Earnings Call
XP Inc. (XP)
Earnings Call Transcript - XP Q2 2021
Andre Martins, Head of Investor Relations
Good evening, everyone. Welcome to XP Inc.'s Earnings Call for the Second Quarter of 2021. I am Andre Martins, Head of Investor Relations. On behalf of the company, I would like to thank you for your interest in our webinar. We hope everyone is safe and healthy. It's always nice to connect with you. We have Thiago Maffra, our CEO, joining us today, along with Bruno Constantino, CFO, and the Investor Relations team, which includes myself, Antonio Guimaraes, and Marina Montemor. We will be available for the Q&A session right after the presentation, and you can raise your hand on the Zoom tool to ask questions. Before we start the presentation, please refer to our legal disclaimer in the earnings presentation, where we clarify forward-looking statements and their definitions. All documents explaining why the forward-looking statements might differ from actual results can be found in the SEC filings section of our website. Thank you again for your interest. We will now show a brief video of the first half of the year, after which I will hand over to Maffra for the opening remarks. So, as you've seen, it was a very special first half of the year for us, presented with an upbeat message in this Olympic mood. Maffra, the floor is yours to begin the presentation.
Thiago Maffra, CEO
Okay. Thank you, Andre. First, thank you all for participating in our earnings call. This is my first time here, as Andre mentioned, as the company's CEO. I'm very happy to be here and I expect to be in touch with you for many years to come. Can you move to the first slide? One more. That's it. Well, the aim of the slide is to show how our business model has evolved during the last few years. As you all know, XP has completed 20 years last May and for the first 18 years, we have been very focused on the investment business. However, in the last two years, we have expanded our products and service far beyond investments. On the left box, we show how we started from the most difficult segment to penetrate with high switching costs and great need for a trusted brand. The current satisfaction level of our clients translated by the 76 NPS that we achieved this quarter tells us that we are on the right track. Currently on the center blocks, we are preparing the company to successfully deliver our ambitious goals, which involves entering new verticals and expanding our TAM from 110 billion today to 350 billion over the next three years. It's worth mentioning that the market will generate almost 800 billion in 2021, of which we have about only 1%. Additionally, in order to intensify the disruption that we have been engaging in Brazil, one of the main enablers that will allow us to enter new markets is the digital transformation that we have been doing in the last few years. Our goal is to have a scalable tech platform that will allow us to have lower cost to serve and faster time to market. In that context, new verticals such as banking, insurance and solutions for companies from SMBs to corporate are quickly advancing. We are making substantial investments in these new verticals and we expect to see a huge increase in our financials down the road. Finally, on the right box, TAM gained by embracing universal Brazilian individuals and companies would take XP to a new level of reach, always focused on clients and their needs. We will keep transforming the financial markets in Brazil beyond investments to become the one-stop shop for all financial services, being the number one service provider to millions of clients. Now I'll pass it to Bruno. He will share our financial KPIs.
