XP Inc. (NASDAQ:XP) Q4 2022 Earnings Call Transcript

XP Inc. (NASDAQ:XP) Q4 2022 Earnings Call Transcript February 16, 2023

Andre Martins: Good evening, everyone. I am Andre Martins, Head of Investor Relations of XP Inc. On behalf of the company, I’d like to thank you all for your interest in our quarterly earnings call. So welcome to the Fourth Quarter and Full Year of ’22 Earnings Call. Today, we have with us our CFO, Bruno Constantino. We will both be available for the Q&A session right after the presentation. And whoever wants to ask a question can raise your hand on the Zoom tool, and we will attend you on a first-come first-serve basis. We have the option of simultaneous translation to Portuguese. So we have a bottom as well on the Zoom 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, their definition and we have on the SEC Filings section of the IR website, the definitions, as well regarding those legal disclaimers.

So now, I’ll pass the word to Bruno. Good evening, Bruno.

Bruno Constantino : Good evening. Thank you, Andre. Good evening to all of you. And thank you for attending our 13th earnings call presentation. As a full year presentation I will take longer than usual in the introduction part, given more context about how XP business model works in different macroeconomic cycles. I will also mention the important achievements and lessons learned in 2022. On Slide 5, we highlight how XP benefits from a positive market environment. The recent bull market that went on until 2021 attracted many Brazilians to the capital market as you know. From 2018 to 2021, we had an increase of more than 4 million individuals come into the market. Still nothing compared to the size of the Brazilian population, as you know, but a lot compared to less than 1 million we had in 2018.

And then as the main investment platform in Brazil, and having the biggest specialized distribution network, XP benefited a lot from this scenario with our disruptive and scalable business model. From ’18 to ’21, we grew our client assets by a CAGR of 59%, our revenue by a CAGR of 58% and our net income by a CAGR of 98%, basically doubling our net income for three consecutive years, way above market and our own expectation at IPO. And then comes 2022, a very challenging year, especially for the investment advisory business. With the Selic rate rising from 2% to 13.75%, there was a meaningful change on investors’ willingness and sense of urgency to diversify investments from low risk fixed income options. This movement, which also was seen in other asset classes, is clearly shown by the almost 30% reduction in individuals equities average daily trading volume in full year ’22 compared to ’21.

Other external factors contributed to the standby mode and lower clients activity we saw in 2022, I will name five of them. Number 1, the global inflation and respective monetary policy all over the world; number 2, rebound of COVID in early ’22; number 3, war in Eastern Europe; number 4, uncertainty pre and post elections in Brazil; and number 5, The World Cup fever in November, December, which led to a reduction on actual business days. I know everything I’m saying here is well known by each of you. But it is important to contextualize so everyone can better understand the impact of those events not only in the full year ’22, but on a quarterly basis as well. I will talk more about it in our results section. Going back to the risk, except for global inflation and restrictive monetary policy, which happened throughout the whole year, COVID rebound and war happened in the first quarter ’22, and the elections in Brazil and World Cup happened in the fourth quarter ’22.

Not by coincidence, the two weakest quarters of XP last year. This is important to understand. Last year was unusual when looked on a quarterly basis. So in our view, it’s better to look the full year instead. We had a lot of volatility between segments on a quarterly basis. It will become clearer when we get to the results part, we have some slides to share with you. Going back to the advisory business. So the financial advisory business is based in human interactions, circumstances which make these interactions less frequent, as we had in the fourth quarter, for example, does have a negative effect in the investment business. Going back in time on the bar graph in the right of the slide, will allow us to verify the evolution of our business.

I know that in 2014, XP was a different business, much smaller. But the point to make here is to show how resilient our ecosystem became over time. The last monetary tightening cycle in Brazil began in 2013 and took the Selic rate close to the current level of 13.75%. It took Brazilian Central Bank two years and four months to complete the tightening cycle. And the total magnitude of it was 700 basis points. In 2014, XP’s net income fell 40% relative to 13%, as 80% of our revenues at that time came from equity. With the market worsening our main metrics, net inflow, new clients and IFAs were strongly affected as well. We were much more I’d say a better play at that time. Now, fast forward to 2022, the recent monetary tightening cycle has been faster and more severe than the last one.

It took the central bank only one year and five months to complete the tightening cycle. And the total magnitude of it was 1,175 basis points. It went from 2% to 13.75% really fast. But in 2022, different than what happened in the last cycle in 2014, our revenue grew 10% year-over-year, and our net income remained flat year-over-year. The recent investments we have done in the new verticals help to mitigate these challenges scenario, improving the resilience of our business model. Let’s talk a little bit more about those investments and also about some lessons learned in 2022 in the next slide. Since the IPO, we have been investing in new verticals, as you know and according to our strategy, to go beyond investments, to become dominant in investment.

We are confident that our strategy is in the right track. And by going beyond investments, we achieved three main things: One, we increased the LTV of our existing clients; number two, we enhance the moat of our ecosystem; and number three, we increased our total addressable market. Basically, in three years, since the IPO, we have built our own insurance company, Xp Vida e Previdencia S.A starting with retirement plans and recently moving into life insurance. We have created a bank from scratch, starting with collateralized credit, moving into credit cards, debit cards, and recently digital accounts. We have developed an international investment business, also from scratch, instead of doing it inorganically. We have created XTAGE, our digital assets platform organically as well, allowing our clients to buy crypto assets in the same app they use to invest.

