FINAL TRANSCRIPT 2023-02-16

XP Inc (XP US Equity)

Q4 2022 Earnings Call

Company Participants
Andre Martins, Head of Investor Relations
Bruno Constantino, Chief Financial Officer
Unidentified Speaker, Unknown

Other Participants
Tito Labarta, Analyst, Goldman Sachs
Unidentified Participant, Analyst, Credit Suisse

Presentation

Andre Martins {BIO 20713894 <GO>}

Good evening, everyone. Thanks for waiting. We were just given some seconds for
everyone to join. I'm Andre Martins, Head of Investor Relations. And on behalf of the
company, I'd like to thank you all for your interest in our quarterly earnings call.
Today, we have with us Bruno Constantino, our CFO. We will both be available for
the Q&A session right after the presentation.

Remember that you can raise your hand in the Zoom tool. I see that, as usual, we
have some raised hands and we will answer them after the presentation. Please refer
to our legal disclaimer on page two. There, we have -- we clarify actually the forward-
looking statements, their definition. And on our IR website, you can find the
additional documents to forward-looking statements and why they might differ from
actual results. So without further ado, I'll pass the word to Bruno Constantino. We
have a lot to talk about today. And it's later in São Paulo, right, Bruno, then usual. So
let's get going with the presentation. Thank you so much, everyone, of you for the
interest.

Bruno Constantino {BIO 22475965 <GO>}

Yes, sure. Thank you, Andre. Good evening, everyone. A pleasure to be here with all
of you one more time in our 12 earnings call. This call might take a little longer than
usual, but I promise I'll try to be as brief as possible so we can jump into Q&A. So we
can move to the highlights.

So here, on the slide five, the highlights, we have selected four main highlights for
third quarter '22. First is the improvement in our disclosure. Always considering
feedbacks from investors and thinking about how to enhance our transparency over
time. We have changed three points in our managerial disclosure. We have

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incorporated digital content into retail. As you know, digital content is an enabler,
much more than our relevant contributor to our revenue, so it doesn't make sense to
disclose it on a standalone basis anymore.

Number two, we separated corporate clients companies with annual revenues above
700 million BRL annually from retail clients. This change was motivated by, one,
growth of the corporate business, which was irrelevant until the end of 2021 last year,
and has been gaining traction throughout this year, as you're going to see it
throughout the presentation as well. And number two, different profile of clients as
well.

And third, we have opened the retail revenue base on its main product classes. I
think this is the main change in terms of disclosure that we are making from now on.
What are the main product classes? One, equities, two fixed income, and three,
funds platform. I hope that will help all of you understanding the dynamics of each
business line, depending on what the macroenvironment is.

The second highlights is about expenses. We are still absorbing the impacts of
headcount growth in 2021, as you know. But we do believe that our ongoing
transformation should result in efficiency gains and better margins in 2023 onwards.
Our total SG&A as you're going to see already showed this quarter signs of
stabilization. I will talk more about that as well. And the third highlights, we are
discontinuing the adjusted net margin guidance. And as of today, we introduce, in
exchange of the adjusted net margin guidance, a new earnings before tax margin
that will take into account the expenses related to share-based compensation.

And finally, the last point is just an announcement that we have just released a 6K,
informing about the increase in our actual share buyback program, moving it from a
total of 1 billion BRL l to 2 billion BRL, and keeping the same timeframe, which is until
May next year.

So moving to the next slide. Starting with client assets. So all-time high client assets,
925 billion BR L helped by higher interest rates that tends to increase, as you know,
total client assets. Net new money [ph] has been accelerating from an average of 14
billion BRL per month in fourth quarter last year, to 11 billion in third quarter this year,
but it's still, between the soft guidance of 10 billion to 15 billion net new money per
month. There is -- as I've said, when you have two facts added together, it makes the
scenario poses a very strong headwind for net new money growth, which is not only
higher interest rates, but higher interest rates coupled with uncertainty.

Investors tend to choose daily liquid fixed income instruments instead of allocating
their capital in anything else. Especially in the third quarter, we also had an inversion
in the interest rates curve. And that makes even harder to make investors extending
their duration. So there is a scenario that poses a headwind. It's not new. It's being
with us throughout this year, but we are able to keep the low end of our soft
guidance despite all of that.

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And then we have on the right side, the breakdown of retail client assets per
products as we have done in terms of retail revenue. We also are going to disclose
the total retail client assets breakdown by the same buckets. And here, you -- it's
pretty much clear from ear over ear view mixed shift in terms of investment
allocation. We had in the third water last year, 42% of total client -- retail client assets
in equities. And that number decreased to 34%, third quarter this year. When we
look at fixed income, it's the opposite. It was 22% last year. It increased to 30% this
year. So everything that we already have been talking and -- but now, putting figures
on it.

So moving to the next slide here, is just to show what we have done. So the old
segmentation was retail, including corporate, institutional issuer services, digital
content, and other. And now, we have many more details and the segments retail
institutional with corporate's not with retail anymore, it's together with issuer service.
There is a lot of cross-selling there, corporate clients and investment banking activity.
So we believe it makes sense to put it together. And in retail, we have, as I said, open
the three main revenue streams of retail revenue, equities, funds, platform, and fixed
income. And all the others are part of the new vertical. Digital content is included in
other retail

Now, talking about gross revenue. So our total gross revenue went from 3.4 billion
reals third quarter last year, to 3.8 billion ___ this year, 13% increase. This risk of
scenario has mainly impacted our retail revenue that represents, as you can see on
the right side of the charge, close to 70% of our total gross revenue. So retail in the
third quarter represented 69, 9 months, 71% of total gross revenue is the main
component of our revenue and is the part of the revenue that has been impacted
the most because of the bear market.