Bruno Constantino, CFO
Thank you, Maffra. Good evening, everyone. It's a great pleasure to be here with all of you once again. I will start with the main highlights of the quarter. I will try to be brief so we can go to the Q&A session, which is much more interesting. So the highlights, as you probably can see, show a very strong quarter, again the strongest ever, and I'm going to go through the numbers in the following slides. Also, as the video showed, the M&As that we announced recently and that we expect to keep doing with our partnership model with our main IFA offices as a broker-dealer, we closed four deals also with the independent asset manager business, which is something connected to our ecosystem. It makes sense to leverage those independent asset managers, helping the liquidity of the secondary market and the development of the Brazilian capital market itself. That's key to democratizing access to investments and the growth of capital markets by itself. We announced partnerships with Capitania, Giant Steps and Jive in the second quarter this year and we are always looking for opportunities like that. We also entered the bond market for the first time. We did the roadshow and closed the deal in the second quarter, but liquidation only happened on July 1st, so you're not going to see that in our second quarter numbers, only in the third quarter, but I think it's important to highlight that having access to the global bond community as a long-term strategy is significant considering the size of this market and how liquid it is. And lastly, regarding brand awareness, we are honored to have received an award from Euromoney as the Best Bank for Wealth Management this year, 2021, in Latin America. We think that this business segment in XP was almost non-existent five years ago. We went from zero, from the ground, and receiving these awards this year is something that makes us really proud. As Andre mentioned about the Brazilian Olympic Committee, we established this long-term relationship as an investor in the Brazilian Olympic Committee, and we are really happy with this partnership, especially when we think about how sports can transform society and we are eager to keep this relationship positive. Now moving to the numbers themselves, so the KPIs you have seen already. The Investment KPIs and the banking KPIs are new here, with only the financial KPIs. Looking to the left, the investment KPIs, we reached 817 billion assets under custody as of June, an 88% increase year-over-year. Active clients saw a growth of 33% year-over-year, surpassing the mark of 3.1 million clients in net inflows of BRL75 billion for a very strong quarter. We estimate around BRL30 billion of these 75 billion in a few clients, especially in the private banking segment. However, as someone pointed out in the chat during the Q&A, in the past quarters, we've had extraordinary inflows or outflows. So if these numbers keep coming in every quarter, they are not extraordinary anymore and tend to be more volatile, but it was still a very strong quarter in terms of net inflows. When we look at the middle, the main banking KPIs show 6.8 billion in our credit portfolio. There is no credit part in these numbers, making it low, and the receivables of the credit card are not included in the 6.8 billion. Strong growth year-over-year compared to the last year, but even when compared quarter-over-quarter, we ended the first quarter with 4.7 billion and reached almost 7 billion by the end of the second quarter. When we look at the credit card, we are really happy with the results exceeding our expectations. Our expectation is above 2.1 billion of total TPV. In our first quarter with the credit card launched in March this year, we have a 0% NPL ratio basically because almost everything is collateralized. The credit card follows the same principle being based on investments and plans. Finally, on the right side, we reached record numbers in terms of adjusted net income surpassing BRL1 billion in one single quarter. This is important because in the year of our IPO in 2019, we achieved about BRL1 billion for the entire year, and now, just fast forward a year and a half, we achieved the same in a single quarter, maintaining a high NPS, as Maffra mentioned, at 76. Our total revenue grew from BRL2 billion to BRL3.2 billion year-over-year, a 57% increase. When we look at the components of this growth, it is very diversified which translates into a resilient model that we have.
Andre Martins, Head of Investor Relations
Great. Bruno, thank you. Thank you, Maffra.
Bruno Constantino, CFO
Andre, next quarter the video is going to be responsible for making the whole presentation. That's the target, right?
Andre Martins, Head of Investor Relations
Yes, definitely. That's the goal. We go directly to the Q&A.
Bruno Constantino, CFO
We go straight to the Q&A.
Jorge Kuri, Analyst
Hi. Hope everyone is doing great. Congratulations on the extraordinary quarter. So Bruno, sorry, that was actually my question regarding what you were reading in the Q&A. You have been delivering inflows that are much better than expected and have called them one-timers, but they keep recurring. Is it possible that you have now inflected to a much higher level of AUC growth given your larger scale brand awareness? The IFA network, which is a multiple of what it was a few even a year ago, and that growth over the next 12 to 18 months may continue at this very rapid pace. What would hold you back from saying that they were really one-timers and you shouldn't think of that growth at this pace over the next 12 months?