We have invested in corporate business, basically nonexistent in 2019 year of our IPO, which made a revenue of R$600 million last year. And finally, we have the expansion of the internal advisory team, our B2C, improving our total specialized salesforce, which we expect to reap the full benefits of it when the macro cycle reverts. These projects demanded an initial allocation of financial and human resource that is decreasing as they mature. And, honestly, I don’t remember in our history a period where we have done so much and so fast. And maybe here is a lesson learned in 2022. We, as a company and as entrepreneurs, we are disruptors. We always want more. And it’s always good to remember that Brazil is one of the most concentrated financial industry in the world still.

You take that in a very benign scenario of recent years, where we doubled our net income for three consecutive years and we much recognized this environment has influenced the pace of our expansion. As I said, we have executed our plan too fast and as you can see, we heavily expanded the headcount base almost three times in three years, and people is 70% of our SG&A. We added 1,200 employees in 2020 and 2,500 in ’21. And we have done it right before a market downturn. Again, we have no doubt that each of these initiatives will add value in the long-term and are 100% connected with our strategy. But we must be humble and recognize that we have entered 2022 with the wrong cost structure, it’s a fact. Now, it is time to operate on a much leaner cost structure going forward.

And the ongoing transformation process that XP is going through, and I’ve talked about it in previous quarters, will be key to help us execute this expense reduction without jeopardizing our service quality or ability to advance with our strategy. Just to connect the movements, it’s important to remind that this transformation process has started through our tech team at the time led by Maffra, when he was our CTO, and expanded to the whole company when he became our CEO at the end of second semester ’21. With a leaner cost structure, a greater addressable market and advancing in our core business, which we are going to show in the next slide, we believe XP is well positioned for test times ahead. The scenario, as we all know, 1,175 basis points in just one year and a half.

And still our main KPIs for the investment business kept expanding at a slower pace, of course, but expanding. Last year, more than 2,000 independent advisors on a net basis join XP’s platform, which reinforce not only the potential of this profession, but the leadership of XP in attracting new IFAs into our ecosystem. If we were a new broker dealer starting up in 2022, very tough time to start a business, we would be by far. At the end of the year, the third largest IFA network in Brazil, in one year, only behind XP, the dominant player and BTG. Net inflow totaled R$155 billion. We believe this shows the resilience of our distribution model and the premium quality of our client base. And we added 406,000 net new clients in our ecosystem. Just as a reference, it took us 16 years of existence to achieve that number of clients.

And our client assets kept growing as well, reaching 946 billion at the end of the year. So in summary, despite the strong headwind that continues in 2023, XP was able to keep growing and advancing in its core business KPIs net inflow, IFAs and net new clients. When we have the next tailwind scenario, and it will happen, our ecosystem is going to be much bigger and complete than when the last bull market happened. We are expanding our ability to grow exponentially when a reversal of the tightening monetary cycle occurs. Cross-sell, cross-sell is one of the biggest opportunities we have beyond investments. The clients are in the house and have already trusted us with the most precious thing they have, their savings which we are honored for the trust.

The combination of our client base growth and the maturation of new products in our platform, presents the best compelling opportunity for revenue growth in 2023, considering we’re going to have very high interest rates for long. If that is the scenario, then cross-selling is the most compelling opportunity for revenue growth that we have. Credit cards, insurance, credit retirement plans, digital accounts, and international investments, accounted altogether for R$1.3 billion of revenue in 2022. In the previous year, 2021, it was less than 600 million. So more than double in one year, we believe a growth of 50% to 60% this year 2023 is pretty reasonable, considering the low penetration of these products in our existing client base. As you can see in this slide, international investments, for example, which should benefit from the current scenario for diversification purpose and risk management as well, has less than 1% penetration in our client base.

Credit card is the most mature product that we have still has less than 20% penetration. So we will continue to have businesses inside our ecosystem with high double or even triple digits of growth, even in a challenging macro environment. Expenses, the lessons learned in 2022. SG&A grew alongside headcount in new verticals as already said, reaching R$5.6 billion ex incentives in 2022. We went from R$1.9 billion in 2019 to R$5.6 billion in ’22. That’s almost R$4 billion in three years. We have done more with more. Our SG&A expense ratio went from 37% in 2019 to 42% in 2022. So our main priority for this year 2023 is to regain the inherent operating leverage of our business. How? Through a companywide adjustment of expenses that already began in fourth quarter ’22, then in simple execution; and as I’ve said already, helped by the ongoing transformation in the company.

This is an important point, because what we’re saying here is our business, which has always had a strong operating leverage with the ongoing transformation, will increase that operating leverage through a much leaner cost structure, sustainable and not impacting our deliverables or clients, which will show its maximum benefits in the next market upturn. Different from 2022 when costs were controled but not reduced, the current initiatives should allow for margin expansion, even in tough scenarios for revenue growth and is 100% under our control. And to better align market expectations around expenses, we estimate that SG&A ex incentives for this year will range between R$5 billion to R$5.5 billion, which at the bottom of this range implies a nominal reduction of 11% year-over-year.

And that is connected to our EBITDA margin guidance as well of 26% to 32% in 2023 to 2025, moving from the bottom to the top in the period. Now, moving to the financials. On Slide 12, we provide some context on the headwinds faced especially by our advisory channel in fourth quarter ’22, which relies on human touch and availability I mentioned earlier. The post-election period, coupled with World Cup and the approach of holidays, added a layer of difficulty on the advisor client interaction in the quarter. And this is important when you analyze our business, you cannot only look at average daily trading volume, what’s going on with the bridge here, because the advisory business, it demands a relation of advisor in clients. And that’s why January, for example, it’s a weak month, because people are on vacations, clients and advisors.