A natural consequence of that is a deceleration of our growth pace, but it's still a
growth, 13%, as I said, year-over-year, 5.4%, quarter-over-quarter. But as we also have
been saying, thanks to a more diversified ecosystem, part of retail revenue,
especially the new verticals we are going to show, and also outside with retail
revenue, institutional revenue, incorporate issuer services revenue, have a different
dynamic in such a tough scenario, helping the overall results of the company. That is
why we believe XP has been building over time, even more resilient business model.

And that's what make us believe as (inaudible) mentioned in his letter to

stakeholders that our strategy is in the right path, going beyond investments and in
investments, adding more products and services so we can keep diversifying. Our
revenue stream increased the loyalty of our clients and also the LTV of our clients.
Imagine if XP nowadays in this scenario that we are living, where XP back 10, 15 years
ago when we were mono product equities and mono client retail.

And move to retail brick now. Yes. This is live that will take little longer if you allow
me because that's new, all the numbers here. It's completely new. And we are going
to share with you every quarter from now on. I will explain a little bit the dynamics of
each block. It's pretty much straightforward impact of macro. When we have a boom
market equities benefit the most from it, funds platform also benefits from it, fixed

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income is hard to tell depending on which moment of the boom market, you are.
When we have a bear market is the opposite equities, they get hurt, funds platform
also get hit by the bear market, and fixed income benefits mostly because of higher
interest rates.

But here is interesting to look at the relevance of those three blocks that we are
showing right now. Equities, fixed income, and funds added together. In third
quarter last year, they represented 86% of total retail revenue. In third quarter, this
year, '22, their relevance decreased from 86% to 72% of total. A very relevant
decrease in relevance. But it's still the most relevant block of retail revenue by far
compared to all the other components.

What explains that decrease, the bear market scenario. And these headwinds has
taken away more than 1.5 billion reals in revenue from our results in 2022. How do
we get to that math? You just add together equities and funds platform, for example,
in the third quarter this year. It will give you roughly 1.4 billion reals, and you
compare to funds and platform in the third quarter last year to keep the same
seasonality. That will reach 1.8 billion reals. So these 400 million reals per quarter. If
you analyze that, you would reach almost 1.5 billion hays in annual revenue for
freight.

Now, another way to see this impact that I've been mentioned about this headwind
including fixed income, you can include a fixed income just to get the three main
blocks of our retail revenue. And fixed income is the positive number comparing
year-over-year, okay? But let's add it together. You're going to see that those three
blocks added together, even with fixed income, they decreased year-over-year, 15%.

So here, we can do all the math you want to, but it's going to be pretty much clearer
why retail is suffering in terms of revenue and revenue mix. Despite all of that, retail
has been able to deliver strong revenue numbers that has to do with all other
components of the retail revenue, fixed income helping, other that mainly it has
other things there, but as there is in the note, float digital content effects and among
others, everything that is not embedded in any of those blocks goes into other. But
float is more than 80% of that that revenue.

So fixed income floats in all the new verticals, retirement plans, cards, credits,
insurance, they all have been helping retail revenue to keep a very healthy number
and still growing year-over-year despite this headwind that I've been talking about.
Another interesting data that we can extract from discharge is a comparison quarter-
over-quarter. When we third quarter '22 compared to second quarter this year is a
different real [ph]. Basically, equities, for example, it's growing 5% similar to our DATs
number, the daily average trading number that grew 3% quarter-over-quarter. Funds
platform here decreased 29%. But if you take out, because then when you compare
quarter-over-quarter, there is a seasonality, okay?

So second quarter, we have performance fees. When you take out performance fees,
third quarter increased close 10% quarter-over-quarter. So the two main blocks that

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have been hit the most year-over-year. Quarter-over-quarter, they show sign
stabilization, which is a good thing in my view. So looking at the other components
that I mentioned, new verticals, the growth, it goes from 45% year-over-year, up to
170% with CAGR [ph]. CAGRs has been growing a lot, 26% growth, quarter-over-
quarter. So this is I think the main is live of the presentation where you can drive
many different conclusions, but it shows hopefully the impact of this macro
environment in our retail revenue as a total.

So we can move to the next slide, take rate. So take rate is that retail revenue divided
by average AUC as you know? Now, what is the difference? Now, this take rate is
taken into account retail revenue, X corporate revenue, that went together with
insured services. And the client assets, the total client assets, we are only doing the
take rate for retail using retail client assets for sure. So the take rate 1.33, it was 1.40 in
the second quarter. But in the second quarter, we had a performance fees, as I said,
you take out approximately eight basis points of performance fee. We have 1.32 with
1.3, again, a signal of stabilization.

On the right side. We highlighted funds, platform, and retirement plans. Why have
we done that? Because we believe, when we think about take rate as a price, so
relating to the client assets and then as a price, those two components of the retail
revenue are the components that makes more sense relating to client assets, funds,
platform, and retirements plans, because all the others, equities, fixed income, and
the other verticals, especially equities and fixed incomes, they have a lot of revenues
that are transactional-based instead of plan asset-based.

But going back to funds platform in retirement plan, we are not considering in the
funds platform performance fees here. What we see is the same movement, shift
away from equity and market funds that have higher management fees into fixed
income funds. So the take rate went from 71 base points last year to 5 base points
this year, 16 base points on contraction. But again, quarter-over-quarter, a slightly
increase of one base point. So basically, flat quarter-over-quarter, same (inaudible).