Bruno Constantino, CFO
Yes, when we think on a quarterly basis, the investment business, as Maffra mentioned, is the hardest to penetrate market. There is an inertia there that depends on tailwinds sometimes to get people out of inertia. So I am always conservative when answering that type of question. That's why we say between 10 billion to 15 billion per month and there is volatility there. But you're right when considering the best quarters, as I mentioned, we had strong net inflows in three out of the four past quarters that we showed to the market. So I prefer to remain conservative here and not consider those more concentrated inflows in the private segment or corporate segment. Even without that, we hit the market of more than 15 billion per month in the second quarter. So yes, I think there is more brand awareness contributing to the momentum, but despite the interest rates going up, as seen in the graph that I showed in the presentation, the expectation is about 7.5%, 8%, which is still below double-digits. When we look at a longer period of history in Brazil, this growth won't stop financial deepening. The way I see it, Brazil is really underpenetrated in terms of different asset classes. We can see this in our ecosystem in terms of cross-selling for international funds and alternative investments. We mentioned in the video, the private equity and venture capital access, democratizing access for clients that never invested in those types of products. We have the profile to invest in those types of products, so I think this momentum will keep going. But it's hard to specify at what inflection point, what you mean by that, Jorge. Thank you, Jorge, and congratulations again on the great quarter and Thiago, congratulations on the appointment and best of luck in the new role.
Thiago Maffra, CEO
Thank you, Jorge.
Andre Martins, Head of Investor Relations
Thank you, Kuri. We hope to speak to you soon. Next in line, we have Otavio Tanganelli from Bradesco BBI.
Otavio Tanganelli, Analyst
Hi, Andre. Can you hear me?
Andre Martins, Head of Investor Relations
Yes, we can.
Bruno Constantino, CFO
Hi, Otavio.
Otavio Tanganelli, Analyst
Thanks for taking my question and congratulations on the very strong quarter. I wanted to understand a little better the revenue trend. So one thing that was particularly impressive for me was the margin expansion, especially in such a competitive scenario that we see pressure on the cost base via phase and so on. So in terms of the mix of revenues, I understand there was a higher share of non-commissionable revenues. I'd like to get your views on that, how should that evolve going forward and whether is it sustainable or not. The gross margin levels that we're seeing here are really positive in such a competitive scenario? Thank you.
Bruno Constantino, CFO
Yes, the gross revenue was strong. You're correct. We had gross margin expansion year-over-year from almost 70% last year to a little bit more than 70% of gross margin in this quarter. But the compression in terms of the investments we have been making in our IFA network is there. So though the investment we have made and the expenses are related to those investments, it's in our commission line where you can see that. So it's more a mix of products and the operating leverage we have in our business. I wouldn't say that it's non-commission-based as you mentioned; the commission line grew a lot, but revenue grew even more, giving us operating leverage there. Gross margins should remain stable year-over-year, I believe, but we do have stronger operating leverage in SG&A and EBITDA margin because there you have the entire structure of the company and platform to serve all the clients.
Otavio Tanganelli, Analyst
Thank you, Bruno. I have one more question, if I may. I noticed you recently announced the acquisition of something I couldn't identify. I’d like to hear your thoughts on the B2C market. What opportunities do you see there? We often discuss the B2B aspects, particularly the IFA network, but I’m interested in your perspective on this market and whether you consider it a promising opportunity moving forward.
Thiago Maffra, CEO
Do you want me to take the first part, Bruno here?
Bruno Constantino, CFO
Go ahead. Go ahead, Maffra.
Thiago Maffra, CEO
Yes, we see financial deepening in Brazil happening, and that's accelerating in the next few years. When we look today, I would say we have about 1,100 IFAs in the market. We believe this number can go up to 36,000 IFAs in the next three years. So we see financial deepening accelerating, and when you compare the B2C and B2B markets, we believe both have room to grow because, as I mentioned, we see the IFA network growing three times in the next few years. So there is a significant opportunity for growth for both. Regarding the acquisition, it's very important for us. XP was born as an education company and we will keep investing in education. Having strong content and solid investment information to provide to our clients is vital. So our strategy aims for very strong digital content to assist in the execution part of the business. Thus, we see both market aspects growing, B2C and B2B.