So this kind of interaction, whenever they have difficulties, it has an impact. In the fourth quarter, it’s exactly what we lived. So because of that, and also, because of lower official business days relative to third quarter with their revenues, didn’t grow as expected. You can also see that on the left part of the slide. The fourth quarter seasonality usually is the strongest quarter of the year, because of strong capital markets activity and performance fees that happens in the fourth quarter. It didn’t work last year. Last year was unusual in that sense. From ’18 to ’21, fourth quarter represented on average 30% of total revenue for this specific year. Last year, it represented less than 24%. Also, after a record third quarter, third quarter last year was our best quarter, when our gross revenue reached the R$3.8 billion helped by anticipated deals and traded volumes in Institutional and Corporate & Issuer Services, that in the fourth quarter faced a lesser favorable quarter, as previous signaled in our last call — earnings call.

So together just to give you a sense, Institutional and Corporate & Issuer services represented 80% of the sequential revenue decline quarter-over-quarter. Looking at the full year 2022, which we believe is the best way to look at the results of XP last year because of the disparity that we had among quarters throughout the year, our gross revenue grew 10% relative to a strong 2021, the high of the bull market cycle, which reinforces what I said earlier, the resilience of our business even tough scenarios. The Retail segment, the most relevant one and together with Issuer Services were the most impacted by this challenging macro environment in 2022, but still Retail grew 4% year-over-year, despite the drawdown seen in the equity part, the most relevant for Retail revenue of 21% year-over-year.

Equity in ’21 represented 55% of the Retail revenue. In ’22, decreased to 42% of Retail revenue. So, what helped Retail revenue in investments? Number one, fixed income plus 17% year-over-year; and number two, float that is in other Retail, 70% growth year-over-year, both of them benefiting from higher interest rates. Still, Retail, we also saw the strong contribution from the new verticals initiatives. Retirement plans for example, grew 47% year-over-year. Credit, fixed floor, insurance, key institute and cards 229% year-over-year growth. Institutional and Corporate both had growth in 2022 and strong growth, Institutional 50%, and Corporate 250%. Institutional that is a more mature revenue line benefited last year from mostly FICC revenues, fixed income currencies and commodities.

And Corporate benefited from the natural growth of a new business that had a very positive year in 2022. On the other hand, Issuer Services decreased 33% versus a very strong 2021 basically due to a weaker capital market activity especially in ECM comparing year-over-year. When we look at our gross margin, despite on an annual basis being virtually flat in 2022 compared to 2021, gross margin fell 7.1% in fourth quarter versus third quarter ’22. This margin compression was mainly related to: number one, revenue mix, there was a change among quarters. Remember that Institutional and Issuer Services they have almost 100% gross margins because commission which is the most relevant line in COGS is mostly related to Retail investment revenues. Prepaid expenses write-offs, we had these one-off in the fourth quarter regarding ended contracts with IFAs. Remember that we have a prepaid expenses related to a long-term contract with the IFAs. If when IFA leaves, we write off everything that is prepaid.

On the other hand, we receive the fine of whatever we have paid in double and that goes in other income in SG&A. And third, we have a change in interchange fee recognition criteria aligned with other players in the industry. So as of fourth quarter ’22 interchange fee is recognized upon transaction. So it talks directly to the TPV that we release. Looking at this year 2023, we expect gross margin to remain stable relative to ’22 and 2021 on an annual basis, despite volatility between quarters. It’s always good to remind that between quarters, we can have volatility as we had last year. Moving to expenses. When analyzing SG&A expenses, we prefer to exclude revenue from incentives from Tesouro Direto, B3, and others, within Other Operating Income, you have that in our financial statements.

Because despite being a recurring line, its magnitude is volatile by nature. As a reference this line was 200 — a positive number 285 million in 2022, a positive 366 million in 2021 and 353 million in 2020. So when you look at the last three years, we always had a positive reduction in SG&A coming from revenues that are not recognizing the top-line, but inside operating income in SG&A. So we are going to have something in 2023, I have no doubt about it. The magnitude of it is hard to forecast. So that’s why when we look at expenses, we exclude these revenue, and then the SG&A is higher. So SG&A expenses, excluding the incentives, grew 18% in 2022, reaching the R$5.6 billion. People expenses, as I said, represents 70% of total, while Non-People 30%.

And as previously mentioned, for 2023 expenses, we are estimating a range of 5 billion to 5.5 billion. What’s going to drive this range? It’s mostly the revenue growth and the performance of the business. So for instance, if we think that 2023 is going to be more of the same and like 2022 and our revenue would grow the same thing, the 10%, for example, we would be in terms of SG&A at the bottom R$5 billion. To get to the top, our revenues should grow at high-double-digits. So that’s why we have this range because there is a component of our SG&A based on performance, which is the bonus that can vary depending on the results. In fourth quarter, looking at the right. SG&A was flat relative to fourth quarter ’21. And on an annualized basis, it was 5.5 billion already within the guidance range.

So over the next quarters, we expect further reductions in SG&A. Net income. Net income is basically a result of everything that I’ve just said. So 2022 net income, flat year-over-year, 3.6 billion with a slightly higher earnings per share growth due to the buyback program that we’ve been fulfilling. So during 2022, we have bought back R$1.8 billion of which R$1.3 billion only in the fourth quarter. On the quarter, our net income was 783 million, which fell 21% year-over-year and 24% quarter-over-quarter due to the impacts that I already explained in the previous is life. Revenue outlook and the gross margin compressions what explains this drop. Factoring in our expectations for the business and the SG&A guidance, we estimate 2023 net income to be between 3.8 billion and 4.4 billion.

