Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo First Quarter 2020 Earnings Conference Call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with this call. All material can be found at www.stone.co on the Investor Relations section.

Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted free cash flow. These are important financial measures for the company but are not financial measures as defined by IFRS.

Reconciliation of the company’s non-IFRS financial information to the IFRS financial information appear in today’s press release. Finally, before we begin our formal remarks, I would like to remind everyone that today’s discussion might include forward-looking statements.

These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company’s expectations.

Please refer to the forward-looking statements disclosure in the company’s earnings press release. In addition, many of the risks regarding the business are disclosed in the company’s Form 20-F filed with the Securities and Exchange Commission, which is available at www.sec.gov.

I would now like to turn the conference over to your host, Rafael Martins, Investor Relations Executive Officer at Stone. Please proceed..

Good evening, everyone. Thank you for participating on the call and hope all of you are safe. We have today in our call, Thiago Piau, our CEO; Lia Matos, Chief Strategy Officer; and Marcelo Baldin, CFO.

On this call, we will present our operational and financial results for the first quarter 2020 as well as some updates regarding operating metrics of our business in the beginning of the second quarter. I will pass it over to Thiago so he can share with you the main highlights of our performance.

Thiago?.

one is the strength of our online businesses, which grew TPV 42% in April when compared to January levels, with strong growth in our online SMB client base. The second is the geographic diversification of our hubs, with two-thirds of hub volume being spread in cities outside the 27 state capitals where 50% of COVID cases in Brazil are concentrated.

Regarding margins, despite the second quarter being the most affected by COVID-19, we expect an adjusted pre-tax margin between 20% and 24% in the quarter, already including one-off items such as severance costs related to our workforce reduction and incentives provided to clients, among other factors.

So to be clear, as we said, we will keep reporting on numbers the same way as always with all costs and expenses included, and we will give you color on one-off effects in the second quarter separately as we see this as a useful information. Before I pass it over to Rafael, I would like to summarize, as shown in Slide 4.

In the first quarter, we continue to invest heavily in our operations, producing strong top line growth and evolving fast to become the partner of choice of Brazil SMBs, both in brick-and-mortar and online operations. When COVID-19 became a reality in Brazil, we took decisive actions to protect our team, clients and community.

We’ve increased operational efficiency through a redesign of processes and structure, rapidly reinforced our balance sheet and continued to widely allocate capital in our strategic priorities.

Looking ahead, we keep focused on consolidating our presence in the SMB market as well as in the online space, and we will continue to invest heavily to become the main financial platform for our clients, integrated with great solutions to help SMBs better manage their business, grow and sell online.

We manage our company for the long term, aiming at a much bigger future. And every day more, Stone becomes a technology company with financial service embedded into its roots. With all that said, I will pass it over to Rafael.

Rafa?.

Thank you, Thiago. I wanted to start on Page 5 by reinforcing what Thiago said that we started out the year seeing very strong growth in our core operations as well as initiating a new cycle of our company to solidify our position as the partner of choice to SMBs.

Up to mid-March, we were accelerating growth and investing heavily on the evolution of our platform with record investments in our technology team when COVID-19 caused on March 11, the first local commerce lockdown in Brazil. On Page 6, we highlight some of the initiatives towards our clients, team and community.

I would like to give emphasis to our actions in the health front, in which we provided a 24/7 telemedicine support to our team as well as protective equipment and instructions to those few that are still working on the street, mainly logistic Green Angels.

Additionally, we put emphasis through our campaign, Cuide do pequeno negócio, to provide tools for our clients to better navigate this crisis environment, such as MLabs and Delivery Much, as Thiago just mentioned. Moving on to Page 7, I want to detail some aspects about how we maintain a strong financial position through the onset of this crisis.

We implemented different measures to manage costs and expenses and did a technical resizing of the organization to better balance revenue and investments through our redesign of processes.

Since the crisis started, we maintained constant access to liquidity lines and kept our prepayment operations at full speed, prepaying our clients around BRL11 billion through the months of March and April while increasing our cash position by 43% year-over-year to almost BRL4 billion at the end of the quarter.

Our adjusted net cash position increased to BRL5.1 billion, demonstrating the strong financial profile of the business. We take cash flow management very seriously, and we were impressed to see the hard work of our treasury team reflected in our strong financial position. In our earnings release, we provide further details of our cash flow dynamics.

On Slide 8, we show the performance of our TPV so far in the year. We were accelerating our TPV growth until mid-March when COVID-19 hit Brazil. However, in April, we already started to see TPV resuming growth on a yearly basis and in May up to the 23rd, this growth rate jumped to nearly 23%.

The right chart shows the evolution of our TPV for each period of 15 days, starting in the first half of March, which is indexed to 100. As you can see, we have been able to consistently recover our TPV and we are seeing volumes in the first half of May being equivalent to 87% of the volumes in the first half of March.

As seen on Slide 9, there are two main factors which contribute to the positive evolution of TPV. The first is our geographic footprint in the hubs where more than 60% of our hub volumes are in areas less impacted by lockdowns.

Additionally, approximately 41% of our volume comes from digital and integrated partners, with more than 180 clients transacting at least BRL1 million in TPV on a monthly basis as of April.

On the graph on the right, we show the strong growth of our online volumes, which grew 42% in April compared to January as well as a strong increase in the number of online SMB clients, which grew 29% in the same period and is a very profitable segment.

Now moving to Slide 10, on the left, we want to show you the evolution of the productivity levels of our salespeople in the hubs up to May 15, indexed to 100. When the crisis hit, as we could not be in the streets, our productivity dropped by around 40%.

Once we better understood the demand dynamics, we decided to put a relevant part of our team on vacation, and we redesigned our lead generation and closing processes so we could better work through the phone and chat. With that, we brought our team back from vacation, tested the new processes and right-sized our sales operation.

