XP Inc. Q2 FY2024 Earnings Call

Good evening, everyone. I'm Andre Parize, IRO at XP Inc. It's a pleasure to be here with you today. On behalf of the company, I'd like to thank you all for the interest and welcome you to our 2024 Second Quarter Earnings Call. This quarter, the results will be presented by our CEO, Thiago Maffra; and our CFO, Victor Mansur, who will both be available for the Q&A session right after the presentation. Before we begin our presentation, please refer to our legal disclaimers on Page 2, where we 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.

Thank you, Andre. Good evening to all. I appreciate everyone joining us for our 2024 Second Quarter Earnings Call. It's a pleasure to be here tonight. Let's delve into our quarterly performance and discuss the strategic steps we are undertaking to ensure our continued growth and education to all shareholders. I would also like to extend a warm welcome to Victor Mansur, our new CFO, as this is his first earnings call with us. We are excited to have him on board and look forward to his contributions to our financial strategy and operations. This quarter has been positive for XP. We have showcased our ability to generate alpha and achieve growth with profitability by managing several business levers independently from the challenging conditions. Our total client assets increased by 14% year-over-year, reaching BRL1.2 trillion. More importantly, we have observed a re-acceleration in our client net inflow this quarter, details of which we will elaborate on during the presentation. We have also set a new record in the total number of advisors, reaching 18.3 thousand, and continued to expand Brazil's largest investment specialized sales force, growing 11% year-over-year. Finally, we ended with 4.6 million active clients, marking a 16% increase year-over-year. We had our all-time high in revenue, EBITDA, and net income. Gross revenue was BRL4.5 billion for the quarter, up 21% year-over-year, and EBITDA of BRL1.4 billion, 43% higher year-over-year, and BRL1.1 billion in net income with a margin of 26%. This result reinforces and gives us comfort that we are on track to deliver our gross revenue and EBITDA margin guidance in 2026. In terms of balance and profitability, we closed the quarter with a return on tangible equity of 27.2%, the highest in the past two and a half years. XP’s Basel was at a 20.5% level. The EPS for Q2 2024 was BRL2.03 per share, a 10% increase year-over-year, partially reflecting the share buyback that we completed in the second quarter, aligned with our capital return plan to create value for shareholders. Because of the many levers we have been implementing for growth and with strict cost control, we are expecting improving results for the second half. Moving on to the next slide, we'll look at our strategy tracker, reminding here the main levers of business growth. We will dig deeper into each of them. Also, we'd like to highlight our gross revenue and EBITDA margin. If you remember our Investor Day back in December, we showed our last 12 months gross revenue as BRL14.8 billion, and since then we have increased our gross revenue to BRL17.4 billion LTM with an implied 25% CAGR. To reach the top of the guidance, we need a 19% CAGR until Q4 2026. Regarding our LTM EBITDA margin, we have reached 28.1%, a 180 bps expansion compared to our Q3 2023 LTM figures, indicating that we are on the right pace to reach the 30% to 34% target range in 2026. Starting with retail investments, our goal is to establish ourselves as leaders in investments, which is our core business. As highlighted in the first slide, a key achievement this quarter was the improvement of net new money. We recorded BRL32 billion in net new money for the quarter, with BRL24 billion coming from retail. This means that in retail we nearly doubled quarter-over-quarter. We attribute this improvement to several factors, primarily the effective execution of the levers we control. These levers include: first, product platform, the largest investment platform in Brazil, which continues to be a major differentiator through our constant innovation. Our fixed income platform is expected to maintain its prominence in the market, and part of this competitive edge is related to our efforts in structuring and warehousing new assets for retail distribution through our wholesale banking. Second, diversification and expansion of channels. A few years ago, we launched the internal advisors model, becoming a dual distribution channel business. Today, we have evolved to a multi-channel distribution with independent financial advisors (IFAs), internal advisors, consultants through our Registered Investment Advisor (RIA) channel, and the digital channel. We currently have around 2,000 internal advisors and 1,000 RIAs. Our RIA channel represents over 10% or more than BRL100 billion of our total client assets. All the new channels combined represent around 50% of our total retail client assets. Third, focus on productivity through our empowering tools for advisors such as the Hub and XP Academy and the provision of data and intelligence to the sales force, ensuring their long-term success. Lastly, it's worth mentioning the continuous evolution of the company's mindset, transitioning from a product distribution firm to a service provider. This shift permeates all areas, including the entire sales force, aligning with our quality initiative and financial planning, catalyzed by open investments. Our cross-selling initiatives are leading to another business that presents an opportunity ahead, which is insurance. We are currently less than 2% penetrated and expect to grow 3 to 4 times over the coming years. Our total written premiums have seen a 52% increase year-over-year, reaching BRL307 million in the quarter. In retirement plans, we continue to gain market share, growing our client assets by 18% year-over-year, achieving a 5% market share and also 5% penetration. Combined, FX, global investments, and digital accounts grew 51% year-over-year with BRL4 million in revenues this quarter, and we have a clear plan for each one of them to keep growing. Finally, regarding corporate and SMB clients, we have maximized our corporate and SMB client base by leveraging relationships built with our network of advisors and our investment banking business. We have reached more than 60,000 active clients, with this client base growing 22% year-over-year. We continue to improve penetration with FX, derivatives, and loans. Notably, in derivatives, we improved from 10th to 5th position over the last two years, and on FX, we also improved, moving from the 41st to 16th ranking over the last four years. As a result, we have grown corporate gross revenue by a 50% CAGR in Q2 2024 against the last 12 months ending Q3 2023 when we held our Investor Day. We recently launched the Corporate Digital Account in August and will launch Trade Finance soon, reinforcing our cross-sell opportunities for the coming years. Victor will provide more details about the revenue growth. Now, I will hand it over to Victor so he can discuss this quarter's financial results. Thank you.

