XP Inc. Q1 FY2024 Earnings Call

Good evening, everyone. I'm Andre Parize, Head of Investor Relations at XP Inc. It's a pleasure to be here with you today. On behalf of the company, I would like to thank you all for your interest and welcoming to our '24 First Quarter Earnings Call. This quarter's results will be presented by our CEO, Thiago Maffra, and our CFO, Bruno Constantino, who will both be available for the Q&A session right after the presentation. Please refer to our legal disclaimers on Page 2, which clarify forward-looking statements. Additional information on forward-looking statements can also be found in the SEC filings section on our IR website. So now I'll turn it over to Thiago Maffra. Good evening, Maffra.

Good evening, everyone. Thank you for joining us today on our 2024 first quarter earnings call. It's a pleasure to be here tonight. Before we review our financial results, it's important to acknowledge the devastating floods that have impacted the region, resulting in a tragic loss of lives and homes. It's particularly heartbreaking as XP began its journey in a small square foot of space. During this difficult time, we are committed to supporting the affected communities. Our hearts go out to all those affected. Now let us discuss our quarterly performance and the steps we are taking to ensure our continued growth and commitment to all our stakeholders. As we continue our conversation today, I want to reiterate our commitment to serving our clients by delivering innovative and high-quality service. I am proud to announce that during this quarter, we have implemented a sophisticated and scalable financial planning tool. This technology provides us with a clear view of our clients' financial cycles, enhancing our service offerings. Additionally, it integrates seamlessly with our recently launched open investments initiative, which broadens our ability to present diverse investment alternatives at better rates and lower prices. I will revisit this topic shortly to provide more details on how it functions. Before we delve into our financial performance, it's crucial to address the macroeconomic environment, which remains challenging. The first quarter of 2024 began with terminal interest rate expectations nearing 9% per year, controlled inflation, and an appreciating real. However, as the quarter progressed, we saw interest rates adjust to 10%, with slightly depreciated real and ongoing fiscal challenges. In terms of market activity, the appetite for equities has continued the trend from previous quarters with slightly lower turnover, while our attention remains focused on fixed income. Despite competing with Tax-Exempt Credit notes, our competitive portfolio continues to grow, benefiting from our complete ecosystem. For instance, during the quarter, our corporate credit book saw gains from narrowing credit spreads, and our debt capital markets flow remained strong for a first quarter. On the flip side, we prepared ourselves for another tough year both in terms of expenses and what we would expect in revenues. The recent worsening in market conditions didn't change much of our overall expectations for the year. Turning now to our financial performance, despite the challenging macroeconomic scenario, we achieved a 28% year-over-year growth in top line and a 29% growth in bottom line. Our EBITDA margin expanded by approximately 81 basis points. This quarter was marked by a strong focus on efficiency and cost discipline across all operations, as demonstrated by an efficiency ratio of 36.5%, which is 384 basis points lower year-over-year. Our diluted earnings per share increased by 25% year-over-year, reaching BRL 1.85 per share. Lastly, I would like to highlight our return on tangible equity, which we consider a more accurate measure for running our business. It stood at 25.4%, marking an increase of 491 basis points year-over-year. Moving on to the next slide, let me provide an update on our strategy tracker for 2024, following up on our discussions on Investor Day last December. Firstly, regarding our leadership in retained investments, we are pleased to announce the appointment of a new CEO of our Private Banking division. This division has seen relevant enhancements in process, product offerings, and service levels. We are confident in our path toward establishing ourselves as one of the top private banks in Brazil. Also, we have once again been recognized as the best adviser platform in the country, a testament to our commitment to excellence in client service. Our vision is clear: we aim to dominate the investment industry in Brazil, which is a significant but achievable goal. I will dive deeper into the specifics of this strategic pillar in the next slides. Last quarter, we introduced our financial planning tool for advisers, marking an important milestone in how we serve our clients. These tools represent the third wave of differentiation for XP, following our open architecture platform for third-party products and our extensive distribution network.