Usually, we do not give that kind of estimation on an annual basis. But we understand that in such macro environment, and being harder for many investors to understand the impact in our company and in our business, it would be important to give this kind of guidance for the year. So you can follow in the next quarters to come. And finally, before we go to the Q&A, just wrapping up the main messages here. Expenses, already talked a lot about it. So leaner cost structure, that’s the main priority. And that transformation will allow us to expand margin on a sustainable way. Number two, cross-sell, we already talked a lot about it. We have businesses with exponential growth. Number three, we keep evolving our strategic roadmap and our business keeps getting better the way we look at it, especially when we compare to previous cycles.

And number four, about the 2023 expectations are the guidance, net income between 3.8 billion and 4.4 billion. SG&A exclude incentives between 5 billion to 5.5 billion. With that, I think we should go to Q&A now Andre.

A – Andre Martins: Okay, Bruno. Thank you. So, again, we have a lot of analysts on the line here. So I’ll ask you to be patient. We will go one by one, answering the questions. First one, Rosman, Eduardo Rosman from BTG.

Eduardo Rosman: Hi, Andre. Hi, Bruno. I have two questions. The first one is more related to the short-term. And the second one more related to the long-term. Do you prefer me to do the — both at the same time or do you prefer — so let me just do the both of them. So the first the short-term, you gave the guidance, which was great, thanks. I think it helps. And that guidance implies earnings growth, right, year-on-year. I think it has to do a lot with your cost control, right? But how do you think that will evolve throughout the year, right? Because my sense here is that first quarter is likely to be pretty weak, right? So this year, we know it’s very bad after the Americanas situation. January is bad. You don’t have the let’s say the incentives.

Costs as I know, usually, you have some upfront costs and then you benefit throughout the year. So it’s fair to assume that first quarter very likely is going to be the weakest of the year, and then we’re going to be recovering over time? So that’s the first one. And the second one I think is related to — it’s more about the long-term, right? We know that the short term stuff, so let’s try to think about the long-term here. Which I think it’s an important theme, which is the partnership model, right? If you can, maybe talk a little bit more about the model, how it’s working today? We know that you had a model in the past, which was at the controlling group, all the partners were there. And that worked pretty well during let’s say, many years.

But you had to change, right? You had to change that, because you’ve now bought big stake different times, changed that a few times or a couple, I don’t know. And I assume there’s a chance to change again. So how crucial you think it’s this partnership model, if you have anything to add towards? Because we think here is something very important.

Bruno Constantino: Perfect, Rosman. I mean, the first question about how we’re going to evolve over 2023 with the guidance. You’re 100% correct. First quarter, should be the weakest quarter in 2023. The Americanas event, that you mentioned, has a secondary effect in capital market activity. We know that DCM activity has been like frozen, especially in the distribution part where XP acts as the key role there. So yes, first quarter, it continues to be a tough quarter. We do have the expense reduction that is 100% under our control, as I mentioned. So we do expect when we look at SG&A to show already a reduction, considering the guidance that we gave. You also are correct, when you say that in the first quarter, we had the benefit of the SG&A because of the incentives and we are not going to have that in the first quarter.

That’s correct. But as our guidance goes to SG&A ex incentives, it doesn’t matter that much. But yes, we are going to see evolution of the SG&A in the first quarter, okay? And then we expect to keep evolving that throughout the whole year. Going to the partnership and the more long-term question. You already gave some of the answer when you mentioned what happened with Itau. We liked a lot the model that we had in the past with XP Controle. We had to change that model after the IPO exactly because of Itau, they went to super voting rights, super voting rights should be for the controlling shareholders, but it was their agreement. We had to accommodate that. And we didn’t have, I would say space to keep the same model that we had as non-listed company.

Then we started with the restricted stock here and it’s with a different vesting period. In the middle of the way we improved the model that we had learning from feedbacks and from experience as a newly listed company. And we are always thinking about improvements in our partnership model. That I can assure you, because that’s the heart of our business and we take that as a main priority. The model that we had in the past, not directly related to share price fluctuations. For example, take the model of return on equity model where you buy and sell based on return on equity, we think it’s a very good model, because it aligns you in terms of the return of the company, in terms of cost reductions for example. And you are not directly exposed to market fluctuations, but more about the fundamentals of the business.

We like that very much. We don’t have anything to announce right now but what I can tell you is that we are always open and thinking about ways to improve our partnership model. The restricted stock units are working, are working just fine. Can it be improved? We think yes.

Q&A Session

Eduardo Rosman: Great, crystal clear. But do you think that when you have — if you do any changes, or anything on that front, I think it will be great.

Bruno Constantino: No, we will announce. That’s for sure. Because as I said Rosman we think it’s a priority in terms of, it’s a very important topic for the company. No question about it.

Andre Martins: Okay. Our next question is from Mario Pierry. Just a couple of seconds.

Bruno Constantino: We have some delay. We are trying. You should announce that Andre. We are trying to a new model where we can see the analysts, whoever is asking the questions. So we might have a delay.

Mario Pierry: Hi, guys. Thanks for taking my question. Two questions. In the last quarter, I think you had changed your guidance to be on earnings before tax because of the volatility in the tax rate. So I was wondering what kind of effective tax rate are you assuming on your guidance for the net income that you gave? And then the second question is related to your expense reductions, right? You’re talking about you reduced your headcount by 5.5% from December to January. I was wondering if you have any other plans, like in order to get to the bottom of your guidance, right, so 11% reduction in SG&A. So in order for you to get to the 11%, does it mean further headcount reductions or does it mean cost savings in other areas? And what kind of impact this could have on the growth of some of your other businesses?