After those improvements, we started to see the productivity of our team back on track. Also, as shown on the charts on the right, we were able to increase our main KPIs in our customer service amid the crisis, reaching a record 72 NPS in April. Our logistics operation was also able to keep its service standards.

With that, I will pass it over to Lia so she can talk about our strategic initiatives and the performance of our solutions beyond payments.

Lia?.

MLabs, a leading social media management platform that helps SMBs to digitalize their businesses and has the potential to evolve to a social commerce platform in the future; Delivery Much, a full delivery platform present already in more than 230 small and midsized cities with a similar and synergistic expansion approach to Stone’s; Vitta, a health plan management and EMR software solution, which has a 15,000 doctor network and manages 100,000 lives and can become an important provider of health plans for SMBs; and finally, MVarandas, a POS and ERP software for foodservice with a strong regional presence in the northeast of Brazil and an expanding operation throughout the country.

We see a massive opportunity in the software space, creating a comprehensive ecosystem of solutions to our clients, and we will continue to work on our twofold strategy for that.

We believe that the combination of great software solutions integrated with a complete financial platform, direct distribution and an excellent service level in a single technology company like Stone can transform the Brazilian SMB environment. We define ourselves by the clients we serve, not by the products we offer.

That is one reason why our vision is to become more and more a software company that embeds financial solutions and a financial services company that provides software and services to help merchants better manage their businesses and sell more.

With this, I will pass it over to Rafael who will discuss our financial results for the first quarter in detail..

first, BRL100 million in prepaid marketing expenses from TON to Globo in connection with a specific attractive media negotiation, which dates pre-COVID and in which we have 3 years to use that amount.

The amount was fully funded by the upfront cash contribution from Grupo Globo in TON, which is not accounted for in our free cash flow calculation and appears only in our cash from financing activities.

The second component affecting our free cash flow was an 8-day undue temporary tax withholding of BRL53 million, which was released in the first week of April. Besides those two exceptional items, our free cash flow was also affected by higher CapEx, in line with our strategy to grow our base of compliance.

With that said, operator, please open the call up to questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Tito Labarta with Goldman Sachs..

Hi, good evening. Thanks, Thiago, Rafael and Lia for the call. A couple of questions. First, I mean, you gave some good color in terms of your online exposure and how much of the volumes are going to you.

But can you just remind us what percentage of your TPV is online? And is there – what is the take rate on the online TPV compared to the off-line? It doesn’t have to be exact numbers, but if you can give some color on that would be helpful.

And then second question also on the take rate, you mentioned it was a 6 basis point impact because of COVID-19.

But I guess to understand, excluding the COVID-19 impact, what drove the increase in the take rate? Is that because of you were doing more credit? Or just to understand, before COVID-19, what was driving the take rate higher? Because you had been pretty stable on the take rate, so interesting that you had been able to increase it before COVID-19.

So if you can give some more color on that would be very helpful? Thank you..

Tito, Thiago here speaking. Thank you very much for your question.

Rafael, do you want to go ahead and take this first question?.

Hello?.

Hi, everyone. I am going to take the question because it seems like Rafa is having a hard time connecting. So regarding digital volumes, Tito, so what we mentioned before is we consider our integrated partner and digital part of the business together. We haven’t disclosed exactly that share of TPV.

What we can say is that, that part of the business has been growing significantly and with a larger growth even after the onset of the COVID crisis. We expect this to continue to happen moving forward. Regarding take rates, what we can say is that within digital, those take rates are pretty much equivalent to our take rates in the hubs.

And regarding integrated partners, given the larger mix of large clients that take rate tends to be a little smaller. But within digital, it’s pretty much equivalent to our take rates in the hubs..

Lia, if I may add, Tito, it’s Thiago here speaking. So you have – we tried to provide more color on our numbers in this release, in this presentation. So I will start saying that we continue with the same level of TPV spread between hubs and digital and integrated partners.

It’s difficult for us to separate sometimes digital and integrated partners because sometimes you have transactions from marketplaces, from wallets, from e-commerce. So we decided to put all together into the same bundle of TPV.

But what I can tell you and give you more color about this is that when you add our digital and integrated partners clients, we have around 40,000 clients in which more than 180 clients transact more than BRL1 million per month.

And we are seeing a strong growth in terms of our SMB online operation as well as some platforms that integrates to our platform through our integrated platform channels. Regarding take rates, when you compare take rates in online clients, in the SMB-only clients, they’re pretty much the same we charge in the – in our hubs.

So take rates are much more an effect of size of clients than if they’re connecting through our hub operation or through our online gateway and our online strategy. And regarding take rates, actually, our take rates are stable mainly because we keep the same strategy regarding pricing.

We were actually expecting higher take rates for this quarter, as we said before, but as we decided to be conservative and put higher provisions into our credit products, we reduced our revenue from credit, thus impacting the take rates that stayed at 1.81%.

If it wasn’t for the effect of these higher provisions in our credit products and some reliefs that we have given to our clients, then take rates would be bigger. So I think that we have always said that we can manage take rates between different products in the way that’s the best fit for our clients.

And we tried to provide some color in terms of our return on assets in our credit products. So we are always trying to provide more color in the way that we can charge our additional solutions such as the software, the banking.

So we will keep our strategy of providing an integrated set of solutions to our clients with a level of price that can be much better for them, when you see all the products combined, with a healthy profitability to our firm. So I am very happy with the price strategy that we have.

I think there’s a good balance between the value that we generate to our clients and how they perceive this in the price that they pay for our products..

Great. Thanks Thiago and Lia. Very helpful. I guess – so it looks like the take rate was increasing, except for the higher provisions, which impacted in the quarter. And you showed some good loan growth there like BRL386 million already in April.

How large do you think that, that loan portfolio can get by year end, considering the additional risk as well?.

