XP Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 12 speakers on the call.

Operator

Good evening, everyone. I'm Andrew Parisi, 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 the interest in welcoming you to our 2023 Q4 earnings call. This quarter, along with 2023 results, will be presented by our CEO, Thiago Maffra and our CFO, Bruno Constantino, who will both be available for the Q and A session right after the presentation.

Operator

If you want to ask a question, you can raise your hand on the Zoom tool and we will attend you on a first come, first serve basis. We also have the option of simultaneous translation to Portuguese. There is a button below if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on Page 2 on which we clarify forward looking statements. And additional information on forward looking statements can also be found on the SEC filings section on the IR website.

Operator

So now, I'll turn it over to Thiago Mafra. Good evening, Mafra.

Speaker 1

Thanks, Andrea. Good evening, everyone. Thank you for joining us today on our 2023 Q4 earnings call. It's a pleasure to be here tonight. I will start with a brief introduction to this year's highlights and key updates.

Speaker 1

As I mentioned in my annual letter, 2023 was both a challenging and a transformative year for XP. Despite the still difficult macro environment, we remain committed to better serving our clients through innovation, high quality serves, and growth. In this slide, I would first like to talk about our financial performance for the year, marked by the resilience of our business model. I will leave for Bruno to talk about the 4th quarter's financials. In 2023, we celebrated the milestone of surpassing the $1,000,000,000,000 mark in client assets, with a market share at still less than 12% in investments for individuals in the country.

Speaker 1

This shows the large potential growth we're still ahead of us. Despite the macroeconomic condition I just mentioned, we were able to achieve a 12% growth year over year in top line and 10% growth year over year in bottom line with approximately 100 bps growth in our EBT margin. This year was also marked by a strong focus on efficiency and cost discipline through the whole company as we achieved an efficiency ratio of 36%, the lowest level since our IPO. Our diluted EPS increased 16% year over year, reaching BRL7.22 per share. Also in 2023, we returned almost R4.5 billion dollars in capital to our shareholders, both in dividends and share buybacks, totaling a payout ratio of 114%.

Speaker 1

Lastly, I would like to talk about our guidance. We prefer mid term guidance than annual guidance, but at the start of 2023, we open an exception aiming to better guide investors about 2023 in the context of an unusual weak results for the Q4 of 2022. We gave true annual guidance, SG and A and net income, as you can see on the right hand side of the slide. Happily, we delivered on both metrics, even adding Modal in SG and A, what had not been considered in our guidance at the beginning of 2023. Back in 2022, we also gave the market a medium term EBT margin guidance from 26% to 32% from 2023 to 2025.

Speaker 1

We closed 2023 with an EBT margin at 26.8%, within our medium term guidance. We expected to see our annual EBIT margin improving on the next couple of years. Moving to the next slide, I'd like to give you all an update on our strategy tracker for 2023, in line with what we talked about on our Investor Day last December. First, leadership in retail investment by which we aim leadership in our core business. This year, we estimate we have gained approximately 66 bps in market share for individuals.

Speaker 1

This is yet another sign of client recognition and trust in our service. Yet, we have much to do with still less than 12% market share. Also, on retail investments, I would like to highlight how we have managed to position ourselves as a premier hub for entrepreneurs by consistently pioneering in our distribution channel efforts to IFAs, consultants, wealth managers, among others. 2nd, in relation to our retail cross sell, which we talked a lot about in our Investor Day, we aim to continuously grow together with our clients' needs. Clients' adherence to new products and service shows a strong bond of relationship.

Speaker 1

When we consider everything beyond investments, new verticals plus corporate and SMB X Investments, we have seen an increase in their representativeness from 2.6% of our total gross revenue in 2019 to 17.5% in 2023, bringing more resilience to our model. Besides, in 2023, we improved our service, specifically in FX and Insurance, and both are responding with strong growth. During the year, we also had relevant product launch in our platforms, like our global account, which allows clients to spend and invest internationally, providing them with a seamless experience within the app. 3rd, in Corporate and SMB, I believe we have a unique competitive advantage in wholesale banking due to our sophisticated retail investors' client base and large distribution channels. Because of our singular distribution to sophisticated clients, we are able to provide corporate and SMBs broader access to capital, creative product structuring, and tailored solutions.

Speaker 1

Although we are still in the very beginning of our wholesale franchisee, I believe this is a large untapped opportunity which we'll continue to focus on the next years. Lastly, central to these pillars is our commitment to a culture of quality and our client focus. We have talked a lot about this on our Investor Day last December, and I strongly believe this is the new true differential we will have in the years to come. Quality isn't just a word for us at XP Inc. It's a commitment to excellence that permeates everything we do.

Speaker 1

Today, I want to go deeper into what quality means for us and how it shapes our long term strategy. When we talk about quality, we envision putting our clients at the heart of everything we do. It's about understanding their needs, anticipating their objectives, and delivering solutions to exceed their expectations. From that, we organize our value proposition with precision, ensuring that it resonates with the diverse and evolving needs of our clients. But quality doesn't stop at words and promise.