Thanks, Maffra. Good evening, everyone. It's a pleasure to be here with you again. Starting with our core operating KPIs, all three main KPIs for investments hit record numbers for the first quarter of '24, signaling we are on the right path toward our goal to be dominant in investments. One, total client assets at BRL 1.141 trillion, a 20% growth year-over-year. Two, total active clients at 4,587,000, a 16% growth year-over-year. Three, total advisers at 17,700, a 16% growth year-over-year. The total adviser number includes our IFAs or B2B, as we call it, already disclosed in our previous quarters, combined with internal advisers and registered investment advisers. We decided to disclose these numbers starting in 2024 because of the growth of other channels beyond IFAs. We believe this number better represents our total distribution capability. As you know, the investment advisory profession in Brazil has evolved with XP leading this movement, and different channels to serve the client have appeared, presenting relevant growth in recent years. From now on, we will present the total number of advisers, including all channels. Total net new money, another important KPI, stood at BRL 15 billion in the first quarter of '24, with retail net new money slightly better quarter-over-quarter, moving from BRL 12 billion in the fourth quarter of '23 to BRL 13 billion in the first quarter of '24. While lower than its potential, especially considering the size of our ecosystem, we believe retail net new money will improve as we grow our total advisers, improve the client experience with a powerful financial planning tool, invest in our private banking segment, and expect less tax-exempt credit notes from incumbent banks due to regulatory changes. There is a macro component that impacts net new money; resilient inflation, coupled with still high interest rates, doesn't help. But we see a positive trend going forward, considering we are moving toward a better cycle for investments, even though the pace is likely to be slower than initially thought. Moving on to gross revenue, total gross revenue grew 28% year-over-year, boosted by the diversification of our ecosystem, strong DCM activity, and easy comparisons with the first quarter of '23 when we had dysfunctional markets due to corporate credit problems in Brazil. The main highlight is the continued relevance of corporate and issuer services at 12% of total revenue, while retail still represents the majority at 73%. A strong performance from capital markets is reflected in both retail, especially in fixed income, and corporate and issuer services. New verticals continued to deliver strong growth year-over-year. In the first quarter of '24, new verticals revenue stood at BRL 493 million, a 35% growth year-over-year.

Moving on to our corporate and SME sector, our unique position in wholesale banking continues to strengthen. This quarter, our role in structuring and distributing corporate credit has been prominent, underscoring our competitive advantage through sophisticated retail investor clients and a large distribution channel. Our corporate and SME revenue was 5% of total revenue. Lastly, on top of quality and strategic execution, we have launched a financial planning tool for all our advisers, which has seen rapid adoption with over 2,500 active advisers on the platform within just two weeks of the launch. We have also centralized the Chief Investment Officer role with Artur Wichmann to provide consistent allocation across all client and risk profiles, which have been recently reviewed. This launch coincides with open investment initiatives, which we see as a good opportunity for us. As I have previously mentioned, the next phase of XP's growth will be driven by our ability to provide a higher quality experience for our clients throughout their financial journeys. Our ongoing enhancements to the solutions we offer are designed to empower our advisers to deliver precise investment advice by optimizing clients' portfolios to align closely with individual goals. We are raising the bar for what it means to engage in high-quality financial planning. We are committed to democratizing access to premium service, broadening our perspective to proactively meet clients' objectives and offer a complete and curated set of investment alternatives. These efforts are designed to not only meet but exceed client expectations. This new approach to resource allocation presents great opportunities for revenue generation and increasing lifetime value, simplifying how our emphasis on quality translates into tangible benefits for both our clients and our business. This strategy distinguishes us further from incumbent banks and strengthens our position for continued leadership in the coming years. This quarter, we introduced new features that integrate our financial planning platform with open investments regulations, creating a positive feedback loop. With our financial planning tools and servicing incentives, clients are encouraged to share their data, enabling us to provide even better service. With client permission, we gain visibility into their entire financial portfolio across XP and other platforms. We have already begun training our advisers on these new capabilities and expect to complete training across our entire adviser base in the coming quarters. Granting XP access to their full financial portfolio is a straightforward process for clients, allowing us to present an integrated and comprehensive view of their investment options by leveraging our modern financial planning platform. We provide advisers with tools to offer holistic advice and compare investment opportunities within XP and across competitors. I want to highlight this as an important differentiator that sets us apart in the market. Currently, we are not aware of any other player implementing such a strategy on the same scale. This initiative represents a significant step forward for XP, marking what we like to call the third wave of differentiation following our development of the open architecture product platform and establishing a more sophisticated and complete distribution channel for our network of IFAs. These innovations underscore our commitment to staying ahead in the industry and continuously improving the value we offer to our clients. Now I will hand it over to Bruno so he can discuss this quarter's financials. Thank you.