It’s very difficult to provide an outlook about this, Tito, but we still expect a huge room to grow this year.

I think that in the next three or four quarters, we can double the amount of our outstanding credit balance and using a conservative approach, mainly because I think that as our business evolves and the way that we created this product, we know pretty much the transactional behavior of our clients.

We are very conservative in the way that we have built our scoring process, and we invest a lot to keep evolving the intelligence behind our algorithms on a daily basis.

And now I think that with the regulation being the right place regarding the lock of receivables, we can still use – we can already use credit sometimes as a first relationship with our clients because now we have the ability to lock receivable of the other payment providers.

So those receivables, they are mainly backed by future sales, so the risk that you take is that the clients will be able or not to transact in the future in any type of different payment matters.

So once you select the clients that are in activities that continue to operate even through the COVID scenario and they have ability to grow their volumes, once you understand their pattern in terms of transactional data, it becomes a very good product that you, on a conservative way, can generate good profits..

Great. Thank you, Thiago. And just one clarification, going back to the online volumes, you said it mostly comes from the digital and integrated partners. And in the past, you had said that digital and integrated partners were roughly between – can be 30% to 40% of volumes.

Is that correct?.

Yes.

If you added up digital and integrated partners, we still have 40% of our volumes coming from both channels, but we are seeing an increase in growth during COVID scenario in those channels, either because of e-commerce clients or SMB clients that are setting up e-commerce of operations or the platform and marketplaces that we attend that are getting better volumes.

But in average, I think that we keep the same trend that our profitability comes from our SMB online partners but we have scale within some large clients that we have.

I decided to show this new number of 180 clients that transacts more than BRL1 million monthly to show that this business have actually had some diversification in terms of clients that maintain it on a very healthy level..

Alright. Thank you very much..

Tito, just to clarify, there is data on this breakdown on Page 9 of the presentation..

Okay. Thank you, Lia..

Our next question comes from Felipe Salomao with Citibank..

Hi, Thiago, Lia, Rafael. Thanks for the opportunity to ask questions. I have two questions. One is also about take rate. I know that there are a lot of moving parts here, I mean, change in volume mix, different clients paying different prices. There’s also the impact of credit – of provisions for future credit losses.

But would it be possible to share your thoughts about how take rates would look like in the second Q of this year given these things that I mentioned to you? And the second question is a question from a statement on the press release.

You mentioned that you decided to negotiate an upfront media package of BRL100 million for TON, a very attractive media deal to be used in the next 3 years.

So I just want to clarify, is BRL100 million the expected marketing budget for TON to be used in the next 3 years or this is just one specific, let’s say, marketing facility that you decided to pay upfront but investments could be above that level? So these are my two questions. Thank you..

Hi, Felipe, can you hear me now?.

Yes, Rafael, I can hear you well..

marketing in Globo that go beyond that BRL100 million; and also marketing through other media like social media, for example, that is not in budget. So this is a package that is common in the marketing industry. You negotiate a certain package, and when you pay upfront, you have an attractive discount. So this is not the whole budget.

This is only a part of it..

Rafa, can I add some comments? Salomao, Thiago here speaking. It’s very difficult to say about take rates in second, third quarter. I think that we are living on a very uncertain scenario here. But what I can tell you is that I believe in our strategy of providing more solutions to our clients over the long run.

That’s why we have invested to keep a relevant client base, and we are investing heavily to grow our client base as we have said before. And I believe in our ability to have better take rates next year than this year.

So when you look to more – difficult to say about the next quarter, but when we think about 2021, I believe in our strategy to have better take rates than 2020, mainly because of the penetration of new products.

And we decided to provide this color on the return on assets of credit, as an example, where we can move pricing strategy with different products.

So when you see banking, software, credit and payments, you will see our strategy of always trying to put – part is on monthly subscription, you will see part on the transaction activity, you will see part on our financial revenue lines. So I think that we have the ability to grow take rates over time.

And regarding TON, I think that is exactly what Rafael said. This is just the first negotiation that we did. We know that the industry negotiates with discounts when you have better volumes to negotiate. So we actually could have access to a better discount than regular prices because we did these prepayments right before COVID.

And we have 3 years to use it. So I think that was a great negotiation. This was funded by the upfront amount of Grupo Globo, so actually it was not a real impact to our cash position, and we are happy to have the 3 years to use it..

Okay, Rafael, Thiago, thank you very much for the answers..

Thank you, Felipe. Thank you very much..

Our next question comes from Craig Maurer with Autonomous Research..

Yes, hi, thanks for taking the questions and good to hear everybody’s voices. I wanted to dig in on the volume acceleration that we saw in May.

Could you comment on how much of this was driven by processing for MercadoLibre? And if MercadoLibre was an increased portion of volume during second quarter, if that’s going to weigh on take rates in the second quarter? And then secondly, with the decision to slow investment in TON right now while you experiment with different channels and find optimal LTV to CAC, does this present a missed opportunity, considering the way the government and others are trying to accelerate benefits through the likes of PagSeguro and, therefore, driving new account acquisition right now? Thanks..

Craig, Thiago here speaking. Thank you very much for your question. It’s a great question, actually. So let me start with the first question.

So it’s – we don’t want to – we don’t like very much to talk about volumes of other companies, but what I can tell you is that we are not seeing relevant changes in terms of volumes from this specific client that we have.

And keep in mind that the majority of volumes that we process of this client is from the brick-and-mortar operation, their machines, right? So the majority of their online volume, do not pass through our platform.

So this is mainly being – this recovery has mainly been driven by our hubs and our SMB digital operation as well as other integrated partners’ platform that has online transactions, too. And our hubs have presented consistent recovery through April and May.

Talking about TON, actually, what we saw was that creating a brand and a new business in an environment as this can be challenging. I don’t think that it’s the best moment for you to allocate a lot of capital in terms of creating a brand in the moment that you already have many different messages going on.