Thanks, Maffra. Good evening, everyone. It's a pleasure to be here with you. As this is my first earnings call, I would like to share three pillars we are focusing on for the years to come before discussing the second quarter numbers. First, a short-term objective: our corporate restructuring. We have a bank in our ecosystem, and having a bank can provide us higher leverage and lower costs. At the same time, we can restructure new products. To gain all the benefits of having a bank in the ecosystem, we started a corporate organization last year to have XP Bank as the parent company in Brazil when completed. This will provide us lower capital costs by increasing our ability to issue Tier 1 and Tier 2 debt. The process with the Central Bank is flowing as expected and should be completed by the end of the year. Second, a midterm objective: our guidance delivery. EBITDA margin expansion should come through new products increasing profitability as they evolve in the ecosystem coupled with strict cost discipline without harming innovation, which is part of our DNA. Third, a long-term objective: capital allocation. We understand that having continuous capital management through disciplined capital allocation and returning capital to shareholders is key for our long-term goals. XP is a profitable company that generates cash and does not need to reinvest 100% of its profits to grow. Capital allocation decisions are based on ROE, profitability, and their connection with our long-term strategy. The combination of these initiatives should lead to higher returns going forward. Now let's move to the numbers. Total gross revenue grew 21% year-over-year and 5% quarter-over-quarter. Once again, XP posted positive performance in capital markets reflected both in retail, especially fixed income, and Corporate & Issuer Services. Institutional revenue was slightly lower quarter-over-quarter. On the right side of the slide, we can see our gross revenue breakdown. The trend remains the same as last quarter, with Corporate & Issuer Services increasing their participation in total gross revenues. Retail revenue achieved BRL3.3 billion, a 14% growth year-over-year and a 5% growth quarter-over-quarter. Fixed income was the main highlight, with a 42% growth year-over-year and a 17% growth quarter-over-quarter, driven by our capacity to develop new products including corporate credit and structured notes through primary offerings and our capacity to provide liquidity in the secondary market, considering our higher than 50% market share in most securities. Corporate & Issuer Services posted all-time high revenue, achieving BRL629 million in the quarter, representing 122% growth year-over-year and 24% growth quarter-over-quarter. Issuer Services continues to present a fast pace of DCM activity, posting higher revenues than last quarter and reaching BRL384 million, a 145% growth year-over-year and a 37% growth quarter-over-quarter. By having a consolidated investment banking business with solid credentials, we can reach our corporate clients to cross-sell. In that sense, corporate presented the same trend as last quarter, with transactional revenues growing on the back of derivatives and FX. Corporate posted BRL204.5 million in the quarter, a 94% growth year-over-year and a 7% growth quarter-over-quarter. Our loan book is primarily focused on supporting our warehouse business, ensuring it paves the way for retail distribution. In this quarter, we originated BRL10 billion in new corporate securities warehoused in our balance sheet. In time, those securities will be sold to our retail clients, and this revenue will show in fixed income. By having market-making capabilities, we can also recycle this risk and provide liquidity to our different types of clients, maximizing the return of our balance sheet. Cost discipline and efficiency are priorities in our business to keep XP competitive. With that in mind, we achieved the best efficiency ratio since our IPO of 36.1%, 220 basis points better year-over-year and 40 basis points better quarter-over-quarter. SG&A ex-incentives reached BRL1.4 billion in Q2 2024, a growth of 14% year-over-year and flat quarter-over-quarter. Bear in mind that in Q2 2023, we didn't have Modal’s SG&A in our financials. The strict cost discipline along with innovation initiatives will allow us to keep expanding our EBITDA margin towards our guidance. EBITDA achieved the highest level in our history, a combination of rising ecosystem revenues and strict expense control, reaching BRL1.4 billion. This represents a 43% growth year-over-year and a 27% growth quarter-over-quarter, driving our EBITDA margin to 32.8%, a 552 basis points growth year-over-year and a 509 basis points growth quarter-over-quarter. On a last 12 months basis, our EBITDA margin reached 28.1%. We expect to improve our EBITDA margin on an annual basis towards our guidance in 2026. Regarding net income, we also achieved the highest net income in our history, BRL1.1 billion in Q2 2024, growing 14% year-over-year and 9% quarter-over-quarter. The net margin posted at 26.5% in Q2, a decrease of 103 basis points year-over-year and an increase of 110 basis points quarter-over-quarter. As we mentioned in our Investor Day, we expect XP's effective tax rate on a last 12 month basis to gradually increase over time due to revenue mix, as cross-sell and corporate and SMB businesses evolve and present a higher tax rate. An efficient capital management is key to achieving our long-term objectives. Over the last two and a half years, we have distributed over BRL7.5 billion through dividends and share buybacks. These distributions connect to our strategy of returning part of the excess capital at XP Inc. level to shareholders while keeping a conservative Basel index. We intend to reduce it across the years between 16% to 19%. Those initiatives together, if our net income grows, will result in higher returns going forward. You can see the evolution of our earnings per share showing solid growth, achieving BRL2.03, a 10% year-over-year and a 9% quarter-over-quarter increase. In Q2 2024, XP posted 27.2% in return on tangible equity (ROTE), with an increase of 310 basis points year-over-year and 108 basis points quarter-over-quarter. ROTE presents a better comparison to peers in Brazil due to BR GAAP and IFRS differences. Now, I turn it over to Maffra for his final remarks.

