PagSeguro Digital : 4Q22 Speech Transcript

Transcript

4Q22

March 2, 2023

Operator: Good evening! My name is Nihuge, and I will be your conference operator today. Welcome to PagBank PagSeguro' webcast results for the third quarter 2022. 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 PagSeguro's 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, Investor Relations and ESG Director. Please, go ahead.

Eric Oliveira: Hi everyone. Thanks for joining our fourth quarter 2022 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 PagSeguro's current assumptions, expectations, and projections about future events. While PagBank PagSeguro 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 PagSeguro'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 PagSeguro's most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank PagSeguro'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 webcast for the fourth quarter 2022 results. Tonight, I have the company of Alexandre Magnani, our CEO, Artur Schunck, our CFO, and Eric Oliveira, Head of Investor Relations and ESG.

Before I turn to Alexandre, I would like to share a quick overview of our journey, as we completed 5 years as a public listed company last January. After that, I will share the main 2022 achievements and comment about our ESG initiatives.

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SLIDE 03: Going to slide 3, we share the 5 years key performance indicators for our company, and the 3 years key performance indicators for PagBank, our financial services and digital bank unit launched in May 2019. Our company truly experienced an exponential growth and scale over the years, including millions into the financial system, initially through payments, and then through digital bank and financial services. We have been successfully unlocking new addressable markets in payments and financial services, always balancing growth and profitability.

Starting with PagSeguro data, our TPV grew 9 times in 5 years, reaching 354 billion reais, and we have the largest payment´s network acceptance in Brazil, accounting for more than 7 million active merchants.

PagBank, our financial services and digital bank business, has been growing consistently in all important metrics, increasing engagement, unlocking cross-selling opportunities, and leveraging our banking license to reduce our cost of funding. PagBank TPV increased 19 times, with total deposits growing 10 times, surpassing more than R$ 20 billion reais. Our credit portfolio grew 7 times, reaching 2.7 billion reais, still very small compared with the opportunity we have ahead of us.

And finally, even with all investments in our organic growth and the macroeconomic challenges such as interest rate increases, inflation, and uncertainty about consumer spending, not only in Brazil but around the world, our profits grew 3 times. And our equity position increased from less than 1 billion reais in 2017 to almost 12 billion in the end of 2022. On the chart in the right of the slide, we can see that 52% of the 2022 equity figure is composed by retained earnings, fully reinvested in our organic growth.

SLIDE 04: Going to slide 4, we can see some of our 2022 achievements. We successfully implemented our repricing to offset financial expenses increase. At the same time, we had strong deposit growth, which helped to reduce our funding costs and helped to diversify our funding sources.

We also have been successfully diversifying our payments business and 2022 marked the consolidation of our HUBs initiative to extend our best-in-class services to small and mid-sized clients, and PagBank consolidated as the second largest digital bank in Brazil, with 28 million clients.

In credit underwriting, we took the right decision in Q1-2022 to shift our underwriting from unsecured products to secured products. By doing so, we were able to unlock new growth avenues such as the payroll loans and credit cards backed by CDs and account balance savings, improving our gross profit in PagBank.

Finally, our disciplined capital allocation led to a significant improvement in operating and investing cash flow generation, paving our path to further explore the opportunities in Payments and Financial services in the Brazilian territory in the coming years.

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SLIDE 05: Moving to slide 5, our natural call for disruption and value creation led us to set a high bar for deliveries in ESG. In December 2022, we released our second Sustainability report, where every stakeholder can follow our main initiatives and positive impact in society.

One point to highlight here is that our financial inclusion has been massive, through a safe a hassle-free platform, empowering clients, employees, and communities.

With that, I finish my presentation and pass the word to Alexandre Magnani.

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

SLIDE 06: After Ricardo shared our main achievements for 2022, I would like to share our highlights only for the fourth quarter, beginning in the slide 6.