Bruno Constantino: Perfect, Mario, good to see you. Regarding the income tax rate, you’re right. We gave the earnings before tax margin guidance. And we know that the accounting income tax rate is tricky depending on the mix of revenue. But that’s exactly why we have this I would say wider range in terms of the net income from 3.8 billion to 4.4 billion. We have many different assumptions here. So I cannot give you a specific what we use to give this guidance, because it depends from the range. What I can tell you is we’re confident that we can deliver the bottom of the range. And one simple math here to help you out is the following. Imagine that we are in 2022, the whole year, so R$14 billion revenue, R$3.6 billion of net income.

We would have instead of 5.6, R$5 billion of SG&A, right, R$600 million of reduction in expenses would mean more than R$300 million additional to net income. So with that, we would be able to reach the bottom of the guidance. Of course, as I answered the previous question, the year started in a very tough way, because of what happened with Americanas and its capital markets activity and so on. But we do not expect the market to stay, I would say dysfunctional throughout the whole year. So capital market activity should resume at some point, the companies need to roll over their debt. We have several investments in fixed income that mature around this year. So all of that factored in is what gave us the confidence with that. So I don’t have a specific income tax rates to give you.

Your second question about the headcount. You mentioned the 5.5, the 5.5 reduction is only comparing January to December. But what I would — I would say two things here. Number one, yes, you can expect further reductions, that’s going to be — the efficient theme is going to be constant throughout the whole year. But most important than paying attention to headcount is to pay attention to SG&A, right? Because we can have, for example, in third quarter last year, just to give you an example, third quarter last year, our headcount growth went up. We had a growth in headcount compared to the second quarter. But we had a lot of interns and young developers that we had a partnership with that we bring — brought in the company. And that’s a different structure of layer.

So, the transformation, the benefit of the transformation ongoing is exactly to have less span in layers, to have merge of leadership, to simplify. And that’s how the reduction in SG&A will come, headcount decrease. It’s happening, but I would pay attention to the reals, to the expense itself. It’s more relevant than the number of headcount, that’s what I’m trying to say.

Mario Pierry: Okay. And the impact that this headcount reductions could have on revenue growth?

Bruno Constantino : Sorry, I didn’t I didn’t answer that. None. And that’s what I tried to explain throughout the presentation. It’s the benefits of the transformation. Whenever you have a transformation, it’s natural to have a J curve, because you’re going to be working with more than you need. But it’s important, so you do not let anything fall off the table. And we accelerated that. That process intensified when Maffra assumed as our CEO, and last year, the second semester, mostly in the fourth quarter, we accelerated a lot. So, the way XP now is organized through business units, it gives us more agility, and efficiency in terms of the teams working together, and that’s the big benefit. So we are not postponing any deliverable in terms of products or, we are not jeopardizing experience for our clients as I mentioned, nothing like that. So, we’re not dropping anything.

Mario Pierry: This is all related, like, on the SG&A guidance that you gave, are you including any severance charges associated with these layoffs?

Bruno Constantino: Yes, we are.

Mario Pierry: So, there’s not going to be additional?

Bruno Constantino: No, it’s not additional. We are including because — you’re correct, we have several layoffs. So everything — it’s going to be in the first quarter. So basically, most of it.

Mario Pierry: And then when you talked about, like the SG&A falling from 5.6 billion to 5 billion, the 600 million delta, and you said it’ll be 300 million to the bottom line. But we know that your effective tax rate has been close to zero?

Bruno Constantino: No, it depends. Yes, but, depends on where — I’m using, I would say a conservative approach in terms of where we are reducing the costs. But yes, that’s just a conservative approach. The tax rate is — it’s the accounting one is trickier than the one that we release when we have the equivalent. Because remember that we do pay more tax than what is shown in our accounting because we have parts of our business where we do not recognize the full revenue. We recognize the revenue already net of tax. That’s what happens, but we pay the taxes.

Andre Martins: Okay, I’m bringing Geoff in from Autonomous Research.

Geoff Elliott: First, just a very quick clarification, the net income guide, is that on an adjusted basis or a GAAP basis?

Bruno Constantino: No, it’s — Geoff, it’s on accounting basis, not adjusted. It’s the gap, net income gap. We still release the adjusted net income but we have withdrawn the adjusted net margin guidance, as we look at it, including the share based compensation, despite a noncash expense, we consider an expense. So, we — that in the last quarter.

Geoff Elliott: And then in terms of the pressure that you saw in the retail business, and specifically in equities, how much of that is simply less activity and how much of that is product mix, kind of people trading cash equities versus — and derivative products and things like that. What’s driving the pressure there?

Bruno Constantino: I would say activity, especially — in the full year, it’s — we have equity part, clients migrating out of equity into more fixed income products because of interest rates. But on a quarterly basis in the fourth quarter activity, not for the brokerage business, the trading part. But for example, you mentioned structured notes. Structured notes, I believe the industry fell like 20% to 25% quarter-over-quarter. So there was less activity. So, that’s basically what I would say in terms of the equity drop in the fourth quarter. The base is low now, Geoff, because we’ve been in that train for a while.

Andre Martins: Okay. Next in line Domingos from JP Morgan.