We had a solid quarter with revenue growth and operating leverage. This combination gives us confidence that we are on track to deliver our 2026 guidance. All initiatives, from distribution channel diversification to sales force expansion, are proving that we are moving in the right direction to deliver a higher level of net new money compared to last year. Finally, we believe that we are keeping and enhancing our modes by: First, offering the best product platform in the country, ensuring that our customers have access to an unmatched range of solutions; Second, empowering the largest and best-trained sales force in the industry; and third, evolving our company's value proposition to a new level of service excellence, moving beyond the traditional product distribution model to a far more sophisticated and value-driven approach through financial planning. Now, Andre Parize will start our Q&A session.

Okay. Thank you, Maffra. We're going to start the Q&A. The first question is coming from Antonio Huet, Bank of America. Antonio, can you hear us?

Hi, good evening, guys. Can you hear me?

Yes, we can.

So two questions on my side. First on net inflows, if you could please explore a little bit the consistency and quality of these net inflows. I would like to understand how you break them down in terms of inflows and outflows, as well as the mix and whether it's coming from other players or if it is new money. A deeper dive on net inflows would be great. My second question is on headcount. We noticed an increase in headcount during the quarter and would appreciate it if you could explore that a little bit.

Thank you. Hello Antonio, this is Thiago. First of all, I apologize to everyone on the call for the issues we've had. We do not disclose outflows or inflows, and we do not provide specifics on where the money comes from. However, I can tell you that there is nothing inorganic in this number, it is 100% organic. It relates to the levers we've been working on in the past quarters that are maturing and starting to bring in more net new money. We believe the worst is behind us. We're not providing short-term numbers for the next quarter or beyond, but we do not expect to go back to BRL13 billion or BRL12 billion as seen in previous quarters, and we believe good levels of retail net new money will continue moving forward. Regarding headcount, we've been hiring people, particularly as we are adding internal advisors. We now have almost 2,000 internal advisors, and we've been adding around 80 to 100 new advisors each month, which accounts for a significant part of the increase. Additionally, we had an internship program with 200 interns, which contributed to the overall headcount increase.