Now, going to issuer, corporate and issuer service institutional. On the left,
institutional, on the right, corporate plus issuer services. Here, both revenues, both
segments, they performed really well in the third quarter. It's a fact. The numbers
speak for themselves. Institutional more than double year over year. Corporate and
issuer services increase 34% year-over-year. And quarter-over-quarter, both of them
grew more than 30%, quarter-over-quarter. So third quarter, no doubt, was a very
strong quarter for institutional and corporate plus issuer services.

We believe there is a relation with the elections in Brazil, a lot of anticipation, the
positive impact in the (inaudible) derivatives trading that we do with our clients,
either corporate or institutional clients. So this shows the benefit of the
diversification. It's very positive, anticipating myself that I expect a question in the
Q&A. In the fourth quarter, we do not expect those two segments to perform as they
did in the third quarter. It's natural to think that if there is an anticipation in the third
quarter because of elections, you need like a transitional period, like a hangover to
absorb everything that has been anticipated. It's hard to estimate how much, but the

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concept behind the fundamentals, I believe the third quarter, should be the record
quarter for 2022 in those two segments.

And one more thing that I forgot to mention about issuer service, it's interesting to
note that in our -- we have this quarter. And all-time high, quarterly secured
placement revenue of 525 million reals. You can see that in our earnings release.
That number is -- it's s per our accounting income statement, okay? Out of the 525
million, we have 228 million in the third quarter here in issuer services, but
everything is related. The other part of the revenue goes into retail. It's mainly
distribution fees. And they go into retail in different segments. So it was an all-time
high of secured placement revenue in a quarter that we still are in a bear market, not
equities playing a role because DCM is really weak. But DCM and also alternative
funds playing an important role in this quarter.

SG&A and earnings before tax margin. So total SG&A has been flat quarter-over-
quarter. I believe that's a good thing. The apparent growth in known people, you
have the breakdown here on the left of people and known people that are included
in total SG&A. So the apparent growth in known people expands quarter-over-
quarter from 374 million to 405 million is lower than it shows. Why is that? I talked
about our reclassification from the precision amortization into SG&A.

You can see that also in our earnings release, depreciation quarter-over-quarter
decreased approximately 12 million reals. And that's most of it are reclassification
between lines, okay? So discounting this effect known people would have grown 5%
quarter-over-quarter. And remember that in the third quarter, we also have our
annual event expert that the expense is embedded in there.

We also can see an EBITDA earnings before tax margin on the right part of the slide
recovering. So we had our lowest EBITDA margin in the second quarter, 25.3%,
coming from 28.6% in the first quarter. And third quarter already shows a recovery
going to 27.2%. We are given this new guidance of EBITDA margin from 26% to 32%.
We tend to be always conservative in our guidance as you know. We had 25.3%
EBITDA margin in the second quarter this year. But it's our expectation that, as I
mentioned, the ongoing transformation in the company, no matter what the macro
environment is, looking at the signals that I also mentioned of stabilization in those
revenue lines that get hit the most by a bear market compared to a boom market.

We believe we are going to scale up our EBITDA margin from '23 to 2025 in the next
three years. So next year, you could expect our margins closer to what it is nowadays
and increasing a little bit, moving towards the 32%, the top of the range in 2025.
That's what we are going to fight for here in the company. And also in terms of
expense for next year when we look at total SG&A, and also people expenses, we,
for sure, are going to have a lower growth than we had this year compared to '21. No
question about it.

Net income and net margin here, it's a record. Net income helped by the earnings
before tax quarterly that we have in the third quarter. It was the third higher EBITDA

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in our history, only behind the fourth quarter of last year, in second quarter of last
year. But remember that second and fourth quarter, usually, they can have a seasonal
revenues that the third quarter doesn't have performance fees. And also, helped by
a positive account tax expenses. So record net income ever.

We also kept a health margin here, 28.5% in the third quarter. Our basic earning per
shares is growing a little bit more than our net income that's related to the buyback
in place. And our adjust net income, although we are not using anymore the
adjusted net margin as a guidance, we are going to keep our adjust net income in
our spreadsheets, in our investor relations site in the internet.

Finally, we have two more slides to share with you. This one is about the net asset
value. We've had several doubts in the last -- mainly in the last two quarters about
our cash flow conversion, cash flow generation, and capital location. So we thought it
in a way to bring here and share with all of you some slides that hopefully, they will
help to understand better [ph] those issues. So first, it is complicated issue,
especially considering that XP is a platform, but also, is a financial institution.

So we hold several types of financial instruments with different characteristics in our

balance sheet. I've said that before. So when you go into our cash flow statement
that follows an accounting rule, it's not business sense to analyze that. We are
working on a better managerial cash flow statement to help you to understand
exactly what our cash flow generation, if you may say is, at least.

But the way we look internally here is to our net asset value. That could be an
analogy to our net cash. What is it? It's basically the adjusted gross financial assets
that you have on the left part of this slide, and that we have been sharing with you
through our earnings release, minus our debt instruments that are not embedded in
the adjusted gross financial assets because the adjusted gross financial assets take
all the financial liability. So anything that goes into our results as NII, net interest
income, is because there is a financial liability associated to it.

It's already embedded in the adjusted gross financial assets. But we also have
corporate that that is not embedded in there, like the bond that we issued, like the
balance sheet that we have issued, so like the IFC that we still have in our balance
sheet. So all of the borings, the corporate debt that we have is what we are calling
here, the gross DATs, on the right part of the slide. We discounted from the adjusted
gross financial asset, reaching the net asset value, which at the end of this quarter,
was 9.8 billion reals.