Speaker 1

It's about tangible results. We believe in delivering concrete outcomes that make a difference in our clients' lives. Take, for example, our strategic initiative to offer comprehensive financial planning serves rooted in asset allocation discipline. By centralizing asset allocation under a single Chief Investment Officer, or CIO, and tailoring our services to individual needs through financial planning, we aim to ensure that every client receives personalized attention and optimal investment strategies. We have had major success in the past on democratizing access to top tier investment products to high income clients.

Speaker 1

Now, we aim bigger. We are democratizing access also to premium services to a broader audience, services that were previously only available to private clients. Moreover, we are committed to maximizing value for both our clients and our shareholders. We recognize that even in the simple act of correcting asset allocation, there is a large opportunity for revenue generation and increased LTV. This is just one small example of how our dedication to Qualys translates into tangible benefits for both our clients and our business.

Speaker 1

In essence, quality isn't just an end goal for XP. It's a mindset that drives us to constantly innovate, improve, and surpass our clients' expectations. As we move forward, we will continue to uphold the highest standards of quality in everything we do because that's what sets us apart and propels us towards sustained success. Now, I will hand it over to Bruno so he can discuss this quarter and annual financials. Thank you.

Speaker 2

Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again. Moving on to Slide 9. Starting with our gross revenue on the left part of the slide, this quarter, we had a relatively stable gross revenue quarter over quarter at R4.3 billion dollars despite having roughly 6% less business days than the 3rd quarter.

Speaker 2

On a year over year comparison, we had a 29% gross revenue growth in the Q4 'twenty three. When we look at the full year, we posted 12% growth in our total gross revenue. Our strategy to go beyond investments with new verticals and corporate and SMB X investments has played an important role sustaining our gross revenue growth as the core retail is still impacted by the macro. Looking to the right side of the slide, in terms of revenue mix between segments, we maintain a relatively stable mix quarter over quarter. While year over year, we can notice an increment in retail revenue relevance mainly due to new verticals growth as we are going to see in the next slide.

Speaker 2

Before we deep dive in new verticals, it is important to highlight that in this slide, we are only looking at the 4 new verticals we currently disclose, which are retirement plans, cards, credit, and insurance, not including FX, digital account, and global investments as presented in the Investor Day. So new verticals continue to perform in the 4th quarter, reaching a total gross revenue of R491,000,000 plus 21% year over year and plus 11% quarter over quarter. The main highlights of the quarter were cards and insurance. Cards reached BRL306 1,000,000 plus 18% quarter over quarter and plus 30% year over year. And insurance reached BRL 46,000,000 plus 28% quarter over quarter and plus 48% year over year.

Speaker 2

As you know, the 4th quarter has a positive seasonality to cards activity due to the holiday season. On the right side of the slide, when we look at the full year of 2023, New Verticals revenue reached R1.7 billion dollars a growth of 43% year over year. And if we add the other new verticals FX, digital account, global investments, and corporate and SMB X investments, in line with our presentation in the Investor Day, the total gross revenue sum up to R2.7 billion dollars in 2023, enhancing our diversification and cross sell capabilities. Now, let's and cross sell capabilities. Now, let's look on the next slide at our core retail revenue and its potential as the macro improves.

Speaker 2

Retail revenue reached its all time high in 2023 at R11.791 1,000,000,000 helped by new verticals which grew 3x from 2021. But core retail revenue, which grew 9% year over year, reaching R8.73 billion dollars in 2023, is still 3% lower than the peak of 2021 despite a bigger ecosystem. It is important that we acknowledge the high operating leverage potential a business like ours has at our core. Equities, fixed income, and funds, they all should benefit in a scenario of risk on which eventually will happen considering it is cyclical. And then the high operating leverage of our unique ecosystem should kick in.

Speaker 2

On the right side of the slide, we brought some data to help envisioning this operating leverage. Even in a tough environment for our core in the last couple of years, we were able to grow our core retail client assets by more than 40% in this period. But the take rate suffered, reducing from 1.5% to 1% in the same period. If we take this 50 bps difference in take rate and apply to today's client assets, just as a math exercise, we would have more than R4 1,000,000,000 in additional revenue. XP's ecosystem gives us a unique position in terms of operating leverage in a bull market for investments.

Speaker 2

Our market share in retail traded volumes on B3, for example, of 48% is 4 times larger than our closest competitor. So in summary, we believe XP is well positioned to benefit from the next positive cycle for investments whenever it comes. Now moving to Slide 12. Corporate and issuer services presented another solid quarter with revenue of R508 million dollars plus 85% year over year and a slightly decrease of 2% quarter over quarter, which had a tough comp considering corporate results in the Q3 'twenty three. As we anticipated in last quarter's conference call, the Q3 was the peak for corporate revenue due to increased derivative demand related to DCM activity in the period.

Speaker 2

But the Q4 'twenty three was the 2nd best quarter for corporate revenues, reaching R177 million dollars 10% lower quarter over quarter but 31% higher year over year. The main highlight here in Q4 'twenty three was the all time high issuer services revenue at R330 1,000,000 a growth of 3% quarter over quarter and 136% year over year boosted by the evolution of our franchise in investment banking with M and A as the main contributor for the growth. These positive numbers are a result of a complete range of products and continue to show the benefits of the increased diversification of our business model, translating on a 22% growth in 2023 compared to 2022. On Slide 13, our SG and A expenses continue to be under control as cost discipline is a priority for us. SG and A, excluding revenue from incentives, totaled R1.5 billion dollars 2% lower quarter over quarter and 10% higher year over year considering we didn't have more DAO in Q4 'twenty two.