Alright, thank you.

The next question is from Jorge Kuri, Morgan Stanley. Jorge, you may proceed.

Hi, everyone. Thanks for the opportunity to ask questions and congrats on the numbers. I apologize for re-asking the previous question, but I think it's important. On the inflows, I appreciate Maffra's explanation about some of the competitive advantages you have. However, it feels like all those factors were present a year ago and in the last quarter as well, like your multi-channel distribution, product capabilities, digital capabilities, and robust IFA network. Is there a cyclical component to the recovery of net inflows? Any insights here would be helpful.

Yes, for sure, Jorge. Most of these levers were in place, but they are maturing. Of course, they didn't mature overnight; it has been a gradual process. While some changes in the macro environment may have played a role, I attribute more value to what we have been implementing in terms of strategy and execution. It's essential to note that this isn't specific to this quarter. We expect to maintain a healthy level of retail net new money, and we do not foresee a return to the BRL13 billion or BRL12 billion levels from earlier quarters.

Alright, great. Thank you, Maffra.

Next question comes from Renato Meloni from Autonomous. Renato, you may proceed.

Hi, everyone, can you hear me?

Yes, we can.

Thanks for this opportunity and welcome Victor to the call. Following up on new money, in the last call, you mentioned it would take some time to return to normalized levels of net new money similar to the previous year. Yet the numbers today were much better than any quarter from last year, organically speaking. What changed from your point of view since the first quarter, and what might be the sustainable level of net new money for the coming quarters? Additionally, what drove the increase in the effective tax rate that was much higher this quarter?

I can take the first part, and then Victor can answer your question about the tax rate. The levels we are discussing, particularly in the past quarters, should not have been at BRL13 and BRL12 billion; that wasn’t normal. The normalized levels are closer to BRL20 billion or slightly above, and we are working to reach BRL30 billion or BRL40 billion over time as our competitive advantages remain intact. We will revert to those higher levels at some point. We are firmly committed to improving our position, but it will require time.

Thank you, Renato. It’s a pleasure to join this call for the first time. Moving on to your question about the effective tax rate (ETR), this rate reflects our revenue mix. Corporate & Issuer Services were one of the highlights of the quarter but carry a higher tax obligation. We expect the ETR of this quarter to be the highest quarterly rate of this year. I recommend looking at the normalized ETR over the last 12 months for a clearer understanding, which was set at BRL18.5 million this quarter. We anticipate this number remaining around that over the year.

That's very clear. Thank you.

The next question is from Daniel Vaz, Banco Safra. Daniel, you may proceed.

Hi, guys. Hi, Maffra. Hi, everyone. Your distribution capabilities are indeed strong, and you have these competitive advantages. With strong DCM issuances this quarter, this must have been a key driver, right? Nothing has changed; organically, you can still raise net new money effectively. I want to understand how this robust performance in distribution has contributed to net new money this quarter. Is the growth more concentrated in bank funding instruments, or pertains to tax-exempt instruments?

Hi Daniel. Thank you for your question. As for retail, fixed income was the main highlight. We have a strong close relation with Retail fixed income and DCM activity. We originated many new fixed income instruments in the quarter, and that has significantly helped generate fixed income revenues.

When we discussed new money, it is also important to consider the broader platform. If you look at the public data, all REIT offerings we executed this year raised nearly BRL2 billion in a single offering. What we are witnessing now is the appetite for more diversified products compared to last year when investor focus was solely on CDs.

Regarding the corporate side, any comments here would be appreciated.

The corporate performance reflects our capacity to introduce new products to our Corporate & SMB clients. We had no derivatives capabilities until recently, and our FX ranking has seen significant improvement over the past two to three years. As we develop these products on our platform and strengthen client relationships, we can effectively increase cross-selling opportunities.

The next question is from Tito Labarta from Goldman Sachs. Tito, you may proceed.

