Good evening, everyone. Thank you for standing by. Welcome to the StoneCo Second Quarter 2024 Earnings Conference Call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found online at investors.stone.co.

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

Reconciliations of the company's non-IFRS financial information to the IFRS financial information appears 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 performances and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause 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, Roberta Noronha, Head of Investor Relations at StoneCo. Please proceed..

Thank you, operator, and good evening everyone. Joining me today on the call is our CEO, Pedro Zinner; our Chief Financial and Investor Relations Officer, Mateus Scherer; our Chief Strategy and Marketing Officer, Lia Matos. Today, we will present our second quarter 2024 results and provide an updated outlook for our business.

I will now pass it over to Pedro so he can share some highlights of our performance.

Pedro?.

Thank you, Roberta and good evening everyone. After reviewing our second quarter results and our performance at midyear, I am pleased with our progress across our strategic priorities and believe we are on schedule to meet our 2024 goals. In payments, we continue to win in the MSMB market and take more market share.

Our client base grew 30% year-over-year. TPV grew 25% and current TPV increased over 17%. We are also executing on our pricing and bundling strategies to enhance client engagement as we discussed during our Investor Day. As a result, our MSMB take rates also continue to expand, increasing seven basis points year-over-year to reach 2.54%.

We believe these strong results arrive from our competitive advantages in distribution, superior service, and our growing ability to provide more comprehensive solutions to our clients. In banking, we are making similar progress. Our client base grew 62% year-over-year and client deposits increased 65% as our team continues to cross-sell effectively.

We now have 2.7 million active banking clients and R$6.5 billion in deposits, which are approaching our 2024 targets. We have also started to pilot interest bearing products such as time deposits, which I believe is being well received by our clients and could be an exciting new area for us.

In Credit, we're also evolving well towards our goals even above set targets. Our total credit portfolio increased 32% quarter-over-quarter to reach R$712 million.

Within that, our working capital portfolio grew over 28%, reaching R$682 million this quarter with strong quality as shown with our NPL over 90 days, still at 2.6% very much in line with our expectations. I'm also excited with some new initiatives underway.

Our specialized project desk, which is focused on addressing the opportunity within our larger SMB client base, successfully completed its first disbursement this first quarter. And we finalize the structuring of our zero fast food product.

This is a short term of address solution designed to address the immediate capital needs of our clients, which is set to launch in the third quarter. In our software business, we are making progress on our cross-sell initiatives and we are improving the quality mix of our business towards more recurring revenues.

Total software and vertical software revenue growth remain modest, but we are seeing underlying signs are improving. For example, we are getting better cross-sell traction in our gas station and retail verticals, and we generated stronger Card TPV growth from our software clients in priority verticals than our overall MSMB card TPV growth rates.

We still have a lot of work to do in our software business over the long term, as I have mentioned, but I'm seeing some encouraging trends from our efforts. We have also maintained our focus on efficiency gains in the streamlining of administrative expenses, which decrease by 13% year-over-year.

In the quarter, we achieved a 180 basis point reduction in administrative expenses as a percentage of revenues when compared to the second quarter of 2023. As a result of this positive developments, our adjusted basic EPS demonstrated strong growth reaching R$1.61.

As I mentioned earlier, we remain committed to our business plan and the targets established during our Investor Day.

In light of this commitment and considering short-term market fluctuations, we allocated capital to repurchase an additional 9.67 million shares, totaling R$724 million, bringing us closer to completing the R$1 billion share repurchase program announced in November, 2023.

Additionally, as part of our liability management strategy, we allocated $295 million to the tender offer for our 2028 bonds, achieving nearly 60% participation. In summary, I'm very satisfied with the trajectory of our results for the second quarter of 2024, and I have full confidence in our team's execution.

Now, I'd like to pass the floor to Lia, who will discuss our second quarter of 2024 performance and strategic updates.

Lia?.

Besides optimizing our commercial strategy for growth and market share gains, we're also putting a lot of focus on improving our payments in banking bundle offerings to new client cohorts, both in Ton and Stone. As you can see on Slide 6, this approach has resulted in more profitable TPV growth in market share gains in the MSMB segments.