And the last slide, we want to present a bridge, a bridge that explains a little bit the
way we look at it internally and the assets allocation. So what we have here? Starting
with December 19 until September 22, we're talking about two years in nine month
after the year of our IPO. On December 19, our NAV was 6.4 billion reals, already
considering here the proceeds from the IPO. Then we have a total net income of 8.5
billion, plus 1.4 billion of a follow up [ph] that we did on December 20.

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If you add 8.5, 1.4 to the 6.4 of NAV, at the beginning of the period, we should have -
-if net income conversion rates to NAV was 100%, 16.3 billion reals of NAV. But we
have a little bit less than 10 billion reals. Where did the money go? What happened
with the company throughout those 2.9 years roughly?

So you have the bridge here showing what happened. Most of the money, if you
take out the share buyback that is 0.5 billion, and 0.3 billion is basically working
capital, and that's also tricky because -- I mean, 0.3 billion in a period of 2.9 is
nothing. But we always are going to have some variation between quarters because
between quarter, NAV can fluctuate a lot in terms of the working capital. For
example, tax reasons for share base compensation reasons, and the other reasons
that might have this fluctuation. But when you extends the period, these effect gets,
of course, diluted. But the main thing here to highlight is the4.2 billion in investment
in our IFA network and the almost 1.5 billion in M&A.

So here, we add together, 5.6 billion reals of investments that we have made. And
those investments, they are not financial assets per se, in the sense that we use in our
adjusted gross financial assets. So they get -- they are not included there. And that's
why they reduce the NAV, right? And we, as Matt Rauso [ph] stated in his letter, we
believe that the investment that we decided to do in our distribution network was
important. That's a competitive advantage that we have.

We were able to sign long-term contracts with our IFAs. And, of course, all of the
transactions, including M&As, we always look to several metrics. But the two main
metrics are payback and return on equity and reconsider all of that in our decisions
years. And also, M&A is small. I have said already that we are not planning to do any
relevant M&A going forward. We already have the deal with model waiting for
approval of the central banking in Brazil.

So the message here is this 5.6 billion reals should be much lower going forward.
That's exactly one of the additional reasons that we decided to increase our share
buyback program in place because we are going to have more investments as we
have had throughout these years, especially in the IFA network.

But nothing compared to the size of what we have done in the past except for the
one -- a little bit more than 1 billion that we already have committed, but we have not
done yet with our IFA network in terms of the broker dealers that we are going to be
(inaudible) shareholders of our IFAs. So except for that, the other is more of the
same. It's basically investments that we do on an annual basis, considering that we
have a distribution network that is the biggest one in Brazil.

So with that, I will stop here, open for Q&A. And then we can answer doubts that you
might have. Thank you very much.

Questions And Answers

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A - Andre Martins {BIO 20713894 <GO>}

Thank you, Bruno. So let's go to the Q&A. Our first question comes from Tito Labarta
from Goldman Sachs. Hey, Tito.

Q - Tito Labarta {BIO 20837559 <GO>}

Hi. Yes. Can you hear me? Good evening, Bruno, Andre. Thanks for the call. Thanks
for all the additional information. That's very helpful and useful to think about and
help us model the business. So appreciate the color. A couple of questions. I guess,
one, just looking at the retail revenue breakdown, right, you show there. That other
line has increased a lot, I think. Is that -- should that be just mostly a function of the
higher interest rates that we're in right now?

And as rates come down, that should come down? And a second question on the
inflows, and I used to have the guidance, the 10 to 15. Have you seen any -- we saw
the equities picked up a little bit in 2Q. I would expect in lower interest rate
environment should be positive for that. But with markets doing a little bit better, any
visibility there in terms of the inflows, either by segment? Are you seeing more
interest in equities, is still more fixed income? Just to try to get a sense of when there
can be an inflection point on those inflow's longer term.

A - Bruno Constantino {BIO 22475965 <GO>}

Yes. The other retail, it's -- most of it is flows revenue. that is a retail revenue and goes
into other. That's the most relevant one, okay? Regarding your second question
about the client assets inflow, net client, net inflow, it's what I said, Tito. When you
have uncertainty, I think as an individual investors, a fluent client with a lot of
uncertainty in the market where if you're going to buy a longer duration secured --
fixed income secured, you're going to get a nominal remuneration that is less than
the one that you can have with daily liquidated.

And then it makes hard. It's a headwind. And even in that scenario, a net (inaudible)
that it's above 10 billion reals per month. In a scenario like that, usually people -- they
freeze, they wait, they don't have to. They have an instrument that is daily liquid [ph]
that pays on a nominal terms more than extending the duration. So it's not easy.

You need to do a lot of explanations. And that's why advisories are so important in a
scenario like that. But it's not an easy sell. And that's what explains in my view, the
weaker net inflow. We have seen stabilization [ph] across all signals, but not a
reversal yet. We still have a lot of uncertainty upon us. You have global inflation, you
have a local recession, you have higher interest rates where fed funds are going to
stop, you have a war still going on, you have a lockdown chance.

So many things happening. Brazil has a new government that needs to tell about
what the fiscal policy is going to be, and so on. So too much uncertainty in my view
to see a reversal. But the good thing is it has stabilized. So I think the -- the worst is
behind us. That's the point.

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Q - Tito Labarta {BIO 20837559 <GO>}

Great. Thanks, Bruno. Thanks. Just looking, because you also disclosed the assets by
segments. So I'm just -- how much of equities was up 30 billion? But I don't know
how much of that, which is the market performance versus potential inflows because
looking at the fixed income, it was 28 billion last quarter down to 20 billion. So just
to try to understand what drove the increase in the assets by segment.

A - Bruno Constantino {BIO 22475965 <GO>}

You mean the equity in the third quarter going to -- compared to the second
quarter?