Speaker 2

Looking at the full year, our SG and A was R5.3 billion dollars in 2023 compared to R5.6 billion dollars in 2022, a result of strict cost control with our efficiency ratios improving substantially year over year as we are going to see in a while on the following slide. Those numbers consider a one off adjustment of R44 $1,000,000 write offs in the Q4 due to an impairment related to the termination of X stage and one investment asset. 1 year ago when we first gave our SG and A guidance between R5 $5,500,000,000 dollars Model was not being considered. Even after including Model in our numbers, we were able to deliver the R5 $300,000,000 within the range. If we exclude Model, we would be closer to the bottom of the guidance.

Speaker 2

For 2024, cost discipline continues to be one of our top priorities within the company, as Mahfra mentioned in his letter. Now, let's look at our efficiency ratios on the next slide. Efficiency ratio is at its all time low since IPO, reaching 36.3% in Q4 'twenty three or 36% if you adjust for the one off event of the quarter. Compensation ratio decreased once again from 25.7 percent to 25.1 percent quarter over quarter, the lowest level in 13 quarters sequentially. Our cost control discipline has played an important role in our operating margin which we are going to talk on the next slide.

Speaker 2

Moving to EBT. Adjusting for the one off event, this quarter's EBT was BRL 1,000,000,000, down 10% quarter over quarter and up 41% year over year. Also, considering the adjustments, EBIT margin was 25.7% plus 245 bps year over year and minus 233 bps quarter over quarter. Revenue mix was the main driver for quarter over quarter margins decrease impacting COGS and our gross margin, which decreased from 70.1% in Q3 'twenty three to 68.1% in Q4 'twenty three. When we look at the full year with adjustments, EBT totaled R3.980 billion dollars up 16% year over year with an EBIT margin of 26.8 percent up approximately 100 bps year over year.

Speaker 2

On Slide 16, our net income for the Q4 'twenty three, considering plus R31 million dollars from the one off event, totaled R1.71 billion dollars down 1% quarter over quarter and up 37% year over year. Net margin was 26.5%, up 18 bps quarter over quarter and up 184 bps year over year. Looking at the annual metrics on the right side of the slide, net income increased 10% year over year to R3.9 billion dollars in 2023, with net margin slightly decreasing 38 bps year over year to 26.4 percent. In 2023, we've continued distributing capital to shareholders, returning $4,500,000,000 in buybacks and dividends, representing a payout ratio of 114% for the year. We kept a solid and comfortable balance sheet with our managerial base ratio ending the year around 20%, impacted by the dividend distribution on Q4 'twenty three and Model acquisition.

Speaker 2

We also announced a new buyback program of 2,500,000 shares, which aims to neutralize 2024 shareholder dilution due to the vesting of share based compensation from the company's long term incentive plan. We expect to return more capital to shareholders throughout the year, in line with our intention to reduce our managerial base ratio between 16% percent 19% over the next years. Finally, on my last slide, I talk about a metric which has become more relevant to us since the IPO and the growth of our bank, return on equity or return on tangible equity. We believe the return on tangible equity is even a better metric than accounting return on equity. But we look at both.

Speaker 2

Why return on tangible equity is important in our case, especially if you want to compare XP with Brazilian peers? First, we believe it's a metric closer to our marginal return on equity or closer to our return on capital employed, which by the way we use to decide how to allocate capital. 2nd, return on tangible equity excludes intangibles and goodwill, which makes it a metric more comparable to Brazilian GAAP, which amortize goodwill differently than IFRS. Return on tangible equity has slightly decreased quarter over quarter by 19 bps to 25.6 percent while increasing 570 bps year over year from 19.9% in Q4 'twenty two. Annual return on tangible equity is likely decreased by 21 bps to 25%.

Speaker 2

Important to remind that this return on tangible equity at 25% has been achieved in an environment where our core has not benefited from the operating leverage which our ecosystem provides, highlighting the resilience and sustainability of our business model independent on where we are in the cycle. When we get the positive part of the cycle for investments, we expect to see our operating leverage kicking in and benefiting our return on tangible equity as well. Now, I will hand over to Mafra for his final remarks. Thanks, Bruno.

Speaker 1

For my final remarks, I would like to summarize my priorities for this year. 1st, our people and culture. Our success is linked to the dedication and talent of our team. In 2024, we will keep our focus on nurturing our culture of excellence and innovation. 2nd, cost discipline.

Speaker 1

For 2024, we will maintain the strict cost control and efficiency initiatives that we did company wide during 2023, as this continues to be one of our top priorities. 3rd, our focus on what we believe is the new true differential, quality. By democratizing access to premium services, which were previously available only to private clients, we are breaking down barriers and creating a more inclusive financial ecosystem, repeating what we did with our product offering. As a result, we expect higher LTV. 4th, this year, we continue to focus on increasing penetration and principality of our new products.

Speaker 1

New verticals should continue to grow strongly, further diversifying our revenues and strengthening our business model. Lastly, this year, we intend to extend our product suite available to our wholesale clients. Throughout the year, we'll roll out our digital bank account for corporate and SMBs clients to further improve their experience with our ecosystem. Now, both Bruno and I will be happy to take your questions.