Before we dive deeper into our TPV performance in payments, I would like to point out that we have refined our disclosure of TPV due to the increasing relevance of PIX QR Codes in the market and in our transactional volumes. From now on, whenever we talk about TPV, we will refer to transaction settled through cards and PIX dynamic QR codes.

When we talk about Card TPV, we will be referring to transactions settled with cards only. Now moving to vitamin take rate results. MSMB TPV increased 25% year-over-year as a result of a 17.4% year-over-year growth in MSMB Card TPV and a 2.6 fold increase in PIX QR code, which reached R$11.5 billion in the quarter.

We achieved this strong growth while also increasing take rates by seven basis points year-over-year, which reached 2.54% as a result of higher credit and banking revenues and higher prepaid volumes partially offset by a lower duration from prepayment transactions. On Slide 7, let's shift to discuss our banking performance.

Our banking active client base increased 62% year-over-year to 2.7 million active clients as a result of growth in both Ton and Stone payments client base with an increase in penetration of clients using banking and payments bundles.

This growth in our client base also helped drive a 65% year-over-year increase in client deposits, which reached R$6.5 billion in the quarter, despite the sequential 8.1% growth in deposits. ARPAC decreased to R$25.7 per month, mainly as a result of lower average CDI in the period.

Moving to Slide 8, let me give some highlights on our credit performance, our credit portfolio increased to R$712 million with the working capital portfolio alone increasing 28% sequentially to reach R$682 million in the quarter.

The remainder of the portfolio is the result of the very initial results of our credit card products, both within Ton and Stone, because such cohorts are very early vintages. We highlight on the page the credit quality metrics of our working capital loan product alone.

NPLs increased slightly this quarter with NPLs between 15 and 90 days reaching 2.9% and NPLs over 90 days reaching 2.6%. As highlighted before, because these cohorts are also relatively new, the ratio of past due loans should continue to increase as they mature.

Provision expenses for working capital expected losses were R$17 million in the period, decreasing significantly quarter-over-quarter.

This reduction reflects the beginning of a conversion of provision levels to expected loss levels as the portfolio matures with provisions now representing 18% of the working capital portfolio down from 20% in previous quarters.

Finally, to summarize the performance of our financial services segment, the second quarter was again marked by strong year-over-year TPV growth and the successful development of our banking and credit initiatives.

These resulted in segment revenue of R$2.8 billion, an adjusted EBT of R$608 million in the quarter, up 11% and 53% respectively year-over-year, and an increase of 590 basis points in our adjusted EBT margin to reach 21.5%. Moving to Slide 10, let's talk about software performance and its strategic evolutions.

Quarter-over-quarter, the Card TPV of clients that use both financial services and software solutions increased 8%, primarily driven by the gas station and retail verticals, which have been our priority focus since last year.

This result has been mostly driven by the cross-selling efforts from our financial services specialist distribution team, cross-selling bundles to software clients. As Pedro mentioned, cross-sell volumes outperform growth of MSMB Card TPV in the quarter by almost a factor of two.

We're happy with the execution of our cross-selling initiatives so far in 2024, but I believe, we still have a lot of room to grow, particularly as we gear up to enable our link software channels to also sell software and financial services bundles.

On Page 11, you can see the standalone performance of our vertical software business where we're seeing some improvements in the quality of our revenues. Vertical software revenue grew 3% year-over-year due to an increase in recurring revenue growth offset by a decrease in non-recurring revenues in priority verticals.

As a result, we believe the revenue quality of our priority verticals is improving with recurring revenue as a percentage of total revenues increasing by more than 450 basis points year-over-year. In Slide 12, we present the consolidated performance of software.

As you can see, total software segment revenues reached R$384 million remaining flattish year-over-year, driven by the trends I just described in our vertical software business offset by slower growth in the enterprise business.

Adjusted EBITDA in the software segment decreased to R$64 million in the quarter, down 4% year-over-year, and 3% quarter-over-quarter impacted by a non-recurring seven expense of R$3.2 million, and by our decision to focus on growing recurring versus non-recurring revenues, which has a negative impact in the short term, but should be accretive for the business in the long run.

We continue our efforts to implement the software strategy that we presented in our Investor Day.