Bruno Constantino, CFO
Yes, just to add one more thing about our strategy. Think of XP as an ecosystem for entrepreneurs, right? We serve as a magnet that attracts many entrepreneurs to our ecosystem, allowing them to leverage their businesses using our distribution capability and ourselves as entrepreneurs as well. So it's a win-win situation. When we make those acquisitions, they will still be independent because we're merely taking minority stakes, allowing us to help them through our ecosystem while profiting from the equity stake we have. It's a win-win situation as they're able to become more successful entrepreneurs and expand their capabilities. We've done this in the past as a part of our strategy and will continue to do so in the future, considering we have the right price. Regarding commissions, the commission part of COGS increased by more than 50% year-over-year.
Otavio Tanganelli, Analyst
Super clear, Bruno, Maffra. Thank you guys.
Bruno Constantino, CFO
Thank you, Otavio.
Andre Martins, Head of Investor Relations
Our next question is from Mr. Tito Labarta from Goldman Sachs.
Tito Labarta, Analyst
Thanks, Andre. Good evening, everyone. Bruno and Maffra, congratulations on the strong results and on your appointment, Maffra. My question on the take rates, I know Bruno you get this question often, and it's hard to predict, but more specifically on the credit portfolio and the impact that could have on the take rate. I mean you mentioned a positive impact, but any color you can give on interest rates you're earning on this. I know NPLs is zero, but I assume there are some provisions involved. What type of NPLs would you expect over time? And how big do you expect the credit portfolio to get? So just trying to estimate how much this credit portfolio could benefit your take rate and similarly on the credit card TPV, any color you can give on a potential take rate there?
Bruno Constantino, CFO
Sure, Tito. First, we do not disclose segregated numbers of the banking, but what I can share with you is that it's a low base now. However, quarter-over-quarter, the banking relevance and banking-related revenues grew more than 100%. It’s a strong growth trend. The banking is supposed to grow even more than the rest of the products in our ecosystem for obvious reasons, being a brand new business. This relevance will grow in the breakdown of total revenue as we move forward. This will increase the take rates and everything else constant, essentially because there isn't custody associated with that revenue. So we increased some basis points with these banking services and products. We do not have full digital bank accounts yet, but we are rolling out for our employees and a few clients. Expect to see that by the end of this year. The custody should keep growing, and as I mentioned, we have not reached BRL1 trillion of assets under custody yet. The take rate I always answer the same way; it's hard to forecast. I would expect it to remain flat because there is some price compression as I said previously; however, I believe that this price compression skews mainly towards fixed-income funds from the asset managers of the incumbent banks. We do not charge those high management fees in our platform, and our mix is skewed towards more alternatives and multi-market or equity funds. It's under-penetrated in Brazil, so we expect to keep growing irrespective of the macro environment.
Thiago Maffra, CEO
Yes, just to add, regarding the credit card transaction volume, we are not setting a target yet, but to give you some insight, the only clients eligible for a credit card with us are those who have investments above BRL50,000. This represents less than 20% to 30% of our clients. It indicates there is significant potential for growth in transaction volume in the coming quarters. You can expect the transaction volume to rise considerably, as we aim to be one of the leading credit card providers in Brazil in the years ahead.
Bruno Constantino, CFO
The way we did things here is scalable in terms of technology behind it. We can use it across all three brands if we want to. We need to test, execute, listen to clients, and that's what we have been doing. When we think about the long-term strategy, everything should be scalable for many millions of clients in the future.
Tito Labarta, Analyst
Great. Thanks, Bruno and Maffra. That was very helpful. If I could just ask one follow-up then. You mentioned the addressable market of BRL800 billion, which you had fully servicing yet and you have BRL3.1 million clients today. How do you think about the addressable market for clients? I think your client base is more on the higher end, just thinking about the addressable market for clients.
Bruno Constantino, CFO
That's a good point. When you look back two years at XP, we were very focused on investment products. That meant we needed clients who were money savers. Now that we’re expanding into credit, payments, and digital accounts, we can target a broader audience. You can expect XP to increase our target client base compared to a few years ago.
