities for 2022 to keep the best balance between growth and profitability. Moving to Slide 14, I want to share some financial and operating highlights of PagBank, our fintech vertical. Total revenue grew 63% year-over-year, ending 2021 at BRL 917 million, approximately 9% of total revenue and income of PAGS.

Thanks, Alexandre. Hello, everyone. In the top left of Slide 19, adjusted EBITDA on a recurring basis increased by 27% year-over-year despite the Brazilian interest rate. In the last quarter of 2021, the company decided to stop the PagPhone project due to the underperformance of our initial expectations for this product. We still have the devices in our inventories, and the one-time accounting impact in our adjusted EBITDA was BRL 139 million. Moving to the graph below, our consolidated net debt rate decreased by 17 basis points year-over-year, reaching 2.42%, mainly driven by client mix. This impact was partially offset by a higher mix of credit and prepayment volume, which have higher take rates. On top of that, PagBank revenue growth contributed to the consolidated net take rate. In the right side, we present our managerial P&L for the last five years in recurrent figures. In 2021, our total revenue and income surpassed BRL 10 billion for the first time, growing 53% year-over-year. Excluding transactional costs related mainly to interchange and scheme fees, financial expenses related to the cost of funding to prepayment receivables, exchange expenses, and other financial income related to financial investments, our gross profit grew 41% year-over-year. Adjusted EBITDA closed at BRL 2.7 billion, up 27% compared to 2020. Net income non-GAAP achieved BRL 1.5 billion, growing 12% versus last year, even with the tougher macroeconomic environment and the increase of the Brazilian interest rate. Earnings per share in non-GAAP measures achieved a record of BRL 4.68, growing BRL 0.49 versus 2020 and surpassing the pre-pandemic levels. In the next slide, our Q4 '21 adjusted EBITDA on a recurring basis achieved a record of BRL 751 million. In the chart below, the consolidated net take rate increased 10 basis points versus Q4 '20, driven by our efforts to increase prices to mitigate impacts from the country interest rate hikes. In addition, better credit mix, higher prepayment volumes, and PagBank revenues contributed positively to the increased net take rate.

Now, let me pass the word to Artur. Thank you.

We closed 2021 with BRL 8.8 billion in the cash position which is the sum of the cash and financial investments, accounts receivable from bank issuers, and credit portfolio minus payables to merchants, PagBank balance accounts, deposits, and borrowings. The positive position increased by BRL 1 billion year-over-year, mainly due to more BRL 7.7 billion in account receivables, partially offset by BRL 4.6 billion, increasing payables to merchants. This was driven by a better TPV mix towards credit cards and the volume of same-day prepayment to merchants. At the same time, we have been improving our capital structure, ending the year with 66% of our financing position furthered by third-party capital, better positioning our company in terms of tax shield in the cash flow. We have been increasing the APRs and reducing the APYs to manage the higher financial expenses. At the same time, balance accounts increased, bringing a competitive advantage to PAGS. In the right chart, our financial expenses reached around BRL 403 million versus almost BRL 30 million in Q4 '20. The biggest impact comes from country interest rate that rose almost fourfold year-over-year, PagSeguro TPV growth, PagSeguro TPV mix, pre-payment average term, and APYs on deposits.

Through the yearly redeeming of current receivables with the issuers, we have been raising a relevant portion of our capital needs, which costs a few basis points above the Brazilian interbank rate, CDI. On top of that, our deposits work as an additional funding source at the same time, being part of our customer acquisition cost strategy, which also impacts the financial expenses due to the APYs paid by the company. We will continue to look for other funding options and market opportunities to manage the financial expenses like the borrowing contract of BRL 1 billion at a cost of 109% over CDI. Moving to Slide 22. We present our assets and capital allocation. We ended 2021 with almost BRL 2 billion in the credit portfolio, with working capital loans being the most relevant product followed by credit cards. The portfolio increased BRL 1.3 billion in comparison to 2020. Since the company has been adopting IFRS 9 and provisioning up for unexpected losses, we ended the year with provisions for 23% of our book loan, with 8% related to provisions for write-off. Importantly, for tax efficiency purposes, we did not write-off these yet, but they are fully provisioned. This represents an important improvement in comparison to 2020, reducing the balance provision from 19% in 2020 to 15% in 2021. This year, our goal is to remain cautious during the first half while increasing our exposure to secured loans, mostly tied to our CDs and payroll. As time evolves and market conditions improve, we can review our credit underwriting policy for the second half. At this stage, the economic outlook remains challenging with interest rates surpassing double digits again, while we expect inflation to go down. Finally, Brazilian households' indebtedness reached the historical record number, and there is no rush from our side to speed up credit underwriting in such a very volatile scenario.