While we're happy with our evolution in cross selling initiatives in the gas station and retail verticals, we're still working and learning how to best enable our software distribution channels to sell financial services and software bundles via commercial incentives and systems integrations.

We also continue to pursue efficiency initiatives and a more disciplined capital allocation approach within our software settings. Now, I want to pass it over to Mateus to discuss in more detail some of our key financial metrics.

Mateus?.

Thank you, Lia, and good evening everyone. I would like to begin on Slide 13, where we discuss the quarter-over-quarter revolution of costs and expenses on an adjusted basis. Cost of services reached at R$831 million, increasing by 23% year-over-year and 4% quarter-over-quarter.

Sequentially, cost of services is a percentage of revenues decreased by 10 basis points, primarily due to a reduction in low loss provisions, which were reduced to R$18 million this quarter from R$45 million in the first quarter of ‘24.

This reduction reflects the beginning of the process of aligning our provision levels with expected credit losses as a portfolio matures with provisions now representing 18% of the working capital portfolio. This decrease was offset by higher provision for losses in the quarter on our acquiring and banking solutions.

Administrative expenses decreased by 13% year-over-year, resulting in a 180 basis point reduction as a percentage of revenues compared to the second quarter of ’23. Sequentially, administrative expenses increases by 1.4%, but declining by 20 basis points as a percentage of revenues.

This was driven by lower expenses in the software segments due to efficiency gains, as well as by the divestment of impact in the first quarter of ‘24, which eliminated expenses in the non-allocated segments.

Selling expenses increased at 27% year-over-year and decreased 0.9% quarter-over-quarter down 80 basis points sequentially as a percentage of revenues.

This decrease is primarily due to a reduction of approximately R$26 million in marketing expenses related to the sponsorship of reality TV show that Lia mentioned, partially offset by increasing investments in sales teams. Looking ahead, we anticipate gradual dilution of selling expenses as these investments in sales teams mature.

Financial expenses decreased 20% year-over-year and decrease at 4.5% sequentially, leading to a 230 basis points reduction as a percentage of revenues. This decrease was a result of lower average CDI in the period, a reduction in our funding spreads and our decision to reinvest for our cash generation towards the funding of our operation.

These effects were partially offset by higher funding needs for our repayment and credit operations, as well as by a higher number of working days in the quarter. Lastly, other expenses increase at 26% year-over-year and 80% sequentially, or 140 basis points as a percentage of revenues.

This variation was a result of more normalized levels of share-based compensation expenses as the first quarter of ‘24 included a non-recurring positive impact of R$40.5 million from the net effect of the consolidation and new grants of incentive plans. Excluding this effect, other expenses net would have been flattish as a percentage of revenues.

Turning to Slide 14, our adjusted net cash position was R$5.3 billion by the end of the quarter, reflecting an increase of almost R$1 billion year-over-year and R$117 million for the quarter.

We continued to deploy capital towards the expansion of our credit portfolio and executing on our share buyback program in the amount of R$237 million this quarter.

As Pedro mentioned, I would like to highlight that in July, we are located capital to purchase in additional 9.6 million shares amounting to R$724 million, nearly completing the R$1 billion buyback repurchase program announced that in November, 2023.

Additionally, we allocated $295 million in July to the tender offer for our 2028 bonds, which will further optimize our funding spreads as we move forward. Finally, let's move to Slide 15 to discuss our guidance. We are very pleased with our performance in the first half of the year.

The profitability achieved in the first half of ‘24 has positioned us favorably to meet our full year guidance, despite several headwinds. This include R$120 million reduction in revenues due to the changes in recognition of membership fee revenues, and a challenging microeconomic environment with a higher yield curve.

In our banking credit solutions, which are key drivers for our long-term growth, we have exceeded initial expectations not only in volume, but also in quality. This strong performance may put us on track to surpass our year-end guidance in these areas. From my perspective, the most challenging area so far has been our MSMB Card TPV.

PIX QR Code penetration in the market and within our client base has been higher than we anticipated when setting our guidance in November of last year. This has affected our overall volume mix towards less Card TPV and more PIX QR Code TPV.