Tito Labarta, Analyst
Okay. Thank you and congratulations again.
Bruno Constantino, CFO
Thank you, Tito.
Andre Martins, Head of Investor Relations
Thank you, Tito. It's great to hear from you again. Now, Steffen Gruschka, I hope I'm pronouncing your name correctly. Welcome.
Unidentified Analyst, Analyst
Thank you. Can you hear me?
Bruno Constantino, CFO
Yes, Steffen. Please go ahead.
Unidentified Analyst, Analyst
First of all, you did a great job with my name. It's perfect. It's a Polish name in a German spelling. So you did extremely well. Thank you very much and also congratulations for this great set of numbers. I've got a few smaller questions for you. The first one being your assets under custody how would they split? Which part of it is equities and which part of it is fixed income funds? Can you give us a little color about that?
Bruno Constantino, CFO
Yes, Steffen, we do not give the exact breakdown. What I can tell you is equities are the most relevant part of the total, but fixed income and the fund's platform, in general, those three together would be the ballpark of the total custody. It will vary from quarter to quarter depending on market prices. But on the order of relevance, equities, funds, and fixed income.
Unidentified Analyst, Analyst
Perfect. Thank you very much.
Bruno Constantino, CFO
Inside funds you have multi-market equity funds, fixed income funds or the breakdown of divestments.
Unidentified Analyst, Analyst
I think you misspoke. I think you meant to say you have 11,000 now, right, and you expect it to continue to grow to 36,000 in the next few years. Is that correct?
Bruno Constantino, CFO
Yes, when I said it's 11,000 in the market, and the expectation is 36,000 in the next few years.
Unidentified Analyst, Analyst
Okay. With 11,000 would you still have a market share of like 80% of IFAs?
Bruno Constantino, CFO
Yes, roughly. The most important point about the IFAs, in my opinion, is what Maffra said: this profession has grown significantly in the past few years and we expect that trend to continue, especially with incumbent banks needing to cut costs and close branches. Financial deepening is ongoing. Our IFA network is actively hiring and seeking new IFAs while other players in the market are looking to do the same. It's a trend that should keep growing in the coming years as Maffra mentioned.
Unidentified Analyst, Analyst
We completely agree with you. That's why I'm asking in a way I liked a slide with that you had around the IPO where you had the chart of how many IFAs you had. So you discontinued that when I was asking about the number. And I have one more question about the profitability of segments. I think if I understood you correctly, 82% of profits come from the retail segment, with 77% of revenues. Can you tell me about the profitability of first institutional and then of issuer services, which are the two other relevant parts?
Bruno Constantino, CFO
Unfortunately, we do not disclose profitability by segment, particularly because when we think about SG&A, the infrastructure of our ecosystem is designed to serve all segments. The retail and institutional segments are typically served by the same infrastructure. We assess profitability as a whole, as indicated in our reports.
Unidentified Analyst, Analyst
Okay. I understand. Thank you very much. Thank you very much for answering these questions. We are in Germany; we have to wait until midnight. So it was really late, so I have to say thank you very much.
Bruno Constantino, CFO
Thank you for participating in our call, Steffen.
Andre Martins, Head of Investor Relations
Thank you so much, Steffen. It's always good to hear from different countries. Please let us know through our IR contacts if you need a follow-up call, we would be thrilled to walk you through some company dynamics in more detail. Thank you.
Bruno Constantino, CFO
I would love that. Thank you very much.
Andre Martins, Head of Investor Relations
Have a good one. Last but not least, we have Neha from HSBC. Good evening, Neha.
Neha Agarwala, Analyst
Good evening. Can you hear me fine?
Bruno Constantino, CFO
Yes, we can. Hi, Neha.