Domingos Falavina: Two, I think more simple questions in here. First one is you mentioned you’re now recognizing interchange at the moment of TPV. My question is, how did you recognize prior to that? Because it’s the only way I could think of recognizing this. And it wasn’t much of an impact. The second one is everybody had one-off impacts on many — big suspicions, I guess, go towards the Americanas. But in any case, everybody had some sort of loss. I’m just curious, if you had any one-off impact in your income statement?

Bruno Constantino: Okay. Now, regarding the interchange, Dom, was basically — the installments we recognize, basically on a cash basis. And the installment not paid, we didn’t recognize and we adjusted that in the fourth quarter. So that’s why we say, it’s related to the TPV. Our recognition was below what actually was the TPV. That’s what we change. Regarding one-off, I mean, we decided to not adjust anything for one-off, right? Because we always operate in business, you have one-offs every single quarter or every single day. So, if we would adjust anything for what we believe to be one-off, it would be a mess. The Americanas event, I believe can be like one-off because it was a like a very singular event. We didn’t have any impact.

Like the banks in the credit book because our credit book of R$17 billion at the end of last year, zero exposure to Americanas, 90% of that credit book is collateralized. So we are in a different situation here. But we do have market making book in fixed income, that of course the branches and bonds of Americanas were traded. And we had an exposure that, but we could not recognize in the fourth quarter because it was not a credit that you can have NPL there and recognize. It was recognized in January this year with the market to market proceeds of the tradable parts of the book. And to give you the impact, because that’s going to — it’s going to be I believe — it’s fair to consider a one-off . It’s going to impact the first quarter, and the amount is close to 125 total — 100%, R$125 million in the bottom line.

Domingos Falavina: Are you clear of this risk? Is it fully done?

Bruno Constantino: Yes, basically. Yes. We don’t have our market making activity. We don’t have big exposures to one single name. So, it’s basically a function of what the clients buy and sell. And we do have many different names. Americanas unfortunately was one of them. It’s 100% recognized in January, you’re going to see that in the first water, but — that’s it.

Andre Martins: Okay. Next Neha from HSBC.

Bruno Constantino: Hi Neha, I think you are on mute, if you can hear us.

Andre Martins: So let’s try. We can come back to Neha. I’m bringing Tito from Goldman Sachs.

Tito Labarta: Thanks for the call. Thanks for the guidance and color. That’s helpful. Maybe just on the revenues. You had you mentioned challenging quarter. 1Q is going to be a bit challenging. Help us think about sort of the long-term growth potential on the revenue side. One, what do you think needs to happen? Is it just a better macro environment, interest rates coming down? And I know there’s a lot of moving parts in there but just to try to think about that. And yes, I’ll go back a little bit. Yes, at the end of 2021, your Investor Day, got it, R$10 billion in revenues from new verticals. That will be 25% of revenues, like $40 billion in 2025, which is only two years away. So I mean, I think we can reset those expectations, I imagine. But just help us think about revenue growth from here, downside risks and upside risks as much as you can will be helpful.

Bruno Constantino: Yes. Sure. I think that — I will separate my answer here in two parts, Tito. Let’s look at these tough environment for investments with high interest rates and assume we’re going to be in this environment for longer, right? If that is the case, the equity part of the business is going to continue to suffer from the macro environment. What do we have as an ecosystem, two positive things that will benefit from it, no matter what. Number one, I already talked about the new verticals. So, if you look at R$1.3 billion, 50% to 60% of growth this year, we are confident that we can deliver that. And it’s not correlated with investments. We’re talking about R$700 million to R$800 million of additional revenue this year.

Number two, when I think about the funds platform, and we have the largest funds platform, open funds platform in the market, and I think about the fixed income business, both of them, they should grow, what, at Selic rate, which is 13.75%. So, we’re talking about mid double digits here. It’s important to have that in mind. The client assets, because of the shift that we already had, in terms of movement, the fourth quarter, it was the first quarter where fixed income client assets was greater than equities in our breakdown. So, what I’m trying to say here is the impact can continue to happen. Yes, but a lot has been done already. In the fixed income part and the funds platform should grow at Selic rate. So that component also will help revenue growth.

When I think about a longer term perspective, for revenue to really play this operating average and exponential growth, again, we would need the market upturn again. So, the reverse of the tightening cycle. We don’t need anything close to what we had in the last financial deepening process in Brazil of interest rates at 2%, not at all. actually it’s not even good for XP, when we are at 2%. It’s not sustainable. So I think that low €“ high I mean, single-digits, lower than double-digits interest rates is more than enough. It’s a psychological effect, if you have 9% is one thing; if you have 10% is another thing. So, this is important. And we believe that we’re going to get there. We don’t know when. It depends on macro policy, but we believe we’re going to be cyclical.

So, when that happens, what I — the point I tried to make during the presentation is, look, our business still has a very strong operating leverage. And we are growing and we are expanding not only the sales force, but we are complementing the services and products that we can offer to our clients through our ecosystem. So, our ecosystem is not only becoming more resilient, but bigger. When we have the reverse of the cycle and with these transformation and we adjust in the cost structure with a much leaner cost structure, these operating leverage that our business still have it’s going to play an important role. I don’t know when it’s going to happen, but it will at some point in time. That’s what I’m saying. So the growth of revenue, that’s how I would put it.

Selic rate for funds platform and fixed income part; float, same thing, and new verticals growing exponentially. The equity parts already in a very low base, should stay like that if the scenario is a conservative one in terms of higher interest rates for longer.