Speaker 3

So, now we're going to start our Q and A session. The first one is going to be Thiago Batista from UBS. So hi Thiago, please now you

Operator

can make your question.

Speaker 4

Yes. Hi, guys. Thanks for the opportunity. I have one question about the potential improvement in net new money. When we look in the or in the last couple of weeks ago, we saw a change in regulation in Brazil with the Texas Instruments like the CRICRA, LIG, etcetera, becoming much more tougher to be issued.

Speaker 4

Can you comment on the possible impact of this change for XP? And also, the federal government paid about $90,000,000,000 $90,000,000,000 of Pekatorius in the last couple of weeks. Have you saw any positive impact? Or do you believe those applicators will have any positive impact on the net revenue of XP?

Speaker 5

This is Thiago. Thank you for your question.

Speaker 6

When we talk about the new

Speaker 5

regulation, we see as positive when you look the long term, because you guys saw what happened in the past, 2 years, mainly. In the past year, the banks raised almost a BRL1 1,000,000,000,000,000,000,000 in tax exempt products. So today, we have about 1 third of the whole AUC in this type of product. So, of course for the long term as they have like to renew this products to issue new bank products it's going to be harder for them but we don't expect like to have a big impact on the short term. Okay.

Speaker 5

So, that's one side. The second side is when you look the secondary market for fixed income, you guys saw the what happened with the spreads in the past 2 months. Okay. So, we saw an increase level of activity on the secondary market, on the Tax XM fixed income. Okay?

Speaker 5

So, and the spreads they closed it. So, that's also positive for for us. So, I would say that's positive but it's not a big change on the short term. So, that's my view. Okay?

Speaker 5

And talking about the the precatorius, it's hard to say. It's a big chunk of money, okay? But it's not that related to individual investors. Okay? When you look, we saw more impact mainly on the funds.

Speaker 5

We saw a lot of the funds receiving cash from this payment. So, we believe we can see some of just structured funds with good returns for individual clients on the short term. Okay? So, it might be positive because, as you know, when investors see the returns increasing, they start to like to invest more on this type of product. So, can be positive, but I don't see a big, big change also net new money on the short term.

Speaker 4

Very clear, Mafra. Can I do a small follow-up? You mentioned in the slides that you booked R44 $1,000,000 of one off expenses. Only to double check, the earnings of BRL 1,040,000,000, this was not adjusted by these one off expenses?

Speaker 5

No. It's not adjusted.

Speaker 4

Okay. Perfect. Thank you, guys.

Operator

Okay. Next one is Yuri Fernandes from JPMorgan. Hi Yuri, now you can make your question.

Speaker 7

Hey guys, good evening. Hi, Maher, Bruno, Parisi. I have a question regarding our results on the COGS line. It was a little bit heavy this quarter. You mentioned in the release IFAs, commissions and higher provisions for credit cards.

Speaker 7

So if you can explore a little bit what drove it, it was more the commissions, it was more the credit card and if we should see a normalization of this line for the coming quarters. That's my first one. And then I can do a follow-up. Thank you.

Speaker 2

Hi, Uli. This is Bruno. I'm going to take that one. The first and biggest impact in terms of the COGS was due to mix, revenue mix In the Q3, the quarter that we had our highest gross margin in the year, we had part of the revenue with less commissions. And in the Q4, I would say that kind of normalized because if you look at the gross margin throughout the whole year, which is a better timeframe to look at the margins, we do have volatility between quarters.

Speaker 2

It was 68% all over the year. The gross margin of the 4th quarter was 68.1%, so in line with the margin for the year. So that's the main impact. But we did have in the 4th quarter some outliers, I would say, specifically in terms of provisions that we did because of credit portfolio that came from Rodal. Nothing big, but in terms of the expected credit loss, it had an impact roughly about BRL30 1,000,000 that we do not expect to see going forward.

Speaker 2

To talk about normalization again is hard because we do have the largest part of our COGS is commissions and it's related to the mix of this specific quarter.

Speaker 7

Thank you, Bruno. If I may still on the cost side, but now on financial expenses, it was a bit higher this quarter. And I was checking your gross debt and it was mostly stable around the R9.5 billion dollars For sure, we don't know like the intra quarter. So just checking if there is anything different on the year financial expenses line in this quarter and again where this should evolve going forward? Thank you.

Speaker 2

Yes. I mean, we had in the Q4, there is a line, there is a very cheap line that we have through the Banamex, the Mexican bonds that we carry and we use them to finance around BRL2 1,000,000,000 roughly. And we were waiting to renew that line. So if you look at previous quarter, you're going to see that part of the debt was reduced in 1 in the previous quarter and went up again in the Q4. That's the main explanation for interest rate, interest expenses going up in the quarter.

Operator

Okay. So next one is Neha Arrawala from HSBC. Hi, Neha. Now you can make your question. [SPEAKER SEBASTIEN DE MONTESSUS:] Hi.

Speaker 8

Thank you for taking my question. Just wanted to quickly understand how do you see 2024 evolving? What levers do you have in terms on the revenue side, on the cost side? Because you've done most of the cost management in 2023. So what would be the drivers for 2024 profitability?

Speaker 8

Will it be more on the revenue side or more on the cost side? Because net new money, as you mentioned in your last answer, that will probably be on the weaker side in the very near term. So any trends of how 2024 should be evolving will be very helpful.

