PagSeguro Digital : 1Q23 Speech Transcript

Earnings Call Transcript

1Q23

May 25, 2023

Earnings Call Transcript | 1Q23 Results

Operator: Good evening! My name is Nihuge, and I will be your conference operator today. Welcome to PagBank webcast results for the first quarter 2023. At this time, all lines have been placed on mute to prevent any background noise. Should any participant need assistance during the call please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through PagBank website at investors.pagseguro.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Eric Oliveira, Head of IR, ESG and Market Intelligence. Please, go ahead.

Eric Oliveira: Hello everyone. Thanks for joining our first quarter 2023 earnings call. After the speakers' remarks, there will be a question-and-answer session.

Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank's current assumptions, expectations, and projections about future events. While PagBank believes that the assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagBank's presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagBank's most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank's investor relations website.

Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from, or as a substitute for, our financial information prepared and presented in accordance with IFRS as issued by the IASB. For more details, the foregoing non-GAAP measures, and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures, are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.

Ricardo Dutra: Good evening from São Paulo, everyone, and thanks for joining our first quarter 2023 results webcast. Tonight, I have the company of Alexandre Magnani, our CEO, Artur Schunck, our CFO, and Eric Oliveira, Head of Investor Relations and ESG.

Before Alexandre and Artur share the main highlights for the quarter, I would like to share some achievements during the first months of 2023 and the main drivers for profits and cash flow generation, balanced with quality growth for the coming quarters.

Slide 03:Going to slide 3, on the left side, we are happy to announce the convergence of our brands PagBank and PagSeguro into one single brand: PagBank, the complete bank. We are excited about the next steps of our journey, having a unique two-sided ecosystem combining payments and financial services in one single app, one single ibanking and one customer care. For us, PagBank brand represents our offering beyond Payments.

We are also happy to announce that PAGS has joined FTSE Russell preview list, which can impact positively our average daily volumes, increase exposure to passive funds and further improve PAGS shares awareness.

Another milestone was the brokerage license granted by CVM, the Brazilian Securities Exchange Commission, an important step that enable us to provide a complete set of investment products, through our proprietary and integrated platform.

On the right side of the slide, we highlight our main drivers for 2023 financials: Our drivers for profitability during this year are solid and we keep committed to deliver lower losses, keep ou OpEx discipline and further improve our structural competitive advantage by having deposits as a main source of funding and at a lower cost when compared to peers. In terms of drivers for cash flow generation, we are focused on improving our cash earnings and looking for CapEx efficiencies with go-to- market strategy and software development optimization. Finally, in our drivers for quality growth, we will keep fostering PagBank, secured credit portfolio products and growing volumes in key segments. We also reaffirm our commitment to create a superior value proposition for our clients based on a transparent integration between our Payments and Financial Services platform. Now, I will pass the word to Alexandre. Thank you.

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Alexandre Magnani: Thank you, Ricardo! Hello, everyone.

Slide 04:After Dutra initial remarks, I would like to present how the growth, profits and cash generation drivers behave during the first quarter of 2023.

PagBank clients reached 28.7 million, accounting for more than 200 billion reais in transactions processed by us, driven by the strong customer engagement which is a consequence of our superior product value proposition. Our EBITDA reached almost 800 million reais and our Net Income close to 400 million reais, with Q1-23 earnings per share of 1.13 reais.

Our discipline in capital allocation has been driving up cash earnings momentum. Our cash earnings accounted for 379 million reais vs. a cash burn of 17 million reais in Q1-22, reaching 10 billion reais in Net Cash Balance, while our Capital Expenditures marked a decrease of -40%year-over-year.

In our Financial Services division, the main highlight was the breakeven point reached, with EBITDA close to 70 million reais, led by Total Banking Volume growth and better spreads since Deposits reached 18.6 billion with annual percentage yield of 94% of the Brazilian interbank rate.

In Payments division, our TPV grew 10%, with our key segments, micro-merchants and SMBs growing 50% faster than the industry growth, accounting for 16% year-over-year, with 1.2 billion reais in Gross Profit.

Slide 05:In slide 5, we are happy to announce the unification of PagBank and PagSeguro brands under PagBank only. Following our strategy to reinforce our one-stop-shop solution under the PagBank brand, we expect to have a broader reach among merchants and consumers, to simplify our communication strategy and client understanding and increase client awareness about our services beyond Payments.

Slide 06:Moving to slide 6, we present our client base and cash-in evolution.Our number of PagBank clients almost doubled in comparison to 2021, moving up from 15 million to 28.7 million in two years. Active clients accounted for more than 16 million, where 62% of consumers and 50% of merchants considers PagBank their primary account. Our growth in cash-in reached 45 billion reais vs. Q1 2022, led by Total Payment Volume from Merchant Acquiring and strong growth of PIX inflow transactions.