Q - Tito Labarta {BIO 20837559 <GO>}

Yes. If we look on the breakdown of the AUC, it was like 278 billion. It was two 47
billion last quarter. So I imagine, there's a market appreciation in there looking at the
fixed income number, it was lower relative to last quarter. So just to try to see how
those inflows are evolving by segment.

A - Bruno Constantino {BIO 22475965 <GO>}

Oh, okay, I got it. Yes. I would have to get what was exactly the market appreciation
of equities quarter-over-quarter. I can get back -- we can get back to you later on. But
at the end of the day, we are not -- look, we are not opening anymore adjusted
anything like adjusted assets or anything like that. So as we segregated corporate
from retail, in our view, it doesn't make sense because corporate by nature has a
different volatility compared to retail. But of course, we can have some unusual
movements in one single quarter. Whenever we have something like that, we are
going to explain in our earnings release, okay?

Q - Tito Labarta {BIO 20837559 <GO>}

Okay. Thanks, Bruno. And thanks again for the additional disclosure.

A - Andre Martins {BIO 20713894 <GO>}

Thank you, Tido. Next is Jeffrey [ph] from Autonomous [ph]. Hey Jeff, good evening.

Q - Unidentified Participant
Hi, can you hear me okay??

A - Andre Martins {BIO 20713894 <GO>}

Hi, Jeff.

Q - Unidentified Participant
Hi. Can you hear me?

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A - Bruno Constantino {BIO 22475965 <GO>}

Yes.

Q - Unidentified Participant
Great. Thank you for taking the question. And thanks for the new disclosure. There've
been some articles recently talking about IFA's moving away from XP. I wondered if
you could elaborate on why you think some of those IFA moves have happened.
And can you confirm are these IFAs where you had the long-term exclusivity in place
and they decided to pay a break fee to go somewhere else?

A - Bruno Constantino {BIO 22475965 <GO>}

Yes. Oh, look, Jeff, is competition. So a competitor comes, pays, the IFA decides to
go, or we do not think it's worth retaining the IFA, whatever the case is. Then it
happens. It's natural. It's not the first and it's not going to be the last time that it
happens, okay? Remember that we have more than 13,000 IFA. We have close to
12,000. We have more than 13,000 advisors in total. But we have close to 12,000
IFAs. In our network, we have approximately -- if you look only at the IFA world, 70%
roughly speaking market share. So it's something natural, okay?

We look at it as a natural thing that will happen again. And it has happened in the
past. Yes, the IFAs that you referred to, they had long-term contracts. You also 00 I
mean, you can -- in this quarter, we had -- if you go in our financials, you're going to
be able to see the disclosure of revenue where we have revenue from incentives
from B3 (inaudible) and others part of that revenue. When we get back the fine that
we have in the contracts, it goes in there. So this quarter, if I'm not mistaken, the total
amount of that line was close to 40 million reals. And part of it was helped by one
IFA. And we might have that going forward as well. So we got our revenue, get the
cash back, and that's it.

Q - Unidentified Participant
And when they decide to leave, do they sell you that's purely a financial
consideration for them? Or are there elements of your competitors' offerings that
they're choosing because they think the competitor offers something that XP
doesn't?

A - Bruno Constantino {BIO 22475965 <GO>}

Money.

Q - Unidentified Participant
Got it. Thanks very much.

A - Bruno Constantino {BIO 22475965 <GO>}

Thank you, Jeff.

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XP Inc (XP US Equity)

A - Andre Martins {BIO 20713894 <GO>}

Thank you, Jeff. Have a good one.

Q - Unidentified Participant
Sure. Thank you.

A - Andre Martins {BIO 20713894 <GO>}

Next is Chagu [ph] from UBS. Good evening, Chagu. How are you?

Q - Unidentified Participant
Yes. Are you guys hearing me?

A - Bruno Constantino {BIO 22475965 <GO>}

Yes.

A - Andre Martins {BIO 20713894 <GO>}

Yes, Chagu, we can.

Q - Unidentified Participant
Okay. Thanks for the new disclosure. Very good new format. I have one question
about the excess cash that you mentioned in the press release. You mentioned 5
billion reals. I wanted to make sure if I understood the concept of this excess cash.
So in the case of no relevant acquisition or M&A, do XP will be able to distribute
these 5 billion reals in the coming years? Or part of this 5 billion, should we used it in
your organic expansion, so with capex, with IT investments? So I wanted to make
sure if this 5 billion should be distributed in the near future if you don't have any
billion M&As?

A - Bruno Constantino {BIO 22475965 <GO>}

Look the 5 billion in the near future, I don't think so. In the future, yes. But in the near
future, I don't think so. Why is that? Number one, we are conservative, the way we
approach our financial. And we always think about the long-term. Number two, we
still have a lot of uncertainty upon us. I just talked about it. So we think it's -- we are
here for the long-term. It's wise to keep a higher, let's say, margin of safety in
moments like that.

And what I can tell you, Chagu, is we keep generating cash. Our company does
generate a lot of cash on an annual basis. And yes, we are going to keep evaluating
the excess cash because it -- we are distributing. We think 5 billion is enough for now
to keep us access capital in our balance sheet. We can change our mind in the future
and decide to work with less than that or a little bit more. But for now, 5 billion
seems more than enough.

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XP Inc (XP US Equity)

And the access above the 5 billion, yes, we can keep distributing to shareholders.
Remember that XP is a disruptor. We are in the financial industry, mostly in Brazil.
And we have less than 2% of the financial industry revenue pool. So we are at very
early stage of the potential that the financial industry in Brazil offer us as a disruptor.
And the opportunities might arise.