CapEx per sales ended the year at 17%, 13 percentage points lower than 2020 and much more focused on R&D expenditures. Also, given the recent market sell-off which has been dragging down stock prices of several tech companies like us, we took the decision to use part of our share buyback program ending January 2022 with more than 2 million shares in our treasury department. Finally, I would like to share our ESG milestones, consolidating all the positive impact PAGS has been promoting in Brazil, creating shared value for the stakeholders and establishing the goals to keep increasing our commitment to a more sustainable, fair, and diverse society. In 2021, we released our first sustainability report, which was our kickoff to look at all impacts the company has been making in our society. During the year, we created our ESG Committee composed of directors and senior directors. We hired a seasonal team that reports directly to the committee. We also signed on to the Global Compact, conducted our GHG inventory for 2019 and 2020, and we were awarded by Women on Board since 42% of our Board of Directors is composed of women. We also were able to see how impactful our business is in the lives of those who need more. In 2020, we reached 100% of Brazilian territory with our services, allowing millions of merchants to accept electronic payments to generate income for young entrepreneurs, empower women in business, and enable elderlies to complement their retirements. And this is just the beginning. In 2022, we expect to release our second sustainability report, completely aligned to the GRI essentials. Also, we are in the middle of the process to do the GHG inventory for 2021, audit the data and set our goal to be a neutral carbon company, reporting the data in the CDP. We hired a consulting firm to help us to address the goal to be a more inclusive and diverse company, as we will also apply for the Great Place To Work.

Now, we concluded our Q4 '21 presentation and open the Q&A session. Operator, please.

Our first question comes from Mario Pierry, Bank of America.

Let me ask you two questions. First one is related to your client base at PagSeguro. We noticed that the client base declined by 8,000 while you have been growing more than 100,000 per quarter. Can you discuss a little bit about the trends here in mortality of clients, the churn? Is this churn all related to your acquisition of Moip last year? Or does it reflect the fact that it's more difficult for you to increase prices than you expected? So yes, that's the first question, is about your client base and how do you think that's going to evolve in 2022? And then the second question is related to the repricing, right, that you have underway right now, and you're talking about being fully executed in April. What does that mean? Does it mean that 100% of your client base is going to be repriced by April? Or the clients that you wanted to reprice are going to be repriced by April? And then if you can discuss a little bit about the segments. Are you able to increase prices in the micro-merchants versus the SMB segments? If you can discuss your ability to reprice by segment, that would be helpful as well.

Thank you, Mario, for the question. I will start with the first one about the client base, and then I'll pass to Alexandre or Artur to talk about the repricing. Regarding client base, you're right. When you make the math, it's an 8,000 decrease versus Q3. But if we exclude Moip from these numbers, if you look only at PagSeguro, we will see a growth of 130,000 in the quarter. So really, what is impacting this number is the clients from Moip that stopped making transactions with us one year ago, so we don't see this churn from these clients affecting our TPV. As you can see, we are growing pretty strong in TPV, so they were clients with very minor TPV per month. But yes, it affects the number. What we've been seeing so far, the gross adds keep being strong, similar to what we had in the past, I don't know, ten quarters. So we don't see gross adds decreasing. What we see, though, is that we have a base that is reaching almost 8 million clients and the churn as a percentage can make some pressure on this number because the percentage of a big number is huge; the percentage of 8 million. We don't see that as an issue because we had this mortality from many clients because of two years of pandemic. We don't see that because competition is much more related to mortality and related to Moip. And we are focusing now on bringing clients with the better relation LTV versus CAC, which means with a little bit more TPV per month than the nano merchants, so to say. So this churn, just to be clear here, there is no relation with price increase at all because mainly we are measuring this churn of the clients that we made repricing, that Alexandre will talk later. And even if you had the churn, it would appear only one year from now. So we don't see the churn increasing because of repricing, Alexandre will talk later, but just to be clear here. But going back to your question, if we exclude Moip, we would grow something like 130,000 in this quarter in PagSeguro. We are looking for clients a little bit larger than the nano merchants. And again, we don't see that as an issue because it's part of the business mortality after two years of pandemic.

Okay. Mario, this is Alexandre. Regarding the price increase, we have been implementing increases since November of last year. We have scheduled these increases to occur in different phases, with the final phase expected to conclude by April of this year. We are raising prices across all client segments, including long tail, SMBs, and larger merchants. The full effect of this price increase will be seen in the second quarter. This indicates that, depending on the macroeconomic conditions and any future changes in interest rates, we may pursue additional price increases in the future.