Thanks, Maffra. Good evening, everyone. It's a pleasure to be here with you again. Moving on to the next slide. Starting with our core operating KPIs, all three main KPIs for investments hit record numbers in the first quarter of '24. Total client assets reached BRL 1.141 trillion, representing a 20% growth year-over-year. Total active clients reached 4,587,000, with a 16% growth year-over-year, and total advisers reached 17,700, a 16% growth year-over-year. These advisers include both IFAs and internal advisers as well as registered investment advisers. We decided to disclose these numbers starting in 2024 due to the growth of various channels beyond IFAs. We believe this measure better represents our total distribution capability. Total net new money stood at BRL 15 billion in the first quarter of '24, with retail net new money slightly improving from BRL 12 billion in Q4 '23 to BRL 13 billion in Q1 '24. While lower than expected, particularly considering the size of our ecosystem, we believe retail net new money will improve as we grow our total advisers and improve the client experience with a robust financial planning tool, invest in our private banking segment, and anticipate fewer tax-exempt credit notes from incumbent banks due to regulatory changes. The macroeconomic components impacting net new money include resilient inflation and high interest rates. We see a positive trend moving forward, despite the potential for slower recovery than initially anticipated.

Thank you, Bruno. As we discussed earlier, we have seen strong performance despite the challenging environment. Coupled with operational leverage, this should lead to stronger growth down the line. Now let's proceed to the Q&A session.

And the first one is from Thiago Batista, UBS. Please go ahead with your question.

My first question, Maffra, you mentioned several times about this tough scenario that we have right now. What are, in your view, the main alternatives that XP has to post a higher EPS in case there is no improvement in the current situation? Secondly, regarding that new money, total net new money of BRL 14 billion or BRL 15 billion in this quarter, or BRL 13 billion for retail only seems to be one of the lowest figures in recent years. Bruno's speech offered a more positive outlook on the net new money. Can you give us an idea of the trends surrounding net new money in recent months? Also, Bruce, thank you for your partnership in the last couple of years.

Thank you, Thiago. And yes, Bruno will continue with us, so no need to worry. Regarding your first question on EPS, I like to think about our growth along three pillars: investments, cross-sell, and wholesale banking. We have been growing, but at a slower pace due to the macro environment. Attaining growth mainly through cross-selling and wholesale is a focus. We prepared for 2024, anticipating another challenging year, but we believe at some point we will see a better market, which will offer us operational leverage. About net new money, I believe the worst is behind us. We are more optimistic today than we were one or two years ago, and while it will take time to reach the previous levels of activity, we are seeing positive progress through diversification.

Next question is from Jorge Kuri, Morgan Stanley.

I wanted to inquire about the tax rate. Given the changes in the macro landscape, how does that affect your effective tax rate considering the revenue mix? If more of the business will come from excess capital rather than local capital deployment, will that affect your tax rate? Can you provide a perspective on how the tax rate looks over the next two years, particularly in a more sluggish equities environment?