Neha Agarwala, Analyst
Hi, Bruno, and congratulations to Thiago for the new role. We wish to talk often. Thank you for joining the call today, and congratulations on the blockbuster quarter. I think it was a very solid earnings performance. Most of my questions have been answered, but I wanted a bit upon the financial income which you said is 82% related to the retail segment. If you look at the breakdown of the revenue, a big part of the revenue growth for this quarter has been driven by the financial income, and that has become more relevant for your total revenue. If we think about projecting that, what are the factors that we should consider for continued growth of that line? I know a large part is related to revenue, but for analysts like us, it would be helpful to understand how we can project that.
Bruno Constantino, CFO
The net income from financial instruments is indeed growing, and the way I believe you should project going forward is related to the growth of the secondary market. This business is flow-related. For instance, products like REITs, which previously were almost non-existent in Brazil, are now being profited on by XP, helping to develop not only the primary market but especially the liquidity of the funds traded in the secondary market. This is the beauty of our ecosystem. This business of flow impacts all new clients and current clients who continue to bring more money into our ecosystem, as our assets under custody demonstrate. One additional component, which affects net income from financial instruments, directly relates to interest rates. If interest rates increase, the floating balance gets higher due to custody. This, in turn, should increase the net income from financial instruments.
Neha Agarwala, Analyst
Understood. Could you provide some insight on your vision for Banco XP? What products do you have in the pipeline for the next year or two? I know you mentioned that you will launch digital bank accounts by the end of this year, but are there additional products you are thinking about launching?
Bruno Constantino, CFO
There's a huge pipeline. When we consider credits, there are different segments for individuals versus companies. It's massive. We're planning to hold a strategy day with investors and sell-side analysts to provide more color. I'll keep it high-level; then Maffra can complement if he wants. We'll have full digital accounts by the end of this year, which is important to complement the experience with credit cards and accounts. We have a scalable architecture, which allows us to execute across different brands. It's more about business decisions than technical limitations.
Thiago Maffra, CEO
To answer differently, we have three main pillars we aim to explore in the upcoming quarters. Firstly, banking services in general, including payments, digital accounts, and credit cards. We're already working on various credit lines for the next quarters, and we will announce some of them soon. Secondly, we will enhance the insurance range significantly, and lastly, we will develop products targeted at companies from SMBs to corporate clients. This is our upswing for the coming quarters. As Bruno mentioned, we will offer clarity on each product during the Investor Day, but there's a big roadmap ahead regarding our offerings.
Bruno Constantino, CFO
We have a lot of work to do.
Thiago Maffra, CEO
Yes.
Neha Agarwala, Analyst
Thank you so much. I'm looking forward to your strategy day then to hear more about that.
Bruno Constantino, CFO
Thank you, Neha.
Neha Agarwala, Analyst
Thank you, Bruno. Thank you, Thiago.
Thiago Maffra, CEO
Thank you.
Andre Martins, Head of Investor Relations
Thank you, Neha. We don’t have any other raised hands here, so with that, we conclude our second quarter of 2021 earnings call. Thank you all for your participation. Again, the IR team is always available and alert to schedule calls with you whenever convenient. Bruno, would you like to deliver any closing messages and then Maffra?
Bruno Constantino, CFO
Yes, just before Maffra closes the call, I’d like to mention that before our next meeting, the following earnings call, we will likely have our DDRs being traded in Brazil. This is important for us because retail investors in Brazil will be able to buy our shares directly through B3 if they wish. This follows the deal that Itau announced to the market regarding exports. As you know, the Central Bank has approved it. Now it's a matter of time to hold general meetings pending approval by both parties. Assuming that everything moves smoothly and is approved in the third quarter of this year, we expect to complete this transaction and have DDRs being traded in Brazil. Now, Maffra, you can take over for closing remarks.
Thiago Maffra, CEO
I would just like to thank you all again for being here with us. Despite the great results that we are delivering this quarter, we only have about 1% of the addressable market that we believe we should pursue in the next years. As we always say, we are only at the beginning, and I'm very excited to be with all of you for the next year. Thank you very much.
Andre Martins, Head of Investor Relations
Thank you.
Bruno Constantino, CFO
Take care.