Okay. Now, that's helpful. Let me ask then two follow-ups. On the price increases, right, you showed that in the fourth quarter, your net take rate was 2.4%. You are at 2.64% by February. How much higher can we see this net take rate? What is the level that you think we're going to reach by April? And then the other follow-up is on the net adds, on the churn, and Moip. Is this complete now? Like basically, it seems like you lost 130,000 clients from Moip. I think when you bought them, you added about 400,000 clients, so it's a big chunk of clients that have left. If you can be a little bit more specific for the reasons why they're leaving, and if you think that this is complete now, that whoever was going to leave has already left.

I will begin with the last question and work backwards. Concerning the clients from Moip, previously we had a situation where a marketplace supported numerous smaller sellers each generating very low transaction values per month. We reactivated some existing clients and attracted new ones. However, when analyzing the churn, it's partly attributed to the legacy clients from the acquisition in 2020. Some of these clients were affected during the transition period from July to November 2020 when the company lacked management in Brazil. This explains the impact we observed. Nonetheless, this is not a major concern because these were relatively small merchants within smaller marketplaces. It appears that the impact from Moip has ended, as we've seen this in previous quarters. Looking at our core business, PagSeguro continues to grow, with an important metric being the increase in transaction value per merchant. Additionally, our guidance for the first quarter is extremely positive, suggesting we will likely maintain or exceed the transaction values we experienced in the fourth quarter, despite the usual seasonal decline in the first quarter. The guidance indicates we expect higher transaction values than in Q4, which is a very encouraging trend for us.

Okay. And for the second part, going back to repricing. Moving forward, we want to recover the margins as much as we can. And again, increase our margins moving forward according to the interest rate rises. But also, we want to be very competitive in the market, so we'll do all these moves very carefully in order to keep increasing our profitability but also serving the competitors and the environment so we can still grow in an accelerated way.

Okay, guys. I'll let the other analysts ask questions as well.

Our next question comes from Tito Labarta, Goldman Sachs.

A couple of questions also. Maybe first on your margins, right? Just looking at the guidance you gave for Q1, it implies margins around 10%, 10.5%, 11%, so a bit lower than what we see in Q4, yet your take rate is going up. So just to understand a little bit of that dynamic, is that just higher financial expenses? I mean, at some point, will you be able to offset those higher financial expenses? Or it's just more investments in HUBs or PagBank? Just to understand that dynamic. And is there any color or guidance you can give maybe for the full year, either margin revenue or TPV like you gave for Q1? And then my second question on PagBank. Initially, you guided for PagBank reaching 30% of revenues in 3 to 5 years. That was now about 2.5 years ago. Do you think that's still a reasonable assumption? Particularly, you mentioned you probably will be more cautious on credit, given the macro environment today. Will that delay things in terms of monetizing PagBank? Just how you think about PagBank growth in this current macro environment?

Starting with the margins, you're correct. The guidance and TPV are slightly less than what we saw in Q4, mainly due to financial expenses. There’s a delay between how quickly interest rates have risen and how swiftly we raised prices for our clients. That's why we indicated that the initial price increase will be fully in place by April. In Q1, we will still face pressure from financial expenses because the price increase has not been fully implemented yet. This is the primary factor affecting margins. For context, the interest rate in Brazil was 2.75% in March 2021 and rose to 11.75% in March 2022, a rise of 9 basis points. This explains why our price increases did not match the pace of interest rate hikes in Brazil. Regarding PagBank's contribution to 30% of revenues by 2024 or 2025, we still believe this is achievable. Currently, Brazilian families are experiencing their highest levels of debt due to rising inflation, which has slowed down credit operations, but we think we can close this gap in the medium term and achieve that 30% goal. It’s also worth noting that we launched PagBank as a basic account in May 2019 and have since developed a comprehensive ecosystem. Although we had plans to offer more credit, the pandemic impacted this decision. We chose not to rush into credit offerings during a challenging macroeconomic period, which helped protect our financial health. In the medium term, we believe that achieving 30% revenue from PagBank is completely feasible.

Okay. Great. That's helpful. Maybe if I can ask a follow-up on the margins a little bit. Just going back to your Investor Day, you had mentioned that margins could be kind of flattish, maybe even a little bit higher in 2022. Now I know rates keep going up maybe faster than expected. But I think in December, we probably still expected double-digit rates. Did anything change significantly since then other than rates continuing to go up? And any color you can provide also on the impact on margins from the investments in HUBs? And when do you think you become profitable on those HUBs?