Although this trend is positive for the business, it also means that current TPV is growing a little tighter within our expected range. We ended the first half ‘24 with 18% growth exactly in line with our guidance. Despite a more challenging comparable base in the second half of ‘24, we remain laser focused on our efforts to meet this guidance.

Overall, I believe our second quarter results are trained in favorably and we are on track to achieve our long-term goals.

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

[Operator Instructions] Our first question comes from Mario Pierry with Bank of America..

Let me ask you a question about competition. Have you seen any changes in the competitive environment over the last three months? Especially coming from maybe some of the incumbent banks and any changes at CLO, because we did notice that you increase or you talked about making higher investments in your sales team.

Can you -- so like I wanted to understand that a little bit better. Why are you investing in sales team? Do you think like you had a disadvantage, you're catching up or you're seeing a more competitive environment? And if you're seeing a competitive environment, if you can discuss like how you're seeing take rates trending..

I’ll jump start and then I’ll pass over to Lia to make further comments. I think on the pricing piece, I think the way we see it is, it has become really a dynamic process within the company, meaning that we continuously evaluate the profitability of our cohorts and we adjust prices accordingly.

So in terms of the new interest rate environment and competition, I think we'll gradually incorporate the new yield curve and changes in the competition environment in our decision making. And I think we evaluate the economics of passing through these shifts into our clients.

I think as a direction, I think we'll continue to prioritize profitability and to price based on returns. Still on the competition piece and I’m not going to address specific on the -- piece, but I think the market has evolved a lot and I think other players have been behaving in a similar way.

Just another point I wanted to highlight is, that more and more we have more levers to price the relationship with clients through the bundles as the core of our strategy between payments, banking credit and software.

So, I think to some extent this is a kind of a hedge against short terms interest rate dynamics and in some ways on the competition side. I’ll pass over to Lia to talk about selling..

So, talking a little bit about dynamics around selling, I think there's two relevant dynamics to highlight.

First is more of a short-term discussion, which is we've already seen a reduction in selling expenses as a percentage of revenue, as Mateus mentioned, due to R$26 million impact decrease given that we sponsored Big Brother Brazil in the first quarter.

So that's more of a short term dynamics and it's going to continue to sort of impact positively throughout the year. But longer term, regarding selling, we continue to invest and we talked about this especially scaling our specialist distribution as we continue to move up to onboard larger SMBs within the SMB segments.

And as there's a dynamics regarding, our selling expenses in distribution, which is we front load investments in sales. So there's a front load of OpEx, and the results will come as we continue to onboard those clients.

So we are going to see this impact for a few more quarters, but longer term we do anticipate gradual dilution in those selling expenses as the salesforce matures and we bring in more clients..

And if I may add. Its Mateus here. I think in summary, the investments that we're doing in terms of hiring these specialists is not a reaction on any sort in terms of reacting to the competitive environment in the short term.

It's because we're basically seeing a huge opportunity to go up market within SMBs with variable profit -- very profitable type of clients, good unit economics, and our decision is much more of a bottom-up decision and not a reaction to anything that any player is doing..

That's clear.

Can, can you just give us like a sense of the size of how many people are we talking about?.

We don't disclose the breakdown Mario, but I think the way to see this is it's kind of proportional to the distribution of the TAM you have. When we talk about what we call medium clients, so the larger SMBs naturally from a density perspective, there are less of them spread throughout the country.

So we always kind of allocate sales teams in terms of the opportunity that we see locally in terms of the TAM. And although there are less medium clients within a specific hub or within a specific region, these clients are have very attractive economics, they have larger TPV, there's a lot of opportunity to upsell credit.

So we kind of see this from the perspective of the addressable market. And if you think about the overall salesforce specialists are a smaller percentage of that and pretty much in line with the distribution of the addressable market..

Our next question comes from Eduardo Rosman with BTG..

Congrats on the numbers. I have two questions here. The first one is a follow-up to what I asked during the last conference call and it's what about the software division. Why not consider divesting from a least part of it to given that the number of verticals likely to have synergies with Stone’s not that large? So that's the first one.

And the second one is kind of a follow-up as well on the competitive front. We saw a big surge on the number of acquirers in recent years. What do you think about this marketing in terms of consolidation? Do you see room for M&A in the sector? So that would be the second question. Thanks a lot..