So we decided to be conservative, keep our cash position strong under TON and continue to use different channels to test our LTV to CAC ratio to make sure that once we accelerate our investments on TON, we will do this in a cost and an LTV to CAC ratio that we will provide the growth in the margins that we expected.

So we decided this beginning of the business because of COVID to be a little bit more conservative. And once we think that we have the right environment, we will invest more. But we keep developing the platform, we keep developing our channels and we use part of our money to test this CAC to LTV ratios.

And once the scenario is a little bit better we will be back to scale this business..

Thank you..

Now, can I just….

Sure, go ahead, sorry..

Can I just take – continue on the answer, Craig, regarding the government incentives? So what we want to say about that is that we are ready, and we will enable acceptance of corona vouchers as a payment method within our network of terminals, Stone terminals, as well as online.

So we will be technically ready to accept to our terminals within a couple of weeks, and we are already, as we speak within digital transactions, so just to complement Thiago’s answer..

Thank you.

Just one follow-up, should we expect – what degree of severance costs should we expect to impact second quarter?.

Craig, Rafael here. So I think we are not making comments here still about our severance package. It’s a couple of million reals, right? So that’s why we decided to provide our pre-tax margin already including those costs and then you can see it. There is two components of the severance costs.

One is the, like, legal mandatory costs that we have, and the other one is the discretionary package that we have provided to help those people, I mean thanking them for participating in everything that they have built.

So there will be those two components and we will provide more details when we disclose the effect of that reduction in our workforce next quarter..

Okay. Thank you very much..

Just to be clear, Craig, Thiago here again. So in the adjusted pre-tax margin that we have disclosed as an outlook for second quarter, we already have these numbers incorporated. So this outlook incorporates all the costs and expenses as our previous reporting.

And in second quarter, we will give detail about potential one-offs that we will disclose separately as we did in this first quarter release..

Okay. I appreciate that. Thank you..

Thank you very much, Craig..

Our next question comes from Jorge Kuri with Morgan Stanley..

Hi, good afternoon everyone. Good to hear everyone. Two questions, if I may. The first one is on your TPV. You mentioned you’re at 87% in the first half of May versus the first half of March, mostly driven by new clients.

Could you share with us what would be that same percentage if you look at it on a same-store basis? Just to understand what has been the real impact of closures on your existing business? And the second question is on net adds, which evidently were very strong in the first quarter, 50,000, and the driver of that pretty punchy 87% number that I talked about.

Could you tell us now what the net adds are looking like post-COVID, say, April or May, relative to that 50,000 run-rate that you had in the first quarter and the fourth quarter? Thank you..

Thank you, Jorge, for the question, Rafael here. So to your first question, when you look at the index number of 87% in the first half of May, most of the effect here of the recovery is from the base, right, and not from new clients, especially because when you add new clients, it takes a while until those new clients generate their TPV.

So basically, the biggest, the vast majority of the impact here is really from the base recovery and also all the channels that – regarding online sales that Thiago just mentioned. So I think we have seen new clients also contributing to this, but I think the main part is regarding the base.

And then Thiago, can you please answer the second part of the question? Thank you..

Yes, Jorge, thank you very much for your question, very good to hear your voice. So let me try to provide some color regarding net adds.

I will start saying that once we first had – was encountered with this COVID situation, we decided to warrant net adds on a 7-day basis as a leading indicator of what would happen in our management view of 90 days as we disclose it.

So when we see this leading indicator of 90 days – 7-day net adds, I am sorry, what we can see was a decrease in terms of net adds in the beginning of March that became negative in the second half. From March 15 to March 30, it became negative.

But then in the beginning of April, it turned positive again and stayed positive every day since then until now. It’s very difficult to say about net adds going forward.

But – and mainly regarding second quarter because we still have many moving parts here and the impacts of the lockdown on March will be mainly presented on the number of June, right, because of this 90-day effect that we disclosed.

But we expect that in third quarter, our levels of net adds in terms of 90-day view that we disclosed, we will already be above our first quarter level and we will continue to increase after that, as we said before. So in summary, we put in front of us a leading indicator, which is net adds in 7 days. We saw a decrease in the beginning of March.

It became negative from March 15 to March 30. On April 1, it turned positive again and stayed positive since that until now.

And when we see the 90 days that we disclosed to you, very difficult to talk about second quarter because the impact on March will be presented in the June numbers, but we expect third quarter of net additional clients higher than first quarter already and then increasing net adds throughout the other quarters as we have said before..

That’s great. Thanks a lot, Thiago and congrats on the numbers..

Thank you, Jorge. Thank you very much for your question..

Our next question comes from Victor Schabbel with Bradesco BBI..

Good evening, everyone. Thanks for taking my question.

So sorry if I am missing something, but the tone of you guys have been generally constructive during this call, so you were talking about resilient take rates, growing loan portfolio, recovering volumes, as you showed in your presentation, right, with volumes for May already recovering and growing on a year-over-year basis.

So why have you guys decided to lay off 20% of the company in mid-May when you have the numbers already recovering and obvious, let’s say, more constructive tone being conveyed now? So what is the reason behind the layoff? What are you guys seeing that is different now that maybe justifies firing 20% of the staff? Would this be a risk for you in a way that it could put at risk the environment, the working environment, of you guys that is known for being very good and very strong? So I just wanted to understand more properly what were the reasons for the layoff given this somewhat constructive tone that you are right now conveying? Thank you..

Hi, Victor, Thiago here speaking. Thank you very much for your question. It’s an excellent question. When we took this very, very difficult decision, we decided to talk openly about this, and we put a release into our website to talk about this.

And I wrote down a letter that I provided to all of our team and some of the clients that sought this publicly. We are living on very uncertain scenarios. And our assessment was that we had a mismatch between revenues and level of investments.