Tito, compared to the event we had in November, there are two main drivers here. The first is that rates have increased more rapidly than we anticipated last year, and this caught everyone by surprise in Brazil. A report from a major bank today indicated that the Selic could approach 14% by the end of the year, which was not a scenario anyone had discussed last year. Inflation is rising significantly, and interest rates are climbing faster than we expected. The second reason is that we did not implement price increases at the same pace, as we initially thought we could move quicker, but opted for a more cautious approach. Regarding margins, their success will depend on how effective our price increases are. We are proceeding in a measured way, accelerating price increases in segments that are less sensitive to price changes and applying feasible increases where it makes sense. The positive aspect is that the entire industry is undergoing this repricing. This isn't just an adjustment being made by PagSeguro; as we mentioned last quarter, the interest rate in Brazil is a critical factor for everyone. When your raw material moves from 2% to 14%, price increases are necessary. This repricing trend is something we are observing across the industry. We anticipate that we will recover margins, at least partially, in the upcoming quarters.

Okay. And just anything on the HUBs?

Regarding the HUBs, Tito. The HUBs, we gave this information that they pay back between three to five quarters, we keep executing very well. Of course, part of our TPV growth is because of the perfect execution we are having in HUBs. But we don't give too much color on HUBs because of strategic reasons, Tito. That's we have decided here, but I mean, the more we can say, we can give you color in the following weeks, but we give the HUBs TPV usually and then the payback, which is between three to five quarters.

Okay. Great. That's very helpful. And sorry, just one quick follow-up on PagBank. You had initially mentioned probably profitable by year-end 2022. Is that still feasible?

Let's hold off until the next quarter. If we don't reach breakeven, as we anticipated, by the end of this year, we expect to achieve it by early 2023. That’s acceptable; it’s just one or two more quarters, which is manageable as we proceed cautiously. Our slides demonstrate that our net income margin is improving significantly. It has increased from BRL 140 million to BRL 280 million, if I recall correctly. This growth is solid. PagBank and its fundamentals are strong, as reflected in our net income margins and client base. We're closely monitoring the credit portfolio to prevent any unexpected issues.

Okay. Great.

Our next question comes from Jorge Kuri, Morgan Stanley.

Congratulations on the results. I wanted to follow up on the previously answered questions, specifically regarding the repricing. What percentage of the total repricing you intend to complete by April do you believe has already been accomplished? Are you halfway there, two-thirds of the way, or almost finished? I'm asking this to gauge the potential upside on your take rate compared to the 2.64% you reported in February. Additionally, I would like to understand the projected net margin, which you're estimating at 11% for the first quarter, and how much room that may have to grow. My second question is about PagBank. You've mentioned this previously, but I want to clarify. The revenue earning TPV of PagBank remained flat for the quarter. Can you provide insight into why that is? If the business is expanding so rapidly, why hasn’t the TPV increased? You mentioned factors like family leverage, but there are other ways you generate revenue through TPV aside from lending. I’d like to understand why it has remained flat given the rapid growth in the number of clients.

Jorge, it's Artur. And so related to pricing, I would like to say that we are working to adjust prices for almost every client, but in stages. For strategic reasons, we prefer not to share with you the percentage of clients that we have already adjusted. We are adjusting prices as the market conditions allow us to do that, taking a look at the competition, churn, and external KPIs that we need to be looking for, and being cautious to adjust prices and try to avoid increased churn as we are not seeing until now. So we are continuing the process to adjust prices, and in April, we believe we will have a big adjustment.

In March, the take rate is higher than in February, indicating that the take rate is on the rise. I understand there are questions about margins, which are anticipated. We provided guidance for Q1 2022, and considering our price adjustments will be fully implemented by April, we expect a positive impact starting in Q2 for the remainder of the year. While we are not providing specific details at this moment, the trend suggests that margins will improve compared to Q1 due to the price increase in April. We are experiencing strong revenue growth and keeping our investments flexible, with financial expenses being the main driver behind the repricing. So far in March, the results are better than February regarding take rates.

Great. And the issue of the revenue earning TPV at PagBank?

Jorge, if I got your answer correctly, you're comparing the percentage of PagBank versus the total revenue of the company, which is around 8%.

No, no, the revenue earning TPV in PagBank was flat quarter-on-quarter. So I'm trying to understand why the revenue-generating TPV was flat quarter-on-quarter, given all the growth in clients.