Hi, good evening, everyone. Thank you for the call and taking my questions. I have another question on the inflows—how do you think that can benefit revenues going forward? We saw a slight pickup in Retail revenues this quarter of 5%. However, you mentioned before that your revenues do not correlate strongly to inflows. Can you provide insight into how a strong increase in inflows might accelerate revenues going forward? Secondly, regarding your EBITDA margin, which showed a significant improvement, how do you assess its sustainability? Were there any one-off factors that contributed to this improvement this quarter?

Thank you, Tito, for your question. I will address the first part, while Victor will handle the second. In terms of revenue correlation with net new money, there is a small pickup, but it is minimal when considering the total portfolio size, which currently stands at almost BRL1.1 trillion from retail clients. While we do have inflows and outflows, the overall portfolio is much larger than any quarter's net new money. Therefore, our primary KPI focuses on the moat of the company and its implications for future growth rather than immediate revenue figures.

Tito, thank you for your question. The same rationale applies to EBITDA margin as it does to ETR. You should focus on the last 12 months margin, which currently stands at 28%. We foresee a slight improvement towards our target levels in the forthcoming quarters.

That's helpful. Just to clarify about the revenue outlook—do you feel more optimistic, considering the revenue outlook from here? Are there any potential catalysts that could further improve revenues, especially given the current rate environment?

Yes, we believe the second half of the year will be better than the first half in terms of revenues and net income. While we are not providing specific guidance for the next quarter or the year, you can expect overall improvement across these metrics. The trend is upward, and we are on track to meet our 2026 targets.

The next question is from Olavo Arthuzo from UBS. Olavo, you may proceed.

Thank you, guys. Thank you for taking my question. I have two, but my first is just a follow-up on my colleague's question on net new money. I understand that the strong performance this quarter was related to the leverage you have been focusing on. But on the other hand, could you give a sense of the magnitude of the impact of the change in taxes and the policy rate on the flows this quarter?

Yes, the changes in regulation did provide a positive impact, notably as banks were constrained in issuing certain tax-exempt products. However, it's challenging to quantify the precise percentage increase in net new money from these changes versus other combined factors. Rest assured that our strategies do not hinge solely on macro conditions. We don’t need a markedly improved macro environment or lower interest rates for stability. Our competitive advantage remains intact.

Understood. If I may, for my second question, I would like to discuss the credit card business. I noticed an expansion in active credit card base, but monthly spend has dropped for the second consecutive quarter. Is this purely a consequence of the broader economic backdrop, or could it indicate clients migrating to banks or fintechs with similar benefits?

We are working on two fronts to boost our credit card business. Currently, we have 2 million eligible clients from about 5 million total, meaning only 2 million from our brands can utilize our credit card. We’ve issued around 1 million cards, achieving a 50% penetration rate. To grow, we need to enhance the benefits offered and broaden the eligibility among the other 3 million clients. We just launched miles on our credit cards, which can appeal to customers who value points highly. Additionally, we are working to increase the number of eligible clients while managing risk appropriately.

The next question is from Neha Agarwala from HSBC. Neha, you may proceed.

Hi, thank you for taking my question, and congratulations on the results. About the cost of services, I find your management of COGS quite impressive, leading to gross profit expansion. Could you discuss how sustainable this is and clarify what operational levers you've been using for such effective control over service costs? Also, I noticed a 14% decrease in the credit portfolio quarter-over-quarter—could you explain the reason for this decline?

Hi, Neha. Thank you for the question. First, regarding COGS, this reflects our operational leverage and capacity to scale our business without significantly increasing costs. The trends in both COGS and SG&A indicate this should continue throughout the year. As for the credit portfolio decline, we securitized part of the portfolio and moved it to corporate bonds for risk recycling. This allows us to use those bonds as collateral for repo operations with clients, eventually leading to new asset generation.

This appears to be new. Why the decision to implement this approach now?

We haven't done this before, but we wanted to instate a process for recycling risk in our loan book. The underlying asset quality remains solid—low-risk, good clients, and a healthy portfolio. The goal is to create products that allow us to recycle risk while also providing new offerings to clients, thus enhancing our capacity to generate new assets.

Additionally, the provision in this quarter was low—could this be related to the recycling process?

Yes, it’s partially related to the recycling as well as from recovering credits from previous periods.

Okay, great. Thank you so much.

We are up on the hour. Thank you, Maffra; thank you, Victor. Thank you to all of you participants today. I apologize again for our connection issues. The IR team is available for any further questions. Thank you once again, and we look forward to speaking with you next quarter.