I think on the first one, I think we remain focused on executing the strategy we unveiled at our Investor Day. I think in software, our efforts really concentrated on driving cross-sell in our priority verticals and improving overall business efficiencies. And I think, you can see that from the results that we presented.

So while we are pleased with the progress we made so far, I think we do recognize that there is still work to be done on both fronts. And regarding the potential sale, I'd like to emphasize that we're not selling the asset.

I think in some ways, there have been some rumors and what we said is that we continually evaluate all options to maximize value from our assets and really allocate capital within the company. But our focus at this point in time is really on executing the strategy we have laid out.

And on the second question, could you please -- I apologize, but can you please repeat?.

Yes. No, it’s in terms of -- let's say consolidation, right? You had a -- we saw like a big number of acquirers and payment companies coming to the market in recent years many of them, naturally they don't have probably the scale.

We do have the ones linked to the big banks which are becoming kind of a cost center so how do you guys see the market evolving? Do you see room for consolidation?.

Let me highlight our view on the competitive environment regarding number of players and then pass it over to Pedro to complete the answer. So, if anything, I think we see less players entering the markets over the last couple years, I think this dynamics has been much more intense in the past.

What we do see is different players being relevant within each segment of the market. So micro, there's a very clear competitive landscape. SMBs, it's different as you move up.

Naturally, we compete more with incumbents, but I think the overall trend of five key players more or less playing out consistently in terms of market share evolution, I think that has kind of been consistent and the group, which [Abes] calls other does gain share as a group, but I don't think that there's been a lot of difference in who those players are.

So I think from the competitive dynamics front, I don't think that we see a lot of change. If anything, we see less intense, like new entrants and new players coming into the market more recently. Pedro, do you want to complete on --..

I don't believe that the many other points to highlight is, briefly, they're not really any big news regarding the competitive environment. I think it's been quite stable over the past couple of quarters and no big changes on this front..

Our next question comes from Neha Agarwala with HSBC..

On the OpEx side, the delivery so far has been quite strong despite some amount of expenses.

Is there upside to your guidance, could you have better costs and that could drive your bottom line? Or are there any other costs or investments that you're looking to make that could weigh in on the second half of the year? And my second question is on the credit book. The originations, I saw this score, the disbursements were slightly one quarter.

Any particular dynamics there? The NPL ratio is increasing as expected, but are you comfortable with the risk? If you can share more color about the uptake of the working capital? Is it directed more towards the SMBs? Any particular type of merchants who are more willing to take the loan or whom, you are more willing to lend to, any color on the credit book would be very helpful..

I'll start by addressing the credit one and then we talk about OpEx. So regarding credit, in terms of quality, I think we're really happy with the performance of the portfolio, so no worries whatsoever. But in terms of growth, I think the message here is that when we think about the growth in disbursement, it's not going to be linear over time.

What we're doing now is that basically what we're making a series of experiments to test new criteria in the cohorts. And whenever the results from those tests are positives, we roll out new offerings and then we unlock a bigger wave of disbursement. That has been the behavior of the best quarter as well.

And when we look at the guidance, we guided for a portfolio above R$800 million by the year end, we're already with R$712 million the first half of the year. So actually, when we compare to our plan, even though the disbursement for this quarter was a little bit smaller than the previous one, we're actually above the initial plan.

And that said, when we look ahead, I'd say in terms of the economics of the product, we're becoming increasingly comfortable over time.

I think the challenge and the opportunity now is that there is a lot to be done in terms of improving the conversion of their profit pool, but also, increasing the percentage of clients to which we extend a credit line as a result of those tests. Keep in mind that when we look at the product nowadays, it's still pretty much fully digital.

So with very low participation from the distribution channels, which is key in terms of increasing conversion and penetration in the future. So that's pretty much the message around credit. On the OpEx side, I think we're correct. We had a good performance in the first half of the year, especially on the administrative expenses.

When we look at administrative expenses, it's down 13% year-on-year when we look at the Q2, we guided actually for a growth. So it's becoming more clear that we're probably going to land with upside in that line. But more broadly when we think about operational leverage looking ahead, I think the message here is twofold.