But right now, where we are in our strategy, what we have done, I think that XP has
already industry in Brazil offer us as a disruptor and the opportunities might arise.
But right now, where we are in our strategy, what we have done, I think that XP has
already invested a lot. Our expense numbers, they show it. So we have invested a lot
in new verticals. We have put in place our digital account. We have cards. We have
launched cards at Rico Brands. We have our offshore account. We have our digital
assets platform. We have the insurance business up and running and developments
happening as we speak.

So we have done all those investments. Now, it's time to consolidate the investments
that we've done to increase the share wallet of our existing clients. That's part of the
strategy while we decided to go beyond the investments and consolidate all of that
and look for more efficiency in our company, because, of course, we can be more
efficient than we are right now.

It's natural in a company like XP that more than double its headcount-based during
the pandemic -- since the pandemic to today, doing so many things together that we
now believe is the right time to put our energy into consolidating everything that we
have invested in, plus searching for more and more efficiency in our company. And
then if that is the strategy for the near term and we are concentrated in that, the
additional excess capital above the 5 billion reals, we start to tribute that. We don't
need that right now.

We don't want to also to keep distributing capital. And then remember that we have
less than 2% of the revenue. One year later, we think now, we want to do this or that
so we go back shareholders and do a follow up every six months. That's not what we
want to do. So we are conservative the way we make these decisions. But when we
do it, we go forward.

Q - Unidentified Participant
Very clear, Bruno. Thanks.

A - Bruno Constantino {BIO 22475965 <GO>}

Thank you, Chagu. .

A - Andre Martins {BIO 20713894 <GO>}

Next question, from Morgan Stanley. Hi, Jorge [ph].

Q - Unidentified Participant
Hi, Bruno, Andrea. How are you?

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XP Inc (XP US Equity)

A - Unidentified Speaker
Yes, hi.

Q - Unidentified Participant
Congrats on the numbers. And again, I know it is been said before, but really, thank
you very much for the additional disclosure. I think it's going to go long way in
helping the market to understand the -- your business. So thanks for that. My
question is around what you've been discussing, Bruno, so sorry for that. But when
you think about your retail business, is it -- you think the direction of interest rates
that would potentially improve the inflows, or is it actually the level of interest rates?

And I'm thinking obviously on the equities business, which is a big part of the
revenues. And I'm saying this because hopefully, we've seen the peak of rates, right?
I mean, the central bank has been on pause now and the next move hopefully is
down. So the fact that rates are going to start to come down, do you think that's the
trigger? Or is the trigger actually the absolute level of rates? And what do you think
that absolute level is for us to get -- for you to get more inflows to the equity's
business?

A - Bruno Constantino {BIO 22475965 <GO>}

Yes. I think it's more the direction than the level. But remember what I just mentioned
few minutes ago. Retail investors, they look to nominal terms. So if interest rates is
still going down, but the long-term rates are lower than the spot rates, that's a
headwind because you need to convince, you need to explain why is it, what is the
premium and bad, and what is the expectation of futures rates, and so on. We do
that. Of course, we do, but it's a headwind, I would say. But at the end of the day, it's
more about the direction in my view. But we need to take out part of the uncertainty.

And then when we take out part of the uncertainty, equity markets should react first, I
guess, as usually. And investors will follow. It's the cycle that we've had in the past.
For ourselves, the best -- I would say, the best -- the sweet spot is when you have a
boom market start forming, but level of interest rates are still high. For XP the interest
rate at 2%, it's not the best scenario, honestly, would be it in the middle range. I
don't know, 6% to 8%, something like that. When you have a more stable
environment with higher level of inch rates but stable, that's a good environment, a
very good environment.

But we navigate in all kind of scenarios. We have been what change these, the mix
gets worse. But we keep growing. And we grow at a lower pace. That's what is
happening exactly in 2022. But the business is resilient no matter what the macro
environment is.

Q - Unidentified Participant
Great, Bruno. Thank you. And I have a second question. And can you remind us what
is a level of asset attrition a year later when you lose a IFA? I remember maybe a year
ago or so, you published a press release with some of the actual numbers of specific

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XP Inc (XP US Equity)

IFAs that you lost in the past. And the numbers were very, very small. Has that
changed? Can you remind us what the level is today and what does it compare to
IFAs that you lost three or four years ago?

A - Bruno Constantino {BIO 22475965 <GO>}

Yes, sure. Now, the 70% to 80% of the client asset stays within XP. It doesn't migrate.
What we lose is basically the growth of that IFA office, we lose. If it was not a very
good IFA office, I mean, we don't lose much. At the end of the day, that's basically it.
Because when the IFA migrates, the client (inaudible) the client has XP accounts, has
XP app, everything, and then we have more than 13 advisors in our ecosystem, they
would be more than willing to serve that client. And that's what happens.

Up% Great. Thank you. Thanks. And thanks again for the additional disclosure.

Sure. Glad that (inaudible).

Q - Unidentified Participant
(Inaudible).

A - Andre Martins {BIO 20713894 <GO>}

Next, Mario [ph] from Bank of America.

Q - Unidentified Participant
Hi Andre and hi Bruno. Thank you for taking my question. Also, we really appreciate
the improved disclosure. My question is related to what Jorge just asked you, right?
Last year, you published this report saying the 80% of the AUC of the IFAs were left,
stayed with you. So when we see this slowdown in your net new money, are you able
to break down for us how much is lower inflows and how much is due to higher
outflows?

Can you just give us the dynamics, right, that you're seeing between inflows and
outflows? And then my second question is related to your buyback, right? So you are
increasing your buyback program by 1 billion reals? On your presentation, you show
that you only executed half of your previous buybacks. So I'm assuming you still have
1.5 billion left to be bought back.