No, that's fine, Jorge, I understand your question now. You are comparing quarter-by-quarter. For those on the call, in Slide 14, we noted that for the full year, we increased by 8 basis points from 136 to 144. However, your question pertains to the quarter-on-quarter comparison. What we're seeing is that we're adding many more consumers than merchants at this stage, and it takes some time for these consumers to generate revenue due to various known reasons. The cash-in process takes longer for consumers compared to merchants, and they don't have the same volume of cash-in that we observe with merchants, which is why monetization is delayed. Additionally, we've made the decision to be more cautious with credit concessions in recent months. These are the two main factors contributing to why revenue versus TPV in PagBank was relatively flat and slightly lower. Looking ahead, it's clear that we will be increasing credit offerings in the company as part of our plan, but the overall economic environment will need to support this. We won't make drastic changes just to increase credit; we will only extend credit where we have confidence in achieving good results while continuously adjusting for risk and return. The reason we will be able to grow is that we'll be leveraging credit for our PagBank clients.

And Jorge, this is Eric. I think when we look at the NII of the company disclosed for the first time and the trends in the gross profits, I think we have been getting more sophisticated in credit underwriting. And nowadays, it's much more a matter of being cautious and diligent in capital allocation, credit underwriting instead of just speeding up very rapidly and posing additional risk into our balance sheet and company. So this is why the monetization is stable, but the engagement is coming stronger and stronger.

Great. That's very clear. And just a follow-up on my first question on the repricing and the impact that has on take rate or margins. So if I understand correctly, you don't expect net margins to be flat for the year, as you pointed out during the Investor Day. Is that right? Am I understanding your answers correctly to those questions?

Jorge, you're correct. We don't anticipate it to remain flat for two reasons I previously shared with Tito. First, interest rates have risen more quickly than we expected. It may not seem excessive, but it significantly affects the P&L in a rapid and strong manner. A major bank in Brazil recently indicated that Selic is projected to approach 14% by the end of the year, which is a scenario not previously discussed until about two weeks ago. That's the primary reason. The second reason pertains to credit. We had hoped that the macroeconomic environment would improve, allowing credit to generate more revenue and assist margins, but that hasn't happened. So, as you noted, we will not be flat as we mentioned earlier, particularly due to the timing discrepancy between repricing and the quicker-than-expected rise in interest rates.

Great. Thanks for your detailed responses.

Next question comes from Bryan Keane, Deutsche Bank.

I also wanted to ask about the price increases. How much do they offset the higher interest rates, specifically the 9 basis points you're mentioning? Do we anticipate achieving 50% offset by the time everything is fully implemented? Additionally, do you plan to fully realize the rate increase impact in the future, or will you need to absorb some of the higher rate as a loss? Will you eventually pass through the increase in 2023 or 2024? When do you expect to fully adjust pricing to account for the higher rates?

Bryan. Our intention is to reprice the biggest portion of clients, but it will take some time to do that because, as we said, we are adjusting step by step. We defined some stages for the clients, and we are going to adjust those prices. It will take time. I don't know exactly if we could cover all the impact coming from the cost. But the big portion, we believe, we can cover during the year. And maybe for 2023, we can have the biggest portion of the cost offset by the repricing of our clients.

Right. And so if the rates do go higher to 14% as maybe some are suggesting, does that mean then we should expect further price increases in '23 or even in '24 to get back to where we fully have passed through the higher rates at some point in the future?

Yes. Exactly, you are right. If the interest rate in the country continues to grow, we have the ability to adjust prices once, twice, three times, no problem. And it could also impact 2023, and we have some adjustments in the coming years, if the cost continues to increase, that will affect the whole industry. So we believe all the players will adjust the prices going forward, if it's necessary.

Great. That's helpful. And then my follow-up is just on Moip. How fast is the revenue growth in Moip versus the industry? Are people still adopting an e-com and just thinking about how that business is positioned for revenue growth in this year versus the churn? I understand, with some of the smaller base coming off, but how much of an impact is there to the actual top line?

What we observed in Moip was significant growth during the pandemic. While the growth continues, it is not at the same rate as before, similar to the trends in major marketplaces in Brazil. Other public companies have reported substantial growth during the pandemic due to increased online shopping while people were at home. Now that vaccination efforts are underway and life is returning to normal, e-commerce is still growing, but not as rapidly as it did in 2020 and 2021. We have made changes to Moip's structure and systems, and the business is in much better shape compared to a few months ago, positioning it well for growth. We plan to aggressively acquire new clients in e-commerce, having resolved some features that needed enhancement, and we are prepared to approach new clients now to accelerate Moip's growth beyond the industry's pace in Brazil.