Tito Labarta: One follow-up, if I may. I guess just on why you’re confident that the cost cutting won’t impact the revenues, and particularly some headcount reductions? I mean, do you think you over hired? Will you — when the cycle comes back, will you need to hire again? And is there no impact on that?

Bruno Constantino: No, we over hired. I think we over hired, right? That’s one part of the explanation. We — again, when I look at what happened in — we doubled our net income in three consecutive years, and we were doing too much too fast at the same time. So, it’s really hard to stop the train. And we did that in a pandemic. So we started — in ’20, we hired 1,200 employees in 2020, in the pandemic, 2,500 in 2021, working from home. So, of course, it’s hard to manage that. And of course, we have over hired. I have no doubt it. So that’s one part of the explanation. But I think the most important than that, because that’s easy to correct now and it’s done already. But the other part of the cost reduction, in my view is more important is the transformation, because it gives us a structural competitive advantage in terms of the way we are organized and our agility.

So, we are not lacking anything — we are not giving up anything. We have already invested. So, we have the bank working the digital accounts, we have our insurance company working, we have our international accounts working, we have X stage working, we have the corporate business working and we have our internal advisors already hired. Now it’s time to consolidate everything that we have done. And through the transformation, we have done leaner cost structure. So, it’s not about letting anything go. It’s about not doing anything new, but on the other hand, consolidating and taking the opportunity of the cross sell of everything we have done.

Andre Martins: I’m bringing Marcelo from Credit Suisse.

Marcelo Telles: I have two questions. I think the first one is more strategic question. I mean, we’ve seen XP having a very successful business model. In previous years, there was certainly a very strong growth in a scenario where interest rates were abnormally low and where I think the XP had indeed a winning value proposition for the customer, especially vis-à-vis what was being offered by the banks at the time. So there’s a lot of growth. Now, the relationship with the IFAs was easy. The relationship with internal stakeholders was probably easier. When there’s more money, it’s always easier, in that respect. But now, we are in an environment where interest rates are double digit, we can argue whether they’re going to be 14, 15, or 10, but they’re definitely not going back the 2% they had before.

And you have an environment where the IFAs made up them are struggling in this environment, and in an environment where you may not have that same winning value proposition that you had before, because now I mean, banks are fighting back. They have products that you don’t have. As you mentioned earlier, some investors are looking for low risk, type of instruments with — which at times puts the large banks in that advantage, and now you have a large bank — large banks also willing to replicate a bit your model of having offices throughout different countries, and trying to bring that entrepreneur spirit to them, something that you guys did very well over the years. And when I hear your — you talk a lot about now it’s — let’s reduce costs, which I think it’s something that you have to do for sure in that environment, adequate to a new level of revenues.

But you talk a lot about the internal transformation of the XP, and the need to reduce costs, which I agree, I think that’s important. But I think what worries me is that I didn’t hear much about if there’s a need for change in strategy from XP in terms of this new environment. So, how are you going to approach your relationship with IFA? There seems to be — from what we see, we talk, there’s a lot more tradition today with the IFAs and that before we see a consolidation. Now within the IFAs that their bargaining power only increases over time and when things get harder, this model — needs to attach themselves to a bigger effect. That ends up — create a attrition in relationship or maybe forcing XP to have — spend more money to retain them either through the key money or buying direct stake.

So, what is the strategy of XP? That’s my question. Is there any broader strategy in that respect? And one question attached to that is how — do you think about this conflict of interest that exists between the IFAs and the clients, the model that was a winning model back then. Nowadays, you can — it creates a lot of conflicts today, sometimes it’s not in the best interest of the client. So, what is XP thinking strategically to address those issues? Thank you.

Bruno Constantino: You made a lot of questions and assumptions there. I will try to address the concept, and please let me know if I do it. I don’t — I think there is a narrative there that I don’t necessarily agree with that. I think it’s simpler than that. XP is evolving in the business, in the investment business. It’s not that — of course, there is competition and so on but that’s not the point. The point is a very tough macro environment that makes the investment business to suffer because as I said, people — there is a higher inertia in moving money when you have very high interest rates, and then your money just invested in fixed income is more than fine. So when you look at the KPIs that I mentioned, the main KPIs for the investment business, we advanced last year, with all of that, competition, with interest rates going from less than 10% to 13.75%.

We added 2,000 new IFAs. We added net inflows of R$155 billion, and we added new clients — 406,000 new clients. If you look at our market share, in 2000 — in the investment the way we see it, in the investment business in 2019, 7.3%; in 2020, 8.6%; in 2021 10.1%; November, the last data that we have last year, 11%. We are gaining market share, the pace of it is reducing, because of high interest rates, it’s not because of competition. I’m confident that whenever the cycle changes, XP is going to be the main destiny from clients to come here because we have sales force trained in a different way to serve clients in terms of investments, or not other reason, we’ve been elected in four consecutive years as the top of mind platform for investments in Brazil.

So, I think it has to do much more with the macro environment than structural thing. I don’t think there is, honestly, and we keep evolving. So, the attritions that you mentioned about the IFAs, I don’t know what attrition you’re talking about. IFA, we have more than 12,000 IFAs in our network. In the past, we used to have less than 1,000. We communicate with all of them on a daily basis. And if I wouldn’t show you all the complaints, we would stay here for the whole month. And we like that, because that’s exactly what makes us better to listen and to serve. And that’s how we’re going to get better. And that’s what XP has been doing for more than 20 years. So, the conflict that you mentioned, we always tell the IFAs and internal advisors, look, we have to do the best for the client.