But I, I wanted to understand the decision between buybacks and dividend. Why are
you doing everything in buybacks and not in the former dividends?

A - Bruno Constantino {BIO 22475965 <GO>}

Okay, Mario. Your first question, it hasn't changed. It's not -- the slower lower pace of
net client assets, it's not because of migration of IFAs. Of course ,there is a
component, but it's small, okay, it's small. So it's basically the macro environment
posing a headwind in terms of bringing more money into the platform. We are still

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XP Inc (XP US Equity)

bringing, but not with size or amounts that we would like to and think we can do it.
So it's not related to IFA leaving the platform.

Your second question about buyback, you are right in what you said. It's
approximately 1.5 billion, considering the additional 1 billion we announced today
that we have two buyback shares until May next year. And the reason we decided for
buyback is basically because we think it's a more attractive option nowadays. That's
basically the reason, but it could be dividends but with sadest [ph] buyback shares.

Q - Unidentified Participant
And Bruno, any updates on Itaú? Any Itaú decision to continue to sell down their
stakes? Are you talking to them? Could you use your buy back then to negotiate
directly with them?

A - Bruno Constantino {BIO 22475965 <GO>}

No news about that. Itaú or Itaús, they have our direct contact for sure. They know we
are here to help them to sell whatever they want, we have said that. But as far as I
know, it's not in their intention. So I don't know. You would have to ask them, Mario.

Q - Unidentified Participant
Okay. Thank you.

A - Bruno Constantino {BIO 22475965 <GO>}

Thank you, Mario.

A - Andre Martins {BIO 20713894 <GO>}

Thank you, Mario. Marcel Telis [ph] from Credit Suisse. Hi, Talis, good evening.

Q - Unidentified Participant
Hi, Andre. Hi, Bruno. Thanks for the time and started to be -- to sound like a broken
in record here. But I'm very happy to see the disclosure you guys did, so great
initiative. I think this definitely help people understanding the story. So well done. I
have a couple questions, actually, three or three questions. The first one, with
regards to investment in IFAs as you mentioned in your presentation right, you had
about 4.2 billion reals of investments, plus some M&A as well.

And I remember, I think, until recently, I think like a soft guidance for investments in
IFAs on a yearly basis would be -- to be something similar to the amortization, right,
of this --0 of the investments in IFA, which I thought, I think, was about 400 million
reals a year. So how should we think you know about that going forward? I mean, is
that still a reasonable assumption? So that's my first question.

The second question is more of a housekeeping item. I was looking at the -- at your
adjusted gross cash flow. And for the second quarter, it's a bit different versus the
number that you guys published. I think there's almost like 600 million reals

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XP Inc (XP US Equity)

difference. So I just want to understand what was the change there? I think you guys
had about a 9.8 billion in gross cash flow. And I think now is around like 9.2 billion
reals, so understand [ph] the difference. And my last question is more a strategic
question. thinking of your business going forward, of course, you're very successful
investment platform.

You've been adding new businesses to your core business cards, the bank and so
on. When you think of your business today, including these new products, what are
the areas that you think you are not in yet that you like to be, I don’t know, thinking
acquiring maybe be more a digital bank. So how should we think about your
business five years down the road? Would it still very different from what we're
having today with these new products or maybe more of the same? Thank you.

A - Bruno Constantino {BIO 22475965 <GO>}

Thank you, Telis. Regarding your first question about the IFA amount of annual
investment, it's hard to tell. You mentioned about a soft guidance probably. When
we get that kind of question, we answer a number. I don't know we should. But at the
end of the day, it depends because we analyze case by case. That's how we do it.
And as I mentioned, in terms of the capital allocated in the IFA distribution network,
we analyzed all the deals that we have done using several different metrics, using the
data that we have for so many years with those IFAs network considering payback,
return equity, and so on. So it's hard to tell how much it's going to be.

What I can tell you is we do have part of our long-term contracts with our IFA
distribution network. There is a component that is upon certain performance, okay?
So that part of the investments, if the IFA reach the performance that we have
establishing contract, then we have to pay X million additional. And when we do that,
because it's embedded into the same contract, it goes into that line, the prepaid
expanse. So that's one part of the explanation. And we keep doing our network,
keeps growing. You can see by our number of IFAs and so on.

And we keep doing some incentives and contracts with our IFAs when we think it's a
good opportunity, it's a win-win situation for XP and the IFA, of course. This year, we
probably are around putting all together 500 million real, so greater than the 400
million. If you look at the prepaid expense, it has increased a little bit this year, but
it's not relevant if you go to the note. So I don't have a specific number to tell you. It
could be higher than what you mentioned, the soft guidance of the 400 million. But
it's not going to be anything close to the amount that we have dispersed in the past,
as I said.

Your second question about the cash flow, you're right, you remind me something I
should have said. We included in our earnings release, we included the energy, for
example, and compulsory in the asset part. Energy, we have -- oh, there we go.
Thank you. Yes. So energy, that's probably what you're talking about, Telis, the 619
million reals in the third quarter and 540 million reals in the second quarter. In the
second quarter, we had the liability part, but we didn't have the asset part of the
energy. Because the way the accounting recognizing, it's a credit business, prepaid
energy for corporate clients that we have this business here.

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XP Inc (XP US Equity)

But the accounting measure goes into a line that is not considered as financial asset.
But at the end of the day, it is. So that's the adjustment that we have made there. And
the other adjustment that we have made is the commitment subject to possible
redemption that you can see in the liability parts, that is a reduction, is about the
spec that we have in our balance sheet from our asset management arm, and as you
know, SPAC stays in secured T-bills, which is a financial asset, so it goes into the asset
line. And the liability is not a financial asset, so was not included, and we included
there. So those are the main adjustments that we have made.