I can add some color here. We are working in a more integrated way between our three e-commerce platforms on BoaCompra, which is our cross-border platform, and PagSeguro, e-commerce platform and Moip; so we can get the best of each platform. So we can grow faster in e-commerce and card-not-present transactions moving forward. This is one of the areas that we are investing a lot, and we are certain that we will extract a lot of value from it.

We now proceed with Neha Agarwala, HSBC.

Could you just help us break down PagBank revenues? What percentages roughly interchange, how much comes from credit, et cetera? And do you have any update on the prepaid interchange regulation? And then I'll ask my next question.

Neha, this is Eric. Since 2021, the revenues from the credit products have increased their share. Why? Because the credit portfolio increased from BRL 600 million to almost BRL 1.9 billion by the end of 2021. So for strategic reasons, I cannot break it up to you, but you can assume that credit revenues or interest income coming from credit offerings is already or almost reaching half of PagBank's revenues. Neha, related to the change in the regulation. You talked a little bit about the public hearing that there are some changes in the capital requirements for payments in institutions. So in our opinion, the Central Bank continues to foster competition in the industry, reducing potential regulatory asymmetry and also adjusting it to tie to company volumes and raise competition; market remains very concentrated in terms of credit, like 70% or in profits, more than 90% is concentrated in the top six big banks in Brazil. And so maybe the Central Bank is trying to grow financial inclusion in the sector. And we believe the scenario for PAGS is positive. This implementation will take three years, starting '23 and fully implemented in '25. As we acquired a banking license in January 2019, we have already complied with the capital requirements regulation. Just to give you an idea, our Basel index is more than 60% right now. And so we are very comfortable with these new requirements that the Central Bank launched in the public hearing.

My next question is on the financial expenses, which almost doubled quarter-on-quarter. Given that the rates continue to grow up, what should we expect the financial expenses to look like? Is there any way that you can optimize the financial expenses during 2022? And I believe these financial expenses also include the amount that you pay for the deposits at PagBank. So could you just break it down a bit for us or maybe explain how should we think about financial expenses? You know, I think that is key for profitability for this year.

Yes. Neha, as we mentioned, working capital is our essential resource. Particularly during high-growth periods, we need to inject capital into the company. The majority of our credit transaction payment volume is prepaid. We have a product that gives us a competitive edge in the market, allowing for prepayment right after transaction approval. As we experience rapid growth in our transaction volume, we encounter a significant impact on our financial expenses. I want to emphasize that our company is performing well, but it puts pressure on our treasury to support this operation. Additionally, the swift increase in national interest rates has also affected our financial expenses in the fourth quarter. As Dutra indicated, we raised our account interest rate from 2.75% to 11.75%, with projections nearing 14% by year-end. In terms of deposits, securing them is advantageous for funding the company since it is less expensive than other options. We are heavily investing in PagBank to create a more comprehensive offering that attracts more clients, encouraging them to consider us as their primary bank for managing their wealth, which allows us to utilize these deposits to lessen our high costs associated with alternative funding methods.

Understood. I think last question, if I may ask. You mentioned that you focus more on collateralized products in the first half. Could you give us more color on what sort of products you are looking at? I know you mentioned payroll loans. What is the kind of model that you're looking at for payroll loans? And what are the other loans that you can maybe provide during the first half?

Neha. While we have these payable loans that you said, and we also have the product related to credit card with CDs, that's another product that we are making some changes and we see some potential there. But the idea is, of course, to have some collateral that we can use in case of delinquency from the client. We just want to make it easy for them to hire the credit with us and also force to give the collateral in a very easy way. We don't think that today we have the frictionless process in some of these products, so we are focused on that. And also in the salary-backed loans that we have, we expect to have this product grow in the future. So those are the main products that we already have, and we are making some changes to improve and to grow in a more fast way in the following quarters.

Our next question comes from Jason Mollin, Scotiabank.

Can you hear me?

Yes, we can hear you.

Great. I have two questions. My first is on PIX, the instant payment platform. You stated that 9% of PIX transactions are done through PagBank. So can you talk about the implications for PAGS, specifically its profitability? And my second question is on your 2022 guidance. When management thinks about that, or even the first quarter expectations, can you talk about the upside and downside risks to revenue and profitability expectations? Perhaps some comments on the macro and the competitive scenarios.