Speaker 5

Hi, Neha. Thank you for your question. About revenue, as we mentioned in the presentation, we don't have a guidance for revenue or margins, okay? We gave last year more reference because we just what we just explained about the results of the 4th quarter. So we don't have, revenue guidance for this year.

Speaker 5

Okay. So but about costs, as we already mentioned in previous calls and meetings, I would say that the last few quarters, they are a good reference of the level of SG and A for 2024. But again, as we already mentioned, we have very strong cost discipline that's still in place on the company. So, we expect to keep gaining efficiency throughout the year here. Okay?

Speaker 8

Okay. Perfect. If I can just follow-up quickly. Going forward in 2024, is there a mix in terms of capital distributions that we should expect between buybacks and dividends?

Speaker 2

I can take that one. No, we have not decided yet. What we have just announced is a buyback of 2,500,000 shares approved by our board in order to neutralize the dilution expected for this year due to our long term plan for our partners in our partnership model. So that's something that we want to continue to do to avoid dilutions of shareholders. And as I mentioned in my part of the presentation, you can expect more capital to be returned to shareholders throughout the year.

Speaker 2

We keep generating cash. We have under leverage, I would say, balance sheet with capacity leverage. If we want, we do carry excess capital. So all the conditions for us to continue distributing capital to shareholders are in place and we are going to do it. But we have not decided when and how much and if it's going to be buyback or dividends.

Speaker 2

Whenever we do, we are going to announce to the market.

Speaker 8

Perfect. Thank you so much.

Operator

Okay. Next one is Mario Piahi from Bank of America. Hi, Mario. Now you can make your question.

Speaker 6

Hey, guys. Can you hear me?

Operator

I can hear you. Can you hear us?

Speaker 6

Sorry, perfect. Sorry. My question, let me ask you, if you can give us any color on net new money so far in the year And if you can separate that between inflows and outflows? Because I do think, right, you have made comments in the past that inflows remain very high, but outflows had also increased. And then related to that question is, when we look at your AUC, right, it grew 19% year on year.

Speaker 6

But if I take inflows out, your AUC grew only 7%, So which is significantly lower than CDI. So I was wondering, how do you see the performance of your clients' portfolios? How can that improve? Is that something that you think could be hurting some of the inflows that you're seeing? Thank you.

Speaker 2

Okay, Mario. Regarding the explanation about gross inflows and outflows, honestly, it hasn't changed that much about what I've already said in the past. So basically and we monitor that on almost on a daily basis. When we look at the core, the engine of XP affluent clients, B2B, B2C outflows and compared to the client assets, the percentage of outflows is pretty much stable over, I would say, the past 7, 8 quarters. So it has not changed.

Speaker 2

Okay. And the inflows overall, they have increased in 2023 compared to 2022. What has hurt the net new money more is the outflows from companies, corporate, it's really volatile. But remember that we do have in retail SMBs and corporate clients that have an annual revenue below the threshold of BRL700 1,000,000 and also the private, but not the engine. So that scenario has not changed.

Speaker 2

And we haven't seen any big change compared to the past quarter. Regarding the remuneration of our clients and the growth of market appreciation, you need to remember that our portfolio overall on average when you look at our portfolio and total client assets more diversified. And to be more diversified means that you're going to own more equities, you're going to own more multi market funds, alternatives and so on. And in the past year has been tough for all those asset classes, as you probably know. And most of the funds and so on, they are below the silica rate, for example.

Speaker 2

So on average, yes, the portfolio has not performed well, but we do not see that impacting outflows. We have the advisors, the clients are aware of the portfolio. You need to have a longer time horizon in the long term. It should pay off to have this type of portfolio and diversification.

Speaker 6

Okay. Have you done any exercise where you monitor how well portfolios client portfolios are doing in other platforms? Do you think the performance from your clients has been worse or not? Or is this something right that is there's room for you to improve? Because again like the Bovispo I think was up like 20% plus last year.

Speaker 6

Sure the book of the performance came in second half of the year. But just wondering, if you think that there's something else you can do, like, I don't know, training IFAs or getting more involved in clients' portfolios?

Speaker 5

Yes. There is this is Thiago. There is one slide in the presentation and I mentioned, we have a very strong focus on quality and that means for investments being, the best financial planning service provider in Brazil. Okay. So, we have been doing in the past, I would say one and a half years.

Speaker 5

A lot of chains here in the company are very focused on having the best service to our clients is not only about like a having the best portfolios but goes beyond that like a tax planning Section and and all the other stuff that usually. Only private clients have okay so we have been scaling that training all the FAs and internal advisors. So, we have been doing chains here. Today, we have a new segmentation in the company. We have new, not a new CIO, but we have we took the CIO from the private banking and now he manages all the segments in the companies, all the allocations.

Speaker 5

So, we have changed incentives to to our internal advisors. We have changed some of the incentives for their face. So, we have been doing a lot of things like to have them to, to follow, the correct allocation for for all the clients. So, yes, we have been doing a lot of stuff on that. To your point about how is compare to other companies, I would say that the easiest way to compare because it's easy to get is if you compare the exclusive funds, okay?