As you know, we have to put investments upfront, and we have a kind of vertical business strategy in which all of our sales team, our customer service, our logistics, they’re all in-house, and we already invest more than we need for the moment because of future growth that we expect in order for everybody to be trained and to be ready.

Once the COVID-19 happened and we saw the sharp decrease that happened in March and some partial recovery, we saw that the level of certainty required us to be a little bit more – work with a little bit more austerity in terms of how we manage our business models, so we decided to improve our level of productivity in many fronts of our company, and we did a technical resizing of our operations.

So we looked for efficiency in our back office, in many different areas of our firm. And just to give you an example, as we cannot be in the street at this moment to sell as we do regularly through the hubs, we decided to consolidate some of our routes.

And now we can be actually much more productive because we don’t have to move ourselves between different clients. So through the phone, we can be much more productive in terms of selling.

So we decided to keep our team in the level of productivity that we think that fits best for this moment, and we can open opportunities to our people when the economy is back on track.

And I think that in 2 or maybe 3 months, we can establish the size of our sales team in the same level that we had before, and we have the optionality to hire back our team. So it was a very, very difficult decision. We always take good care and we give a lot of attention and we think properly about this because we are talking about our team’s lives.

It’s very difficult, but we also have to manage on a diligent way, with discipline, our business. So with all that said and given the uncertain scenario that we have ahead, we expect that these trends of recovery continue, but there are some of the things that we do not have under control.

We decided to look for a better balance between our investments and our revenues. So I think that we could take care of the people that, unfortunately, are not part of our company now, and we just have to say a big and warm thank you to them. We expect to generate these opportunities in a few months and maybe hire back some of our people.

But at this moment, I think that it was the right decision to balance investments, the results that we are seeing. So you can see some impact in our profits in first quarter.

We know that second quarter, we provided our outlook, but it’s a quarter that we have challenges in the way that we have relationships with our clients and everything that we are doing in many different fronts.

Our company has a financial component, which is important, so we want to keep a strong balance sheet and level of profitability to make sure that we will have all our funding lines working in the way that we need. So given all that said, I think that it was a very difficult but the right movement with the level of information that we had..

Thank you.

And just to make sure I got it, so given the high level of uncertainty that we still have out there, questions about the recovery in June, July, this is why you basically took the tough decision of laying off 20% of your staff in May, right?.

Yes..

Okay. Thanks for the question and congratulations on the transparency when deciding to take this tough decision in May..

Thank you very much, Victor. I can tell you that it was one of the most difficult decisions that we had to make. We’ve built this company from scratch, so we feel the commitment to each and every one that works within Stone and is part of our culture.

So it was very, very, very difficult to everyone here, but it was for the better good of our company and our clients. And in a short period of time, I think – I know that we will have the optionality to and the ability to provide the opportunities for everyone back.

And we hope that we will recover as a society from this COVID experience and will become stronger after this..

Our next question comes from Mario Pierry with Bank of America..

Hello, everybody. Thank you for your presentation. Let me ask you two questions.

First one is related to the cost savings that you expected to get, right, you are laying off 20% of your workforce, but how much does this represent of your total cost base? And then the second question is more related to your business model, right? Your business model, your key – one of your key differences from your competitors was your face-to-face interaction with your clients, was the white-glove treatment that you provided.

How do you adapt your business model to this post-COVID environment? Does it mean then that we see a continuation of these trends that we saw this quarter, that you have more volumes coming online than hubs? Does it mean that you need to close some of your hubs? So I would like to understand then, how are you thinking about adapting your business plan? Thank you..

Hi, Mario. Thiago here speaking. Thank you very much for your question. So in the beginning, as we said, we will provide more color on the second quarter on the initiatives that we took in terms of cost and expenses management. We are basically trying to renegotiate third-party contracts that we need to have.

We are improving efficiency in many different areas of our firm. In terms of resizing, I think that we did everything that we had to do, so we are not targeting any other movement of that. That’s done. Now we are targeting third-party contracts, facilities that we can improve.

And there is many items in our cost and expenses that we can work to find better efficiency in terms of cost and expense management. Regarding the business model actually and I have received this question from other investors about hub model and the digitalization trend and the comparison. We don’t have to choose. Actually, we execute both.

Keep in mind that we were the ones that started this trend of digitalization of brick-and-mortar SMBs. If you may remember, on the second quarter ‘19 earnings presentation, actually, on Page 6, we presented our vision regarding our strategy of helping merchants to sell more through many different digital channels.

In that presentation, I talked about the importance of the POS and the ERP software and how it integrates with social media and marketplaces to help our merchants to manage their inventory combined. And our investments on MLabs and Delivery Much are 100% aligned with this vision.

So, we always executed the digital and the brick-and-mortar part of their businesses in the same intensity. I think that we have now a level of technology in our operation that provide us the ability to continue to serve our clients from our home office with the same level of efficiency as you see on our NPS.

And that is one thing that I think that will not change. Our clients like to have us in the counters of their stores. So once we are – we will have the ability to be in the streets again, our clients can count on us. We will be at the doorsteps with all of our solutions.

And our business has the cost of acquisition and lifetime value ratio that give us the ability to have this direct distribution throughout Brazil. And I think that this is a powerful differentiation that we do have. So, we will keep our distribution. There’s no change in terms of the long trends of our hubs.

We will keep investing heavily in additional solutions that help our merchants to sell more, either at their store or online, as we had already said before. And our long-term vision of integrating the online and the brick-and-mortar remains as a focus to us.

And that’s why we decided – on the second quarter of ‘19, we started talking about this vision that we have been executing from that time. So I believe that our company is very well positioned to this trend of digitalization. That will only accelerate. It was already present. We were the ones investing heavily on that front.