Thank you for the question, Jason. Regarding PIX, we reported a 9% share with 727 million transactions in PagBank, and this does not impact our profitability. This figure reflects a shift from wire transfers to more electronic transactions rather than cash, leading to a 58% year-over-year growth in TPV. We disclosed this 9% to highlight the strength of PagBank and how it is increasingly being utilized for transactions in the country. This percentage indicates the volume of transactions processed through us, particularly for money transfers. From PagBank's perspective, this is a positive figure that does not cannibalize our acquiring business. People are simply using PagBank more frequently. In terms of margins, we are implementing a repricing strategy, with the first phase expected to be completed by April. We anticipate that from April onward, there will be a positive effect on our bottom line due to this repricing. So far, the repricing has not affected churn, which is why we are proceeding with it in phases without seeing an increase in churn rates. The industry overall is raising prices, and there seems to be more rationality as other players follow suit. To be honest, we expect positive outcomes from April onwards, and if there are any changes, we will keep you informed. The goal is to increase prices to achieve this positive impact from that time forward.

Our next question comes from Domingos Falavina, JPMorgan.

Congrats, I guess, on the ability to pass through the cost of fund increase, I guess, the Selic, I think this was a major concern. My question is more, I guess, on a little bit of an accounting adjustment you guys are doing. I realize you adjusted by BRL 142 million associated with PagPhone. And when looking through the presentation, it seems you adjusted revenues by BRL 3.4 million, but then the expenses by BRL 142 million. Sorry if I'm not very familiar with this, if I missed something but just want to understand kind of the history behind it. Like basically, you spent BRL 142 million buying cell phones and only sold BRL 3.4 million, and you're basically writing this off, and you're not going to use these anymore. Or why would you consider research and development projects then recurring? And then, I guess, linked to this one, my second question is when you're soft guiding to about BRL 360 million in non-recurring earnings. What adjustments are you doing to this non-recurring that is not share-based compensation? So ex-share-based compensation, what else are you adjusting?

Domingos, it's good to talk to you. Related to PagPhone, it's important to mention that it was a project whose acceptance has been lower than expected, so we decided to write off the assets. Part of the devices are in our inventories yet, but 100% of the write-offs were booked in our financial statements. Following the best accounting requirements to be conservative as we always are conservative in the company, the impact going forward is zero because we did the full write-off. This is the reason that we consider it a one-time operation because we do not expect any impact going forward. Related to revenue, it's because we had some devices sold by the company. And to be fair with anyone that is analyzing our income statement, we are excluding also the revenue that we had with these devices sold. So it's just to be clear and to be fair, that we have a positive impact in our revenue and we are excluding, and also the negative impact in our expenses we are excluding from the result. The other two effects that we had in Q1 '21, one is related to the digital losses that we had. Probably you remember that we gave this disclosure in Q1 '21 that we had some issues related to a product that we launched. And there were some chargebacks at that moment, and it heavily affected our Q1 '21, and we do not have any other impact related to this product going forward. So it was a one-time situation on that moment. And also, we had a tax reversal in Q1.

Sorry if I misspoke. So super clear, thank you for adjusting both ends. But I mean, more like the first Q '22, you're giving like BRL 360 million. So I'm assuming there is no PagPhone impacts in the next quarter? Anything else that…?

Yes, there is no impact in BRL 360 million in Q1 '22, so yes. Just to make sure that this write-off of the PagPhone, we executed the full inventory, and this is why we considered it a non-recurring effect. So investors should not expect further adjustments related to PagPhone anymore.

Fantastic.

We now proceed with Sheriq Sumar, Evercore.

So hopefully, the last one on pricing. So when I think about your pricing and the expectations for further increases in the Selic rate, are your pricing actions all done manually? Or are you adding like a CDI escalators, which is pretty common for the larger merchants in the market?

For larger merchants, we have already set the costs associated with the CDI, making it almost automatic. While we still need to have an agreement and some discussions, the key adjustments are mainly concerning micro merchants in relation to the CDI. Small merchants have a fixed interest rate, so their costs are not tied to the CDI. We negotiate with them to ensure they understand the pricing clearly, as a stable price over the year makes it easier for them. We are also mindful of market conditions, competition, and our ability to make adjustments. We have decided to implement some changes, with a significant portion taking effect in March and impacting April.

And my follow-up question is for Alexandre. Just wanted to get a sense of what's our top priority for 2022 as to how do you think, like, as to what changes do you think that could be implemented in the organization to kind of drive better profitability for 2022 and beyond as well?

Our top priority is to diversify our revenues and profits by consolidating PagBank. Additionally, we aim to achieve profitable growth in payments, exceeding industry standards. We are also committed to enhancing our two-sided ecosystem to provide a better experience for consumers in both acquiring and banking businesses. We plan to implement all of this with a comprehensive security approach, which is vital for our future in payment and banking. Furthermore, we intend to heavily invest in our human capital, which we regard as our most valuable asset.