Speaker 5

If you look the funds that we manage here to she's pay asset. We have been doing, I would say good compare like to other place. You can compare all the private banks and and we have been doing okay bad not very good against, the select rate as Bruno mentioned, but okay or good when you compare to other portfolio managers for exclusive funds. So that's very easy to check.

Speaker 6

Okay, guys. And just final question on the NPS score, right? You used to show that. I don't know if I missed it, but like are you seeing your NPS scores relatively stable?

Speaker 2

Yes. It was pretty much stable. I believe it's 72 percent in the Q4, Mario.

Speaker 6

Okay. Thank you.

Operator

Okay. Next one is Tito Labarto from Goldman Sachs. Hi, Tito. Now you can make your question.

Speaker 9

Hi. Good evening, everyone. Thanks, Patrice. Good evening, MAPRA, Bruno. And you have operating leverage.

Speaker 9

But how dependent is that operating leverage on sort of cyclical environment getting better. I mean, I understand the cyclicality of the business. But I mean, you mentioned that second half of the year expense is sort of a good base to think about? I mean, just annualizing 4Q expenses, that would imply your expenses are going to grow roughly 15%, right? So to have some operating leverage with that, you need revenues to grow faster.

Speaker 9

So how do you just think about that potential improvements in EBT margin to get to the guide, the longer term guidance that you've given? Should that be sort of linear improvements? Is it very dependent on rates coming down, things improving? Just to understand, and particularly in this quarter, right, the margin was a bit lower. I know there were some one offs.

Speaker 9

Is there just some seasonality in 4Q? Because 4Q last year, EBT margin was also a bit lower. So just to think about how those margins improve from here? Thank you.

Speaker 2

Hi, Tito. I would say that, yes, it is dependent of the macro part of it to have this operating leverage kick in. Our business, I mean, has been growing at a slower pace than in the periods of bull market, still growing, but with margins healthy, but at the low end of our guidance for EBIT margin. And we have said that. We said, look, we expect the margins annual margins because on a quarter basis, it's as I said, it's volatile.

Speaker 2

But on an annual basis, we expect to go from 26% to 32% from 2023 to 2025. And in that assumption, it is embedded a better environment and scenario for investments as we move forward. We are not there yet. So we all the businesses that we have been growing, like cards, for example, it has a lower margin compared to the 26 percent EBT margin, for example. So of course, as the relevance of this business grows and the other part is growing less because of the macro and is the most relevant part in our business, EBT margin will struggle to accelerate the pace really faster even with a strict cost control.

Speaker 2

But so it's not a linear. I don't see this as a linear movement going forward, okay, because we do have and that's the point of that is like that I presented regarding the operating leverage of our business. That's why when we gave the guidance for our net income in 2023, it was a large spread, 3,800,000,000 with 4,400,000,000. And we ended delivering the 3,900,000,000. But why was that?

Speaker 2

Because if the macro change, if was another scenario that we do not control and we do not have a crystal ball to know exactly what it's going to be, it could be much higher. Exactly the operating leverage of the business that we carry in our ecosystem. So the macro, it is important to see the EBIT margin expanding forward.

Speaker 9

Great. Thanks Bruno. That's helpful. Maybe I guess one follow-up there. In terms of also how you think about maybe the seasonality, if we look at your B3 volumes sort of continue to be weak.

Speaker 9

So could there be more short term pressure EBT margin, at least in the first half of the year, because you're not seeing volumes sort of recovery yet, rates are still in the double digits. Yeah, I know you're not going to give short term guidance, but just to think about sort of the current dynamics that we're still currently seeing in the markets right now, is it fair to assume perhaps a little bit of short term pressure?

Speaker 2

I don't know if short term pressure. What I can share here, Tito, are 2 points. Number 1, in terms of, for example, in terms of the efficiency ratio going forward, just remember that when we have the Q1 of 2024, we are going to take out the Q1 of 2023. In the Q1 of 2023, the SG and A was helped by a very low share based compensation. If you go back there and look at the numbers, it was R53 1,000,000 of share based compensation in the Q1 2023 and in the Q4 now BRL166 million.

Speaker 2

And that BRL53 million was low because we had the impact of the layoffs and so on, cancellations, etcetera, that had a positive impact in the Q1. So that's one thing to have in mind for the short term. The other point is we do have seasonality in our results. If you go back in the last 5 years and you do an average, you're going to see that the Q1 of the year is always the weakest quarter for the year. Okay.

Speaker 2

Because that's how the business works, especially at our core business investments. So the last 5 years, the average for revenue, for EBT and for net income in the Q1 is 21% of the total of the year, not 25%. So it's lower. And then 2nd and third quarter tend to be better. 4th quarter is trickier because we have the performance fees.

Speaker 2

You might have some capital market activity, but in terms of the investments, business days and holidays and so on, It's not as strong as the Q3, for example. So we will see. That's why I always like to, you know, guide to look last 12 months. Look, the year look last 12 months, take 1 quarter and put the other with the same seasonality because looking on a quarterly basis, you can get it wrong. It can be a very good and you're going to expect to continue.

Speaker 2

And that's not what happens or the opposite way around.

Speaker 9

Great. Thanks Bruno. One quick just clarification. You didn't really have much incentives from B3 and some of the card companies. Is this a new normal now?

Speaker 9

Should we no longer really expect those incentives going forward?