Our investment philosophy to balancing growth and profitability while keeping a disciplined capital allocation led us to report (i) the highest EPS in PAGS' history, 36% higher than the same period of 2021; (ii) strong revenue growth above 20% vs. 4Q21, reaching almost 4 billion reais; (iii) cash earnings of 410 million reais, almost 4x higher than 4Q21; and (iv) 9.8 billion reais in net cash position, further boosted by our efficiencies in OpEx and CapEx.

In Payments, our strategic pillar to grow in a profitable and efficient way, while we continue to diversify our merchants' base, resulted in (i) 94 billion reais in PagSeguro TPV, with 33% coming from HUBs; and 1.3 billion in Gross Profit, 14% higher than 4Q21.

In Financial Services, we have continued diversifying our revenue streams through the consolidation of PagBank. (i) Gross Profit of 131 million reais, 70% higher than 4Q21 and 3Q22; 28 million clients accounting for 21 billion reais in Deposits; and (iii) 2.7 billion reais in credit portfolio, with increasing exposure to secured products.

Finally, our two-sidedecosystem, which is just in the early stages to fully explore synergies related to lower transaction costs and lower cost of funding through our closed loop, led to: (i) more than 200 billion reais in TPV (PagBank and PagSeguro), 10% in market share of PIX transactions; and (ii) new features to further increase our cross-selling with clients: SMB Payroll Platform and Automatic Savings from account balance.

SLIDE 07: Moving to slide 7, we present our client base and cash-inevolution.

Our number of PagBank clients more than doubled in comparison to 2020, moving up from 13 million to almost 28 million in two years. Active clients accounted for more than 16 million, where 60% of consumers and 50% of merchants considers PagBank their primary account. Our growth in cash-in reached 38 billion reais vs. Q4 2021, led by PagSeguro TPV growth and PIX transactions.

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SLIDE 08: As a result, slide 8 reveals our deposits growth and their respective annual percentage yields. Deep diving, we were able to reach an important milestone this quarter, especially in such an uncertainty scenario related to credit market, given the recent events, and the interest rate trends in Brazil in 2023. The ongoing improvement in products and service levels, combined to the seasonality, led to a strong account balances growth.

Total Deposits reached 21 billion, 1.3 billion reais more than 3Q22 and 12 billion reais more than

4Q21. The increasing share of account balance in the quarter allowed us to reduce our PagBank CDs distribution through third-party partners, reducing costs related to distribution fee and the APYs in PagBank CDs, driving down our costs related to deposits without harming our go-to-market strategy to attract new clients and further engage the current ones.

Account balance APY in 4Q22 reached 69% of the CDI, the Brazilian interbank rate, an increase in comparison to the previous quarter. This increase was mainly related to a higher number of days our clients kept their savings in PagBank.

APY on total deposits reached 96% of CDI, a lower level in comparison to the past two quarters, reflecting the higher share of account balance and the downtrend in APYs for PagBank CDs.

SLIDE 09: Moving to the next slide, I would like to share two features that we recently rolled out to our clients.

Thinking about the challenges of Brazilian merchants to manage the direct deposits of paychecks for employees, we launched our SMB Payroll Platform fully integrated in our PagBank app and in our iBanking platform. Merchants can count with this feature to organize and schedule paycheck payments for their employees with a hassle-free solution. This is an important achievement for our array of financial services, especially for small and mid-sized businesses with multiple owners and employees.

Another feature is the new version of our automatic savings. Initially, it was launched for merchants, where they could define a percentage of their sales to be invested in PagBank CDs. Now, merchants and consumers can also schedule automatic savings according to their account balance, facilitating the investments from other cash-in sources such as PIX, salary portability and other sources of deposits. With this product, we reinforce our commitment to the financial inclusion and education, while we foster the PagBank account engagement.

SLIDE 10: Moving to slide 10, we also would like to share a few updates about the ongoing improvements in our service levels. During the past two years, our teams have been working hard to increase client satisfaction while promoting additional cost savings, through processes, automation and optimization.

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