So within the operation, when we look at selling expenses and cost to serve specifically, I think we should continue to see operational leverage in the next quarter. So there's still work to be done there. We're probably also going to see tax rates conversion more towards the bottom of the range that we provided on the 20% to 25% range.

I think the place where it's going to become more challenging the second half is probably going to be financial expenses, simply given to the fact that interest rates are expected to increase in second half versus decreasing the first half, and we also did a sizeable buyback, which is a creative when we look at EPS over time, but has a short-term negative impact to the P&L.

So those are pretty much the main movements that we see going ahead..

Our next question comes from Tiago Binsfeld with Goldman Sachs..

The first one is on PIX, I think you mentioned that has been an area of challenge, so I wonder how you see the evolution of the PIX agenda. We're following news off PIX type pay. We also see within the open banking agenda some initiatives, we not direct payments.

So how are you preparing for those changes and do you think there can be a meaningful impact to TPV? And I can ask my second question after that..

I believe that it was chopping a little bit.

The whole question is around PIX dynamics, correct?.

Yes, that's right, Lia..

All of this evolution opens up opportunities for us to improve client experience for us to evolve our product development roadmap around the PIX rails. So, there's a lot that we have already developed on PIX rails, and there's a lot that we will continue to do.

We think that PIX NFC may accelerate the cannibalization of debit volumes as I just described because it's going to greatly improve the user experience around paying through PIX.

But as I just said, I think this is a creative for us and our mission here is to make sure that we stay ahead of the Central Bank's roadmap, kind of anticipating how we can turn this regulatory evolution into better products and better solutions to our clients. I think the same is true regarding open banking.

Naturally we expect that with more access to data and an ability to create better product experience, we can also gain from that by giving better experience and solutions to our clients. So I think that's the overall message..

And if I may a second question on software. Just to follow-up, what do you think are the main KPIs we should follow? If execution is going according to plan? I think in the past you may have provided some guidance on margins in that segment. If you could provide an update on that as well, would be helpful. Thank you..

Good question. So I think the two main metrics sort of to look out for, which are in line with the two pieces of the strategy that we communicated in the Investor Day is number one; how we are evolving in cross-selling financial services to links clients. So we disclose the metric of TPV overlap.

TPV is of course only one part of the story, because as we get better at cross-selling financial services to software clients, we also want to advance on the banking and on the credit opportunity. But for now, sort of tracking this TPV overlap is an indicator of our traction regarding this part of the strategy.

And I think the second big message that we brought out is the opportunity to increase efficiency within the software segments. And so monitoring margin evolution is an important aspect of this naturally. We did talk about margin behavior this quarter.

There was an one-off effect from restructuring costs, but in the long run we continue to see still opportunity to improve margins within the software segment. So I think those are that's kind of the main, those two main things to track..

Our next question comes from Kaio Da Prato with UBS..

I have two on my side please, mostly related to your cash. The first one is in terms of the tender offer of your bond. Should we expect the usage of own cash for this operation? And also given your current cash generation, or should we expect the insurance of a new bond with probably lower cost.

And by the end of the day, when we think about your P&L in the 3Q, and in the upcoming quarters, what type of impacts could we expect as we'll probably see savings related to the interest rates; and also a potential tax sheet for the reminder of the bond that was not bought. If you could help us walk through the impacts would be good, please.

And the second one, also looking at your cash generation, just would like to understand what could be the next steps here. Where could we see the usage of cash, if it could go more to repayment or credit product? And if you plan to open a new buyback program as you almost completed the one analysis last year in August..

Thank you, Kaio, Mateus here. So first let's talk about the tender of the bonds. In terms of impact to the P&L, the buyback of the bonds itself had a neutral impact in terms of financial expenses upfront.

But when we look ahead, there is indeed a relevant savings going ahead, because first we saw up a debt that was running at CDI plus 3%, which is the bond. For other loans in our balance sheet that are going to be which much lower spreads.

So to the first part of your question in terms of the balance sheet itself, we're basically swapping the bonds with other debt instruments. It's not going to be a bond issuance. And they run at a much lower spread.

And like you mentioned, besides the savings in terms of having lower financial expenses on these new debt instruments, we now also have the tax shield on the financial expenses that were associated with the bonds, both because these new issuances are happening onshore.