Period. If you don’t do that — and of course, you have to make money and the client needs to understand that. But it has to be a win, win situation. If you don’t do that, you’re not going to be a successful entrepreneur. Period. So our IFAs, they have a very high score in terms of NPS. So honestly, I mean — and our strategy, at least for me, it’s pretty clear. It’s go beyond investments to be dominant in investments, because we are not yet. And we have a very, I would say, interesting asset, which is our client base. Our client base of 4 million clients, it’s a client that has money to invest. And that’s really good. We need to focus on those clients, serve them better and to go beyond the investment means that, as I said, they have already trusted us with the part of their life that it’s one of the most important, their savings.

We need to take very good care of it, serve them well, and then convince them to try other products, other things. And that’s exactly what’s going to expand our addressable market, increase the moat of our ecosystem, and the LTV of our clients. And then we can bring a win-win situation, again, with that client throughout the period. So, I don’t think there is something here in terms of this strategy that needs to change, honestly.

Marcelo Telles: If you allow me just to go one, my second question. The cash flow, I saw — I couldn’t find the managerial cash flow statement in your press release. I don’t know the reason why it wasn’t there. But, I just don’t understand, I saw there was a reduction in the net assets of about R$459 million quarter-over-quarter, because you guys didn’t publish the cash flow statement. I don’t know if that was because of share buyback, or payments to our face. So if you could explain to us what drove that cash burn, that would be great. Thank you.

Bruno Constantino: The share buyback, you brought an important point that I didn’t mention. We have bought throughout the year R$1.8 billion in share buyback approximately. We have now in treasury more than 3.5% I guess from total capital nowadays. But most of it was in the fourth quarter, because remember that in the fourth quarter, on top of the share buyback program, we had the Itaúsa block that was more than R$550 million, something like that. So in the fourth quarter, we have bought R$1.3 billion approximately in total. And that’s probably what you saw there. But we can go into details later, because I don’t have any in front of me. But that’s probably the share buyback program. That continues, so we have been — January, it ends in May.

Marcelo Telles: Did you pay anything to IFAs in this quarter?

Bruno Constantino: This quarter, it’s going to minor.

Andre Martins: Similar base of recent quarters.

Bruno Constantino: Remember Telles that we have — with all the long term agreements that we have done with the IFAs. We have some variable components of it linked to performance. So if achieves, we pay; if doesn’t, we don’t. And then, depending — it’s a case by case.

Marcelo Telles: Thank you. I appreciate your time.

Bruno Constantino: Thank you, Telles.

Andre Martins: Last one in line Thiago Batista from UBS.

Bruno Constantino: Hi, Thiago. We cannot hear you. I don’t know — you doesn’t seem on mute now. Yes, now perfect.

Thiago Batista: Okay. Sorry, guys. Hi Bruno, Hi Andre. So I have two questions. One, actually a follow-up. The follow-up about the guidance only to ensure. The implied top line growth of the guidance in my collection is a low single digit. It is the case so the top line should expand into the three single digits. The second one about the impact of the higher interest rates in your working capital. So, I believe we have not seen yet the full impact of the working — of the highest — rate in your working capital, if it’s possible to see this line expanding into inventory?

Bruno Constantino: The top line, the next time we should give the P&L because you do the backwards calculation to get to the top line. Okay. Look, the guidance that we gave we are not giving top line guidance. But to your point can we achieve the net income guidance with high single digit or high single digit or low double digit revenue growth, yes, we believe we can. So it’s an approach that we factor in especially considering that the first quarter it’s probably going to be tough considering the Americans event and what happened with capital markets. We were conservative in the assumptions to bring this guidance, but it’s not a top line guidance. And regarding the tax, we do have that in the cash flow working capital variation here. But I don’t know exactly what you’re missing there, Thiago.

Thiago Batista: Now, the other point is the highest take rate tend to have a positive impact in your working capital after a while. If not wrong, you guys are investing part of the working capital in kind of fixed income securities. So probably we’ll see higher impact of these in ’23 onwards?

Bruno Constantino: From the increase in tax?

Thiago Batista: Not tax, your

Andre Martins: Thiago is referring to interest on gross cash and interest on equity for example, like

Thiago Batista: Yes.

Bruno Constantino: Okay, the working capital, okay. Now I got it. Yes, it’s going to be higher. You’re right.

Thiago Batista: Okay. Do you have the magnitude of this increase?

Bruno Constantino: Of interest on gross cash?

Thiago Batista: Yes. If I’m not wrong, you guys invest part of this working capital in fixed income securities, so.

Bruno Constantino: In a lot of different securities, but yes, fixed income.

Thiago Batista: The deposit — we have not seen yet the full impact of the highest take rate in your working capital. It’s true to say that?

Bruno Constantino: I don’t know if you’re talking about the other revenue — you’re talking about the other revenue. Now, I understood. Yes, because we also have of the hedge — of the floating, the network that we have offshore, and the corporate FTP that goes into other revenue as a reduction in some part. So we do have that benefit. But we also have, I would say, negative numbers that when you add it to gather, probably, is what explains a lower number than you expected. That’s what I’m guessing here, but we can we can go offline later too. So I can understand exactly what your math or calculation is. And we can help you with that for sure.

Andre Martins: Okay. Thiago was the last one. Thank you, everyone, for your participation. Hope to see you all soon and touch bases. Bruno, any final remarks or goodbyes?

Bruno Constantino: Just thank you for being here with us in one more call. And that’s all. Thank you.

Andre Martins: Bye all. Thank you.

Bruno Constantino: Bye, bye.