Slide 07:As a result, slide 7 reveals a deposits growth of 66% on a year over year basis with nominal growth of R$ 7.4 billion, reaching a total level of 18.6 billion reais on the 1Q23. Also, the respective annual percentage yields on deposits have decreased to 94% of the Brazilian interbank rate due to lower dependence on third party platforms distribution and improvement in cash flow generation.

Account balance APY in 1Q23 reached 73% of the CDI, an increase in comparison to the previous quarter, which was mainly related to a higher number of days our clients kept their savings in PagBank, reflecting our successful engagement strategy in SMBs and consumers with higher income.

Slide 08:Talking about our credit portfolio, we kept our strategy of reducing credit underwriting for unsecured products while leveraging secured products origination. In comparison to 1Q22, we were able to reach 2.7 billion reais in outstanding credit portfolio, where secured products increased its share from 11% in 1Q22 to 44% in 1Q23. The diversification of our credit portfolio has played a pivotal role in our overall business strategy. It has not only expanded our market reach but has also had a positive impact on our risk management practices. This strategic approach has resulted in a significant reduction in the provision for losses, effectively lowering our exposure to high-risk clients.

Furthermore, we would also like to report a substantial improvement in our credit portfolio performance. The Non- Performing Loans (NPL) above 90 days for our outstanding credit portfolio has significantly decreased to 17.9% compared to the high level of 22.4% in 1Q22. This reduction reflects our diligent efforts in managing credit risk assessment and enhancing asset quality.

The successful diversification of our credit portfolio allows us to maintain a cautious yet proactive approach, balancing prudent risk management with the potential for long-term growth. By reducing our exposure to high-risk clients, we have enhanced the overall stability of our credit operations while optimizing our risk-return profile.

These achievements underscore our commitment to prudent lending practices, rigorous risk management, long-term stability, and profitability of our credit operations. As we navigate uncertainties, we remain focused on maintaining a robust risk management framework and driving sustainable growth in the future.

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Slide 09:Before I turn over to Artur, I would like to give you more color on the growth of the Payments business on

slide 9.

As shown before, our TPV has grown 10% compared to 1Q22. Our revenue growth can be attributed to a combination of factors. Diving into the specifics, our MSMB have experienced a +16% growth during the quarter. When we exclude nano merchants, which are merchants with less than R$ 1.000 monthly TPV, this growth was 17% comparing to 1Q22. When we compare total active merchants base, we had a reduction of 10% comparing Q1-23 vs Q1-22. When we exclude nano merchants, we notice a 3% growth on the active base. These figures are a direct result of our focused efforts to address MSMBs needs, prioritizing the merchants with higher average TPV within the segment, which demonstrates the effectiveness of our strategy to allocate our efforts into growing on MSMB and overall TPV. Therefore, we remain confident in our decision to prioritize categories with higher profitability potential.

Now I'll pass the word to Artur, to present our financial results.

Artur Schunck: Thanks, Alexandre! Hello everyone and thank you for joining us tonight. As we usually do, I want to share the financial highlights for the quarter.

Slide 10:Once again, PAGS presented another set of records for a first quarter in company's history: TPV, Gross Profit, Net Income and Cash Earnings marked all-time high figures. Adjusted EBITDA grew 18% year-over-year despite revenues growth of 9% versus Q1-22, revealing that our earnings power and cash generation that is a result of our strategy of balancing growth and profitability.

From Q1-23 onwards, we will change the managerial methodology to allocate float between Payments and PagBank, now on called Financial Services vertical. 100% of the float will be booked in financial services vertical, similar to other financial institutions. There is no change in revenues for Payments vertical, but an increase in financial expenses, since the share of such expenses offset by the float usually booked in Payments vertical will no longer occur. Consequently, gross profit and Adjusted EBITDA will decrease. On the other hand, revenues for Financial Services vertical will increase since the float will lead to a higher interest income. Consequently, gross profit and Adjusted EBITDA will increase. Important to say: there is no change in PAGS consolidated basis. And for comparison reasons, we provide in the appendix the four quarters of 2022 using the same metric applied to 1Q23 to equalize our historical results by vertical.

Financial Services vertical achieved a positive Adjusted EBITDA of R$69 million reais this quarter. Even considering the old managerial float accounting, the result closed Q1-23 in the positive side as a result of better performance of the credit portfolio with secured products that demand lower level of delinquency provisions.

Net Income Non-GAAP achieved 392 million reais and Net Income GAAP increased +6% year-over-year, totaling 370 million reais. This represents an earnings per share of 1 real and 13 cents in the quarter, 8 cents or 8% better than Q1-22. In March and April, we repurchased 2.5 million shares under our buyback program. Our strategy and focus continue to better balance growth and profitability, targeting to improve shareholders' return.