We will accelerate a little bit better, and I think that we have the right business model to pursue these trends and provide great results for our clients and for our shareholders..

Thank you. That’s clear. Let me ask you then, related to laying off 20% of the people, what does that mean in terms of hub closures, because again, right, you were coming through a heavy investment phase, growing your hubs, quite aggressively hiring people.

Now once you lay off people, does that mean that you close some of these recent hubs? And if you do, how do you make the decision of closing regions of the country, in big cities, small cities? If you can give us some color on that, that would be helpful. Thank you..

Of course, Mario, it’s Thiago here again. So just to make sure, don’t make the assumption that the majority of the people that unfortunately has to not be with us now is from our hubs, right? There’s a part of that, but we have other fronts of our company. And we actually – we didn’t, and we will not close any of our hubs.

Actually, what we did is that we improved a little bit our efficiency in all of our hubs, so we keep the same level of hubs that we had in all the regions. We didn’t close any of our operations. We are operating through the phone and chat to provide services to our clients and to sell more. We are using digital channel to generate demand.

We are asking clients to make recommendations to clients that are operating delivery or in cities that they can be, sometimes with their stores, open because these lockdown dynamics, there’s different dynamics between different cities.

That’s why I decided to show you the level of TPV that we have in main cities that are most impacted by lockdown, but we have the majority of our volume out of the main cities. So we have clients that are open. So we keep the same number of hubs. We keep with the same routes.

We just improved our efficiency in the way that we operate, mainly because we don’t have to invest so much time to move from one client to the other and, in the end of the day, to go to the office and then go back to our home. So we have more time to be more productive so we can take care of our clients.

As I said, we are – we had an impact in March, but we are back in our growth in terms of net adds. And it’s just a matter of improving productivity. And once we have the ability to be in the streets, we will keep growing our hubs as we did prior to COVID. And actually, I’m very happy to see the level of engagement of our team during this crisis.

I think that the ability of this team to adapt to challenging times, keeping the strong culture, the level of dedication, improvement in terms of efficiency is incredible.

I’m very happy and grateful to see the efforts of everyone in our firm towards the purpose of serving the SMBs, which are the ones that really needs the attention and our care because we are now – we know that many of our clients are facing challenging times..

Now, very clear. Thank you and congratulations..

Thank you very much, Mario..

Our next question comes from Jeff Cantwell with Guggenheim Securities..

Hey, thanks guys for taking my questions. I just wanted to ask you another one on your e-commerce TPV. Maybe if we can just drill down a little bit more there for a second. So you had 51% of the total e-comm volume on your platform in late March and April, and that’s impressive.

So you’re also talking about a huge online opportunity looking ahead and mentioned that e-commerce is still only about, like, a mid-single-digit percentage of total retail sales in Brazil. So maybe we could just drill down because we can see that your acquiring online TPV increased by 42%, which again, is quite good.

So as we think about your e-commerce volumes and what they might look like in 2 years to 3 years, just on some rough math, should we maybe expect to see that TPV double over 2 years to 3 years? Because that would seem to be the growth trajectory that you’re on and obviously, what you are saying is there is a huge opportunity you’re seeing in e-commerce going forward.

I would just love to hear any of your thoughts there, and help us think through your growth trajectory in e-comm? Thanks..

Yes, so, hi. Jeff thanks for the question. I’m going to start answering then maybe Rafa can complement. Like Thiago has already mentioned, we believe that this digitization trend will continue.

So, overall penetration of digital in Brazil is still relatively small, right, if you compare to U.S., UK any other country which is more developed on that front. So we expect this penetration to continue, and we believe we’re very well positioned because of two factors.

First of all, we really were pioneers within the digital payments space in Brazil. So from our foundation, we started to develop our platform, thinking about the needs of the digital clients in mind. So our platform is very well prepared. We have an enterprise-level solution that works from – anywhere from SMBs all the way to very large clients.

And when we combine the power of our payments platform with our software solutions, we believe that we can drive – we can really help drive this continued digitalization of brick-and-mortar in Brazil. So we expect this as a trend to continue.

Of course, as a consequence of the COVID scenario, this has intensified, and I think the big message here is we think that we’re very well positioned to continue to drive this evolution. So, all the data regarding our digital volume breakdown and growth are in the presentation. I don’t know that there’s much more to say about those.

But we really believe that this trend will continue and that we are very well positioned to help – both help drive the digitalization of our clients and be a part of this evolution..

Hi, Lia, can I add two comments? Hi, Jeff, Thiago here, back again. Just two comments about this. So first, we never talked about our gateway volumes before. And we decided to disclose this at this time to give clarity to everyone because online is a very important part of our business.

We were born actually as an online payment company right in the beginning of our businesses. And we had prior experience even before building Stone as entrepreneurs we built other gateways and acquired companies. So we understand pretty much how the online space works.

We decided to create Mundipagg from scratch as a gateway to improve conversion rates and have faster transaction speed as well as we invested in Pagar.me and then made the acquisition because we saw a level of technology incredible in terms of the ability to provide solutions for small clients.

And for big ones, the way that Pagar.me has a functionality in terms of split payments for marketplaces, so we decided to invest and grow this business. So I think that we have a very strong digital business. When we see the volumes of gateway, I see this as an opportunity to further penetrate payments into that base of clients.

So we expect to continue to grow our online businesses as we have done in the past. And yes, I expect a good level of growth for the next years on that. One additional comment I would like to say, Jeff, too, and to everyone, I would just apologize that we already have one hour and twenty-five minutes of questions, and we have some other questions.

We understand that this is a moment of uncertainty, so we want to take the questions of everyone. So I would like to ask for us to continue a little bit more and take more questions because it’s important to give transparency and information to everyone..

Our next question comes from Neha Agarwala with HSBC..