Speaker 2

No. From the Visa and types of thing, no. We do not expect to have anything relevant there going forward. From B3, We might I mean, it's they have it's like because that's an annual process. But the main the main change that you saw, it was related in the Q4 this year to the Q4 Q4 'twenty three, sorry, with the Q4 'twenty two was due to some incentives that we received from Visa that this last year, Q4, 2023, it didn't happen.

Speaker 2

But we are always looking for incentives to value our ecosystem, our balcony and any player that wants to access our ecosystem knows that we have a premium, I would say, type of client because we are focused on investors.

Operator

Okay, next one is Renato Meloni from Autonomous. Hi, Renato. Now you can make your question.

Speaker 10

I wanted to get some more clarity on the issuer services dynamics for revenues. So it came from a very strong 3Q that was affected by particular reasons there. But again, you repeated a very strong quarter. You had higher volumes, but you also mentioned that M and A helped. So I'm trying to understand here to which proportion M and A contributed.

Speaker 10

And going forward, what's a recurring level of revenue in this segment that you expect? Thank you.

Speaker 2

Yes. The 3rd quarter was really strong because of DCM activity. You are 100% right on that. And but again, we are growing our investment banking franchise as we move forward. The whole ecosystem, what Mahfra mentioned in terms of the potential for wholesale in our ecosystem, considering we already have the relationship with the corporate clients, giving them access to capital market through our distribution and so on.

Speaker 2

It's important. It plays a role. Those things, they take time. So everything is recurrent. But the point is, is not a straight line.

Speaker 2

You have some types of revenue that by nature on a quarterly basis, they are more volatile. M and A is one of those. And M and A is a business that takes time to build. You need to build a portfolio, you need to build a relationship, you need to get the mandates and that's a long term view. And in this Q4, we do not disclose exactly how much was the revenue, but it was relevant in terms of contribution.

Speaker 2

It was by far the highest growth quarter over quarter. And that's an ongoing business that we are not where we believe we can be in the future. So we are going to keep investing in our franchise business and the wholesale platform for our clients.

Speaker 10

And do you think you have a baseline level of revenues here that you can disclose or still expect it to be volatile? I

Speaker 2

can't disclose a baseline. The baseline that we have, for example, is the DCM business. This is like a very I would say. I don't want to use the word current, but it's more stable. It's less volatile.

Speaker 2

But again, you saw the Q3 DCM, was the best quarter for DCM activity with some volatility.

Speaker 10

That's clear. Thank you.

Speaker 3

Okay. Next one is Jorge Curi from Morgan Stanley. Hi, Jorge. You can make your question. Hi.

Speaker 3

Good afternoon, everyone. Thanks for taking my question. I wanted to go back to Slide 11, where Bruno talked about the potential for or looking at potential for operating leverage. You highlighted, Bruno, 1.5% take rate in 2021 versus 1% in 2023 and mentioned that that's around a $4,000,000,000 revenue gap. And I just want to understand why are you going back to 2021 to that 1.5%?

Speaker 3

How is that, achievable again? And, I mean, I'm guessing you, you, you purposely pointed it out, because you do think that that's something where we could head or where the business could head. So under what circumstances could you be again at 1.5% take rate? You know, does it take a year, 2 years, 3 years? And maybe that's not the taker that you can get to.

Speaker 3

That was sort of like extraordinary times, given where rates were, where I think Saliq averaged less than 5% that year, which seems just like an impossibility for Brazil anytime soon. So maybe what do you think is achievable in terms of upside to your take rate, which sat at 1% in 2023, say, over the next 2 years? Thank you.

Speaker 2

Hi, Jorge. The idea of this slide was not a guidance, anything like that, okay? That's why I mentioned a math exercise, but was to remind all of us about the business we have in XP because sometimes we've been through 2 years, very tough 2 years in terms of our core business investments. It's been really tough for 2 years and we tend to forget the type of business that we have in our core. When we put the market share of B3 for retail, to remind that our market share has been pretty much stable around 50%, 48% in the end of December, 48%, 4 times our closest competitor.

Speaker 2

But that type of business can have a huge operating leverage. If we have, for example, a market where risk on mode, a lot of IPOs, capital market activity, individuals in Brazil that is sub penetrated, coming to the stock market to invest in equity, so on and so on. In that type of environment, these operating leverage in our ecosystem can be huge. So the math exercise is not say, oh, if we have a risk on mode, we're going to have 4,000,000,000 highs additional in revenue without one single highs in additional SG and A. That's not the point.

Speaker 2

Can be 1,000,000,000, can be 2,000,000,000, can be the 4,000,000,000. I don't know. I don't know what the take rate would be in such an environment. And you have a point because in 2021, probably, you know, we had very low interest rates in Brazil, 2%. We had the COVID.

Speaker 2

So different scenario probably is not going to be like 2021. I don't know what's going to be, but I know or at least I expect that at some point in time, because this business is cyclical we are going to have or we are going to be in the part of the cycle where it's going to be a bull market, a risk on mode. A lot of companies coming back to the market. And in this environment, our ecosystem as of today is much bigger than what it was back in the last bull market cycle. And we expect our business to really benefit from that scenario.

Speaker 2

So that's that's the message of this is like do not forget this because that's what XP has in its ecosystem. It's been dormant for the past 2 years.