And your third question about this strategy, what we can think about XP five years
from now. Look, we are now focused on consolidating all the investments we have
done. I think that's the wise thing to do. First, because we believe the strategy of
those investments, they are in the right track. And we believe we can really benefit
from those investments in the -- all of the investments, they are at very early stage. So
we need folks there and put traction on that. And that's going to take a while. It's not
going to happen in one quarter, two quarters, not even in one year.

So that's where, I believe, most of our energy is going to be besides, of course, the
efficient part that I also talked about. Five years from now is hard. We have many
ideas here in XP. We are a bunch of entrepreneurs that don't believe anything is
impossible. That's one of our core values. So we have many managers [ph]. If you
had asked me the same question five years ago, I would get totally wrong. I would
not say that we would have the businesses that we have right now and the way the
company would be. So it's hard to tell.

We like to go step by step. That's how we got here. We like to keep our profitability.
We are not satisfied with our margins. We understand our margins. They are a
consequence of decisions we have made that we believe they are in the right track,
as I said, and they have a clear strategy back in them.

But we always think we could have been doing better. That's how we are. We like
profitability. We like to go step by step. We like to feel that we can move to the next
step, but we think of many, many ideas and we have a very small part of the financial
industry. But I don't have -- oh, we are going gold [ph] into acquiring business as you
mentioned, or, no. I don't have a clue to give you as of today, Marcel.

Q - Unidentified Participant
(Inaudible). that's very clear. Thank you so much. If, allow me just to follow up on one
of the previous questions from the other analyst. I think regarding the -- I think
Chagu asked that question about the 5 billion excess capital that you mentioned,
your earnings release, which by the way, thanks for putting that there. I think that's
very helpful indeed. This 5 billion, does that include the amount of money you need
to have, let's say, to do warehousing or to participate like in a syndicate? How should
you think about that? Or this is in addition to what you already have, let's say,
allocated, let's call it your, let's say, minimum operating cash, right?

A - Bruno Constantino {BIO 22475965 <GO>}

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XP Inc (XP US Equity)

Yes. No, it does. I mean, you need to separate capital from cash. The way we use to
get to the 5 billion, we use metrics to adjust all our assets beyond the prudential
conglomerate for the whole group, okay? That's what we do here. And we adjust all
our assets by risk and compare that with our available capital, also for the whole
group. And we use our internal target that is pretty much similar to what we have in
our prudential conglomerates. That's how we get to the access capital that we have.
Cash, cash is not an issue for us in the sense that we have NAV, a net asset value.

We could leverage our balance sheets if we wanted to. But that's a different
discussion. So I would answer your question, yes, everything is taken into account to
consider the 5 billion. But just bear in mind that cash and access capital, they are not
the same thing because in a finance institution like ourselves, those things, they get
confused sometimes. It's one of the reasons that I talked about the cash flow from
operations, for example, that we have to disclose from the accounting perspective.

It's tricky. You cannot look at a company like XP cash flow from operations and
operate. Oh, and you are not -- your operations are not making or generating cash
flow in this quarter. That quarter doesn't make any sense to make this analysis
because, for example, if we take a financial asset that is -- that we have bought in our
assets liability, parts, for example, like a government bonds, that is longer than 90
days, and we just decide to sell and invest in something shorter term like 60 days, it
will not be there anymore in this cash flow account because it will go directly into
cash and equivalent.

And it doesn't change anything. It's the same thing with IFA -- if you there, there is a
financial instruments payable. Basically the banking business (inaudible) that we
issue, etcetera, if we have other financial or they're issue (inaudible) there, it's going
to be a financing part of our -- it's going to be in our cash from operations, the
increase of that source of funding, because at the end of the day, it’s a financing.
What matters is what you do with that money?

If we buy short-term, again, matured -- secured it's going to be in the cash and
equivalent. So at the end of the day, you're going to look at the cash flow from
operation. You're going to say, oh, your cash flow from operation is increasing. It's
not, because we had a financing part that we are investing in cash and equivalent. So
we are working on a better managerial cash flow. That makes sense. The one that we
present is accounting reasons, but it's tricky to look at it and get to any conclusion.
So capital and cash is (inaudible). But yes, I give a long answer, but 5 billion, take
everything into account.

Q - Unidentified Participant
Thanks a lot (inaudible).

A - Bruno Constantino {BIO 22475965 <GO>}

Thank you.

A - Andre Martins {BIO 20713894 <GO>}

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XP Inc (XP US Equity)

Thank you, Telis. Nice to from you. Okay. That was the last question. Thank you all for
sticking with us. It's a busy earning season, right, Bruno? Everyone is looking at the
results.

A - Bruno Constantino {BIO 22475965 <GO>}

You guys are busy there I know.

A - Andre Martins {BIO 20713894 <GO>}

Yes, everyone is busy. So we'll be happy to connect with you guys over the next few
weeks to discuss the results. And anything you might have interest, that I know,
Bruno, if you want to say (inaudible) now.

A - Bruno Constantino {BIO 22475965 <GO>}

No, no, just thank you, to you all. And probably, you're going to have doubts and -- I
mean, we released a lot of new numbers, so count on us to help you understand
anything you need. So thank you very much.

A - Andre Martins {BIO 20713894 <GO>}

Thank you all. Have a great night.

A - Bruno Constantino {BIO 22475965 <GO>}

Have a great night. Bye-bye.

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