Hi. Thank you for taking my question. We really appreciate the time that you’re spending answering all that out. My question is on the e-commerce volume once again. You mentioned 51% of the e-commerce volumes were in Brazil and through Stone’s platform.

How does this compare to the previous quarter? Have you seen an increase or a decrease? And how should we think about this going forward? My second question is on your credit business. We saw that the credit book has more than doubled since December of last year.

Should we expect similar kind of accelerated growth in the credit business or was it more temporary due to the pandemic, you wanted to roll out more credit? That will be helpful to know.

And lastly, how much – these non-acquiring revenues from credit, from your banking platform software, how much do these comprise as a percentage of your total revenues? And what kind of TPV is generated to these non-acquiring activities? I believe that is not included in your total TPV.

So if you can give us any color on the revenue and the TPV you’re making through these non-acquiring businesses? That would be very helpful. Thank you..

Thank you, Neha, Thiago here speaking. I will try to address all the questions. So first, regarding digital, it’s always very difficult to compare our volumes and our market share because it’s difficult to see when the reference number, it’s including airlines or not, wallets or not.

So this time, we saw the number of eBit and by the activities that eBit listed in this BRL8.4 billion in e-commerce, we could take exactly the same type of transactions in our e-commerce part of the business and we could disclose this market share to you. I think that it’s pretty consistent with our market share in this space.

Mundipagg is a relevant gateway and Pagar.me is growing a lot in that segment. So we expect to have – to keep with a relevant presence in digital as we already have. I think regarding credit, we expect to keep the trend of growth in our credit.

We have to change a little bit segments in which we operate, incorporate new type of information regarding trends of our clients.

But given that we had a majority of our clients that still transact, we have new clients coming in, we have the ability to lock the receivables and to have this way that our clients pay as they sell, which is very aligned with their business model.

I think this is a very; protected business model of our credit, we will not rush to increase our outstanding balance. I think we will keep the same pace of growth that you have seen in the previous two quarters.

And we are very confident in our ability to align interest with our clients and help them grow by investing in their business and provide a little bit more liquidity combined with prepayments that we did. So our expectation is to keep our trends in terms of growth of credit as we had in our two previous quarters.

Rafa, can you help me with the other parts of the questions, please?.

Hi, Thiago. Hi, Neha. Thanks for the question, Neha. So regarding your third question about the new solutions, I think over time, we see the contribution from new solutions are becoming bigger and bigger in our results. I mean this is still small, right, we are still in the early beginnings of the new solutions.

If you look, for example, at credit, which is the one that contributes more to the P&L right now, we have a transactional model in which we receive as our clients sell.

So in a way or another, it is related to the volumes that we have with them, right? So, it’s – despite being credit, the product itself is designed in a way that it follows the TPV that our clients have with us. So I think as we grow those solutions, we will provide more and more disclosures.

But we are already seeing the contribution from our new solutions in our results. And we think – and we are very confident that this will increase over time. So the percentage of contribution from those new solutions, we expect to increase over time..

Thank you so much..

Thank you, Neha..

[Operator Instructions] Our next question comes from Domingos Falavina with JPMorgan..

Hey, good evening everyone. Thank you also for taking the question. And at least to us here, surprisingly good numbers in light of COVID and all, my question is more, I think, strategy-wise. So everybody seems to be refraining from having their workforce deployed on the streets given the risks.

But your business model, to a certain extent, relies on that, right? So my question is, what’s kind of – I know you guys usually have strategies for the short, medium and long term.

So my question is, October, November, when some of those restrictions get lifted in cities, how are you guys thinking about going back to business? Like what’s the game plan? What’s the timeframe? What’s going to be the sales strategy, just so that we understand a little bit more how you are envisioning the company operating? That’s my question..

Hi, Domingos. It’s Thiago here speaking. Thank you very much for your question, excellent point. As I said, this moment, we are into right-sizing for the scenario that we have in front of us. And we have different perspectives regarding lockdown measures and the health, overall health situation in different cities.

So there are cities that we can be better working because we don’t have a lot of – we don’t have big numbers of infection in cities that are more challenging ones.

But we decided to have more than 90% of our team working from home, and the level of technology that we have and the brand that we created give us the ability to properly work from home, either because we are much better in terms of allocating capital in market to generate demand, either because our clients provides recommendation to other clients to be part of our ecosystem.

And I think that everything that we did in terms of our actions towards society and the level of investments to ask society to buy at local businesses help and resonate with our brands. So that’s why we keep with strong demand in this scenario, as we said….

But you don’t have to payback 20%. You don’t have like a 20% workforce by September or 50% by October, November, like you don’t have kind of a laid-out plan for coming back..

To me, unfortunately, I don’t. And I would tell you why. It’s based on health situation here in Brazil, so it’s really, really difficult to properly say what will be our ability to be back in the streets. We hope that on a short term, we’ll be back there, but it’s difficult to tell this.

What I can tell you is that once we have the ability to be safe in the streets, we will be very fast to route again and be at the doorsteps of our clients. And by that, we are operating through the phone and chat very well. So we have the ability to increase our workforce fast because we have an investment that we did in our HR department.

We have a machine in terms of our human resource strategy here in terms of finding the right people, training them, the onboarding process. So once we have the ability to expand in the streets, we will be the first movers. But we have to see that our people will be safe and protected.

We have, at this moment, our Green Angels working but with the proper equipment and instructions to make sure that they are safe. So we have to see what the dynamics will be. We are being positive in terms of the recovery, mainly because of the volumes that we are seeing from our clients and small cities and how small cities are behaving to this.

So, we are trying to be on a positive side of this, but we have to be rationale and diligent in terms of taking care of our people. But once we have the ability to be full on the streets than we were before, we will give this information upfront to everyone.

But now I think that it’s a moment to watch and understand exactly what the health situation will be..

Very clear. Thank you very much..

Thank you very much, Domingos..