Slide 11:On slide 11, revenues for Payments vertical grew +10% year-over-year, due to the positive result from the massive merchant's repricing done in 2022. As a result, Gross Profit reached 1.2 billion reais, an increase of 2% when compared to the same period of last year, with Financial Expenses offsetting uptrend given the higher average interest rate vs. the Q1-22.

Slide 12:In the next slide, Financial Service vertical's Total Revenues reached 331 million reais in Q1-23,-1% lower than Q1-22, due to the shift to secured products underwriting, which have lower APRs and longer duration in comparison to unsecured products.

On the other hand, Gross Profit reached 179 million reais, an increase of +274% year-over-year, mainly due to secured products portfolio, that naturally leads to lower provision for losses. Based on that, we are creating a safe and solid path to restore a better mix of credit underwriting composed by secured and unsecured products in the coming quarters, reinforcing our one stop shop value proposition and further increase PagBank principality.

Slide 13:Moving to slide 13, Financial Expenses closed at 813 million reais versus 621 million reais in Q1-22. This increase is mainly explained by the higher average interest rate in the period in comparison to Q1-22. It was partially offset by the higher share of deposits and retained earnings in the period that lowered funding spreads and led to lower financial expenses in comparison to last quarter.

Total Losses decreased -50%year-over-year. This great performance comes from lower expected credit losses of credit portfolio driven by healthier coverage ratio and credit underwriting mostly for secured products. At the same time, chargeback as a percentage of TPV decreased vs. Q4-22 and Q1-22. Important to highlight that Q4-22 reduced around 30% over Q3-22 and on this quarter reduced more 34% over Q4-22.

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Operating Expenses reached 587 million reais in Q1-23, up 5% year-over-year. This amount represents 15.7% of PAGS Revenues versus 16.4% in the same period of last year and stable when compared to last quarter. The improved efficiency has come from Personnel and Marketing expenses leverage.

This quarter, we had the one-time expense related to the headcount resizing around 12 million reais. Excluding this, Operating Expenses in nominal terms were flattish vs. Q1-22.

Slide 14:Jumping to slide 14, we present a summary about how PAGS results evolved during this quarter. Revenue growth, lower Losses and OpEx discipline more than offset the increase in Financial Expenses and Depreciation and Amortization with POS write-offs.

Slide 15:In the next slide, cash earnings continued to gain momentum, reaching a positive amount of 379 million reais, versus a negative amount of 17 million reais in Q1-22. Cash earnings represented ~10% of Revenues, reflecting company's focus on maximizing LTV to CAC ratio by balancing POS subsidies, client engagement and monetization and the dilutive process to leverage profits and cash generation.

CapEx to Revenue ratio reached 10.9% this quarter versus 19.9% in Q1-22. This decrease was mainly driven by the go-to-market optimization in POS, being more selective in merchants' acquisition to leverage PagBank and sustainable growth at the same time setting a higher bar for investments in software and engineering teams.

Depreciation and Amortization, including POS Write-off, totaled 365 million reais, representing 9.7% of PAGS Revenue, keeping the ongoing convergence of CapEx and D&A to unlock additional profitability in the coming years.

Slide 16:On slide 16, our Net Cash Balance ended the first quarter at 10 billion reais, increasing 1.7 billion reais year- over-year. At the same time, we have been improving our capital structure, and diversifying funding sources to support volume growth, with deposits now representing around 59% of our third-party funding source.

Our equity position continued to increase, with 54% being composed by retained earnings, reinforcing our commitment to shareholders about capital allocation and returns.

To conclude our presentation, I turn back to Alexandre for the final comments. Thank you.

Slide 17:Before ending our presentation, we would like to delve into a key point regarding the prepaid cards interchange fee cap impact on our business. First and foremost, it's important to recognize that PAGS ecosystem is a robust and adaptable platform that leverages our complementary businesses, namely acquiring and card issuance. This combination creates a natural hedge for the company, allowing us to mitigate risks and capitalize on opportunities in the market. By observing the impacts on the month of April and looking ahead to 2023, we anticipate that the net income will remain relatively stable, since the impacts on Net Income due to prepaid cards new interchange regulation are relatively negligible.

Slide 18:Before jumping to the Q&A session, I would like to emphasize our focus for 2023:

• Grow with profitability, combining optimization and expansion cycles;
• Consolidate PagBank penetration, customers engagement and revenue diversification;
• Develop an integrated, unique and superior value proposition under a single brand;
• Foster security in all operating levels to reduce losses and improve customer experience;
• Invest in our human resources to keep building a pleasant and highly productive work environment;

Now, we have ended our presentation, and we will open the Q&A session. Operator, please.

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