This is Anita calling in for Jamie. Jamie has a question about the credit debit spend mix that you guys are expecting for 2022? What are your assumptions around that, and how it might impact the take rate? And if we should be aware of any seasonality in that mix?

We are observing a shift in the mix between credit and debit, with credit gaining some market share due to changes in consumer behavior. People are now going out more, traveling, and shopping for clothes again, often using installment payments. During the pandemic, many stayed home and avoided making large purchases with installments. Now, with people returning to normal activities, we are seeing an increase in credit card transactions, moving back to pre-pandemic levels compared to debit transactions. This is encouraging. Additionally, we are implementing repricing strategies to counteract rising interest rates associated with installment transactions.

So my question is related to PagBank. We see that in your guidance for PagBank revenues in the first quarter, it ranges from around BRL 240 million to BRL 260 million, which implies a decrease in revenues quarter-over-quarter. So in that sense, can you give more color about the drivers of this expected reduction? And moreover, to complement, we saw in recent news that card networks already indicated that would reduce interchange fees of prepaid cards. Could you please clarify if fees are already lower today? And if this means that we can see further reduction on a quarterly basis going forward?

Kaio, the main driver for the BRL 240 million to BRL 260 million revenues in PagBank is because of our cautious behavior in credit, so that's the main driver. That's what we did in January and February. We were more cautious in credit, so that's why the revenues are not growing maybe the same way they used to grow in the past. And that's fine. That's fine because at the end of the day, we have 13 million clients. The base keeps growing, people keep making transactions, and we just need to do credit in the right moment, in the right size for the right clients. So that's not an issue for us. That's not something structural. It's something that we are just waiting for the best time to do so. Regarding the interchange for the prepaid, we saw some networks making some change. There are no dates to be implemented. There is no execution plan in a very clear way so far, how it's executed. And for us, for the company as a whole, it's a neutral impact because we have this natural edge. If the interchange goes down in one of our businesses, it also goes down in the acquiring so that you have lower costs there. But we need to wait to see how it's going to evolve this definition. It's good that some card networks decided to be proactive in making some changes, but we are fine with that because we have this natural edge at the end of the day.

Okay, great. And just a final one, it's actually related to it. If you can share with us at least around the numbers, what is the percentage of this PagBank TPV today that comes from prepaid cards, please?

To be honest, I don't have that number readily available. We don't provide extensive disclosure on that, but it shouldn't be a concern. If we experience any decrease in revenue, our costs related to acquiring will also decline. Thus, the overall impact will remain similar. It's possible that revenues from PagBank may dip slightly, but ultimately, the company's impact will be neutral and could even be positive. This is because sometimes transactions from prepaid cards in acquiring grow faster than our prepaid card issuance. Additionally, it's important to note that we offer credit cards as well, not just prepaid cards, and we have recently introduced debit cards. Our card portfolio includes all three types, with prepaid being just one among them.

Just in the context of the discussion on repricing. When we look at the advertised pricing that we can see for micro merchants on your website, it really doesn't look like much has changed at all. So how does that fit into the discussion? What would it take for you to change those headline advertised rates that we can see up on the web?

Geoffrey, you are correct. We need to approach this price increase with caution and intelligence. We haven't adjusted the price on the website because it doesn't significantly affect our overall business. When you consider our 8 million clients in comparison to the website traffic, the website itself has limited importance since customers expect to receive their devices the next day due to our efficient logistics. Additionally, the transaction volume from new clients doesn't significantly alter what we already have from our existing merchants, which is why we opted not to make any changes there. It's crucial for us to continue acquiring new clients, as I've mentioned earlier in this call regarding our strong gross additions. We consistently weigh the potential benefits of raising prices against the risk of losing clients or seeing a decline in customer numbers, which is why we didn't alter the website prices. We are implementing this carefully within our base to avoid increasing churn while positively impacting our financials. So, as you mentioned, we didn’t change the prices on the website.

And Geoffrey, remember that the online sales channel is just one of the many that we have. So since we didn't change yet the price on our website, it's just one of the channels, okay, so make sure that.

This concludes today's question-answer session. I would now like to invite PagBank PagSeguro for its closing statements.

Hi, everyone. Thank you very much for your time and for the questions. Looking forward to meeting you in person and for those who we don't see, we can talk next call. Thank you very much.

And this concludes PagBank PagSeguro audio conference for today. Have a great night. Thank you.