Speaker 3

No. I I appreciate that. I fully understand it. But so, you know, just just to continue on that thought, I'm sure you know what your different business lines can do in a scenario of low rates, risk on volume growth, how prices on an apples to apples basis have changed because of competition and how the mix of your business also implies a change in the take rate. Just help us understand what is that attractive upside?

Speaker 3

Is it 1.1, 1.2, 1 point 3 take rates in a sort of like blue sky scenario? Or maybe it's not right. I mean, maybe it could be 7% because competition just continues to do what it normally does, which is extract excess pricing from the market. So just help us understand that because that's obviously a really critical component of how your earnings look in 2024 2025. So that would be much appreciated.

Speaker 3

Thank you.

Speaker 2

I hear you, but if I give you a number, it's going to be like giving a guidance. And honestly, I don't want to do that. What I can tell you, Jorge, it's not about price, competition. The price. I mean, we for equities, for example, brokerage commissions, we 0 brokerage commissions back in 2018 with Clear.

Speaker 2

We were the first one to do so. So it's not exactly about price. Competition can have an impact in terms of market share, in terms of flow and so on, but not not about price in in my view. So the potential exists. How much.

Speaker 2

The potential means in the bull market, it will depend. It will depend how strong the bull market is. It will depend on various factors that it's hard to give you a number right now. But I'm pretty sure that whatever the number is, is going to be relevant considering the size of our ecosystem.

Speaker 3

Great, Bruno. Thank you. Thanks for that.

Operator

Okay. Next one is Gabriel Guzman from Citi. Hi, Gabriel. Now you can make your question.

Speaker 3

Hey, guys. Good evening. So, both of my questions were answered. One left is about your older other operating expenses line. There is a line in the legal administrative proceedings and agreements with clients.

Speaker 3

This line has been growing much quicker than anything else. It was like $2,000,000 per quarter last year. It was somewhere around $12,000,000 this quarter. There were several news about client complaints recently and XP possibly having to reimburse those clients. Is this something related to what was mentioned in the news?

Speaker 3

Is this something we should expect to continue growing at a quicker pace? Can you please shed some light on it? Thank you.

Speaker 2

Hi, Gabriel. No, I would I mean, it's mainly I would say it's mainly related to Modal acquisition. When we onboarded the whole thing, we might have some part of it related to the cost cuts that we did at the beginning of 2023. Those things, they usually they take like 6 months to kick in. So we would be hit in the 2nd semester last year.

Speaker 2

But we do not expect anything unusual going forward here.

Operator

Okay. Next one is Ricardo Buschpego from BTG. Hi, Ricardo. Now you can make your question.

Speaker 11

Hi, guys. Thank you for the opportunity. I have one question here about credit. You have been seeing that the unsecured portion of the credit portfolio has been accelerating the growth pace, which also has been falling by a higher loan loss provision, right? So once you get more color on why we should expect for both these lines, the, the following quarters and years, And what exactly is the client profile of the, of this injury video taking the unsecured credit, line?

Speaker 11

Thank you.

Speaker 2

Yes. We are hi, Cath. We have been growing our credit card business, as you know. And as we move down in XP Enrico, we go to unsecured credit card, credit exposure. But with a client that has investments somehow with us.

Speaker 2

It can be a low investment, but has investment with us. What we monitor closely also is our loss absorption ratio, which despite the growth in NPL because of these unsecured part, the LA A. Is above 2 times for sure and in a very healthy pace. But as you know, the credit card business, as you grow, it has this impact to recognize the expected credit loss right upfront. So yes, we monitor the economic sense of the business.

Speaker 2

And if it makes sense, we're going to continue to grow cautiously there, but we are going to continue to grow even if it hurts a little bit in the short term for accounting purposes, if it makes economic sense, for sure.

Speaker 11

And just a follow-up here, as you go to the lower part of the pyramid in his operation, when you look at cost of risk, that is the provisions divided by the insecure portfolio, should we expect an increase looking forward because of this mix?

Speaker 2

I don't know. And I don't know if he would see a higher provision ratio because of that. I think we are we are well provisioned right now, and we intend to continue like that going forward. I don't know, MAPFRE, if you want to add something.

Speaker 5

Yes. One important point is we don't have any strategy to go to the bottom of the pyramid or focus to on investor clients. Okay. So that's why when you look our NPL, it's much lower than the market. Of course, we have different card segments for different types of clients.

Speaker 5

What I can say is when you look the collateralized credit card. It's very low clients with 50 ks plus invested at XP when you go to clients with less than 50 ks at XP, the NPL more than double when you go to recall each 3 post compare like today and collect collateralized at 1. Okay. But as Bruno mentioned, the loss of insertion on the worst cohorts is still above 2. Okay?

Speaker 5

That's very high. And when you talk about provisions against the the, the NPL, we have very good provisions today. So, we do not expect like to have any additional provisions, but, when you look there, the card portfolios growing. So that's why you can expect the provisions to grow. Okay.

Speaker 11

Okay. Thank you.

Speaker 3

Okay. So this is the end of our conference call. So thank you very much for attending today. And the R team is available for any further details that you might need and we're going to meet you again in the next quarter. Thank you so much.

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Earnings Conference Call
XP Q4 2023
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