Yes, regarding the tax rate, we saw a higher effective tax rate this quarter due to tax withholdings in our funds, which stood at 18%, compared to 11% in Q4 '23 and 17% in Q1 last year. The effective tax rate is influenced by revenue mix, making it challenging to forecast. If we maintain the current environment, the first quarter figures are a solid estimate, but it's inherently unpredictable.

Your next question is from Renato Meloni, Autonomous Research.

I have a question regarding the equity take rate. Can you clarify the decline in this quarter? Was this due to a mix shift, or are the competitive dynamics affecting fee levels? Additionally, how do you envision the equity take rate evolving under current market conditions?

The take rate saw a marginal decrease, which is normal and is a function of the total client assets in the denominator and revenues in the numerator. It's more about the mix, and we expect it to remain stable as we navigate through the year.

To clarify, there was no change in pricing affecting this metric.

In terms of equity take rates for the rest of the year, we need to consider the nuances in our equity bucket, which includes various elements. Market activity will influence these rates, as more turnover can lead to improved take rates.

Next question is from Antonio Huet, Bank of America.

I would like to follow up on Thiago's inquiry about clients. With the decline in NPS and weak client additions, can you provide insight into what this reflects? Will revenue growth predominantly come from new client acquisition or the monetization of existing clients? What trends are you observing regarding outflows?

The decline in NPS was minimal, so I don't see it as a strategic concern. We anticipate improvements in NPS as we continue to invest in enhancing our service quality. Regarding revenue growth, it will come from expanding both our market share and cross-selling products to existing clients.

Regarding commission costs, they were in line with expectations as a percentage of net revenue. While we see fluctuations between quarters, the overall trend remains stable.

Next question is from Neha Agarwala from HSBC.

In relation to the open finance initiative and the traction received, how do you view the competitive landscape? Additionally, regarding costs, are there further levers to reduce the cost-to-income ratio, or do you expect this to stabilize?

Apologies, you broke up there. Regarding financial planning, we're at an early stage of implementing these services and addressing the competition. I believe we can maintain efficiencies as we manage costs effectively moving forward.

With respect to open investments, we have created a comprehensive financial planning system that enhances service for all clients, allowing for greater engagement. It's early, but we're optimistic about the outcomes from this approach. We've invested heavily in technology to ensure quality service is provided even to our broader client base.

To reiterate, our challenge lies in scaling up high-quality service effectively. While costs have been maintained, we expect some fluctuations through the year based on seasonality, but overall, our efficiency ratios should remain close to their lowest levels seen in prior years.

Next question is from Glen.

Two questions. First, I'd like to understand the decline in NAV this quarter despite a profit. What drove this decline? Secondly, can you elaborate on the energy assets growth quarter-over-quarter?

Regarding NAV, part of the variation is due to seasonality, particularly from tax and bonuses payments, which greatly affected our numbers this quarter. The energy assets represent prepayment arrangements linked to corporate clients, reflecting a comprehensive approach to our portfolio management.

Next question is from Daer Labarta, Goldman Sachs.

About the midterm EBT margin guidance, how dependent is it on the interest rates coming down? Does a higher interest rate environment impact this guidance? Also, regarding card revenue, is the slight decline a sign of maturity for that vertical?

Our guidance does account for anticipated improvements in the macro environment, but can be influenced by the existing high-interest rates. Without an improvement, hitting our targets will be challenging. The decline in card revenue is seasonal, and while growth may slow, we still have substantial potential to penetrate our client base.

To complement, we're positive about achieving our targets for 2024, and we remain focused on our growth strategy based on the three pillars we discussed. The market may be tough, but we are well-prepared. There is still a significant client pool to engage within our cards vertical.

Thank you, Maffra. Thank you, Bruno. Our Q&A session has concluded. If you have further questions, there are teams available. Thank you so much for attending our earnings call this evening.