Our next question comes from Jamie Friedman with Susquehanna..

Hi, it’s Jamie at Susquehanna. I just wanted to ask – I’ll make it brief, but the – in terms of the Q2 guidance, does that contemplate a continuation of the May levels, Lia that you had articulated? Does it assume some improvement? Does it assume we stay here? I’m just trying to understand better the Q2 guidance inputs. Thank you very much..

Hi, Jamie. Thanks for the question, Rafael here. So we do see the improvement, right, as we have mentioned during this call. So what we have decided to do, and I think that we have to be responsible also with the guidance, so we do assume that, that trend is continuing.

And when you look at the 87% index that we provided up to May 15, if you look a few days after, we continue to see this number go up slightly.

So I think we are providing that outlook with the information that we have in the present and with very, I mean, granular data that we take every single day on the ground, and we were comfortable to provide that outlook for the second quarter. So we have many KPIs that we track every single day in a very detailed manner.

So – and we saw that, given the scenario, we could be comfortable to provide that outlook for the second quarter..

Rafa, may I add? Just to add, James, I think that what we decided to do here exceptionally, because the situation is an exceptional situation, is to provide everyone and all of our shareholders the same level of information that we have in our front now.

So that’s why we updated some top line trends until May 23, and we provided more color about the net adds behavior of March and April and some of May. So it’s difficult actually to ensure what will happen from now on.

There is a lot of uncertainty in the table, but in terms of what we control and the level of investments that we do for the future and how we manage our cost and expenses, we are very confident with the adjusted pretax margin that we gave to the market.

And I think that as we see our business model as a strong business model, and we have many of the parts of our customer expenses under our control and we decided to proactively take that tough decision that we set, and it’s done, we are not making any movements on that front, just to be clear, we are confident with the adjusted pretax margin that we have disclosed.

And by second quarter, as we did in the first quarter, we will provide the one-off effects on top line and cost and expenses as we did in the first one in order for all our investors to understand the behaviors and the trends in our business..

Thank you..

Our next question comes from Marco Calvi with Itaú BBA..

Hi. Thank you for taking my question. My question is actually regarding the financial expenses. You guys highlighted two effects that, combined, resulted in a BRL36 million increase in the financial expenses, the first one related with the sale of receivables and the second one related with higher cost of funding.

My question is, are you expecting that to happen during the second quarter and those effects continue to happen? And if so, is this included in your informal guidance for the second quarter EBT margins? Thank you..

Hi, Marco, thank you very much for your question. Thiago here speaking. So I will start to say that yes, everything that will be in our P&L, it’s included in the outlook that we have provided to you, so there will be no one-off items outside that margin.

So when we say the adjusted pretax margin in that level, it already accounts for everything that we think that will happen here. That’s the first thing. And then we will give you one-off effects separately, but that outlook has everything inside, okay. That’s the first thing.

Regarding financial expense let me try to explain a little bit about the dynamics. So we were already – we were always very conservative in the way that we manage our treasury. That’s why we decided to have more cash than sometimes needed for our company.

And what we saw was in the right beginning of this, when we had this – that level of circuit breaks that you may remember in the beginning of March, from the beginning that we saw how capital markets were behaving and the credit markets were behaving, we decided to manage our cash position every single day, and our treasury team was incredible in terms of working around all the credit lines that we had.

I think that our team did a great job. So we decided to sell more receivables than normal in order to improve liquidity, and we decided to sell with longer duration with a conservative approach of improving our liquidity.

We saw some pressure in terms of spot lines during the circuit break scenario, and we decided to balance this with a little bit of our own cash to put the negotiations on the right places.

And with that, we changed some of the lines that we have here within our firm, so we put an extensive cash flow disclosure in our release with all the movements that we did throughout that period.

So you will see that, on a short-term period, we did many movements in terms of strategy to make sure that we would be financially strong because our clients see Stone as a liquidity safe harbor.

So keep in mind that during this circuit break scenarios and all the challenging and the volatile scenario that we saw in capital markets and in the credit markets of COVID, we were the ones prepaying more than BRL11 billion to our clients and extending credit to them in a safe operation.

So to beat this liquidity safe harbor to our client is something very important. It’s a brand creation for the future that we did, and we worked hard to make sure that we were managing our treasury team in the best way possible. So those are basically the effects.

Despite this decrease in overall rates and base rates that we see, the combination of the additional sales receivable, the longer duration and some spot lines accumulated in that negative impact that we had disclosed, and we decided to absorb these one-off effects and keep the strength of our business model.

So we already have, in May, stable funding prices. I think that – or in May, the situation is much better than we saw in the beginning of March and April. So the scenario in terms of funding lines price are much more stable than before.

And we keep a strong cash position and liquidity ratio to our firm because it’s important to provide all the prepayments and the credit ratio that we give to our clients..

Thank you very much. Very clear..

Thank you very much. Marco.

I think we don’t have – do we have any other questions?.

We have no more questions..

Okay. Thank you very much, operator. I would just say as final remarks, I would like to thank you very much, everyone, here in the call, thank you for the amazing questions. Thank you, our long-term shareholders that have supported us throughout these challenging times.

We have received many e-mails by our shareholders supporting us, and I think that the most important message is that we are very grateful to all of our Stone team members because of their extraordinary efforts during this crisis.

And as I said in the letter that we wrote to our shareholders, we believe that together, business and society will find new and innovative ways to conquer COVID-19 and its effects using technology, care, humanity, that’s part of our life, and our SMB clients and all of our clients can count on us with our efforts to improve their lives and find new ways to win the situation.

We keep strong. We think that our business is very strong. We keep excited with the opportunity to grow our business over the long run. We have tremendous opportunity ahead of us. And we will keep discipline, working hard to help SMBs strive in their entrepreneur road. So thank you all, and see you next quarter..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..