And also because in the tender offer of the bonds, we included a provision to switch the debt holder of the bonds to a local entity. So when you add that together, you have a positive impact to the P&L moving ahead. The second part of the question, I think was around what we're going to do in terms of the cash generation going forward.

Right?.

Right. And if you plan to open a new buyback program as well..

First in terms of opening a new buyback plan, we still view buybacks as very attractive capital location especially considering that we are in our view, outperforming the expectations outlined in the initial plan in the Investor Day.

But, when we consider additional share buybacks, we need to also remain mindful that our business is growing very fast and we have a lot of new avenues for future growth that may require additional capital.

So in short, I think we haven't yet made a decision on whether we're going to announce a new buyback program on second half or not, but it's certainly something that we will evaluate and provide updates on the coming quarter. Now, in terms of uses for the cash that we're generating.

When we look at the capital structure for the company, we think we are in a very good and strong position. The company had a net cash position of around R$5 billion prior to the buybacks.

And if even after purchasing around R$1 billion in this first half plus July, the company should still increase its suggested net cash position simply given the fact that the cash flow generation from the business has been really strong. And in terms of what we're going to do with that cash generation, I think the message is pretty much the same.

We continuously evaluate the best use of capital in order to maximize shareholder returns. We feel that if there is an opportunity to buybacks shares, given how discounted the companies versus our plan, we can do. So what we need to balance here again, is the opportunity for the company to grow and to deploy capital in the business itself.

When you look at our industry, I think it's a huge industry and we want to ensure that we have the firepower to pursue the opportunities that we have, especially within credit. So, that's pretty much the message here..

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

Congrats on the numbers. I wanted to ask, go back, I'm sorry to the question about selling expenses. And for the -- I know, you're looking at it on a quarter on quarter basis, but given the investments in people and how long they take to take results, I think it's just better to look at them on a year-on-year basis.

But your marketing expenses are up 27% year-on-year, and for a revenue growth of 8% year-on-year. So that's 3x revenues and relative to TPV is around 2x TPV, and so I went back and look at that relationship last year and it's not necessarily getting any better.

So I wanted to go back and ask to what extent maybe the business is getting more competitive and maybe it's not getting more competitive on prices, but it's just getting more competitive on the ability, on the productivity of the infrastructure that you need in order to generate revenues, because there's just more and more companies looking for the same pool of clients.

So if you can just give us a little bit more confidence on why we're going to see a reversal of this negative trend, and then my second question is on your banking ARPAC, which was down 13% quarter-on-quarter, even though your loan book has really exploded, it's up like many fall year and year 35%.

I think quarter-on-quarter and rates were lower on the float, meaningfully lower if you look at it on year-on-year basis. But on a quarter-on-quarter basis, average rates were only like 5% lower.

So can you just walk us through why your banking ARPAC was down 13% quarter-on-quarter?.

So I'll start from the last question and then we'll talk about selling. In terms of the banking ARPAC, the revenues from credits are not included in the banking ARPAC. It's basically the transactional banking revenues plus loading. So the main driver that it explains why banking ARPAC went down quarter-on-quarter is mainly CDI.

So CDI actually went down 6.9% quarter-on-quarter, and that pretty much covers the GAAP. Now in terms of selling --..

Before you go ahead, sorry.

Is there any reason why the credit revenues are not included in the banking ARPAC?.

Yes. The way that we see the business, we look at credit on a standalone piece, and then when we talk about banking on our segmentation and reporting, we decided to only include the floating and transactional piece. So it's basically a decision on how we disclose the numbers..

And also, Jorge, just to compliment, Mateus the answer on this.

Remember that we extend credit to only small amount of clients whereas we have a very high penetration of banking, so if we were to include credit revenues in our ARPAC, that there would be a huge sort of average effect, because you're diluting this small cohort of clients that has credits in a big banking base, right? So it doesn't make sense to us to include for that reason.

So maybe Mateus on selling..

Yes. So on sale, maybe we'll start with the dynamics that we expect as a percentage of revenues, and then Lia can add on your piece about the relationship between selling and competition.

So in terms of the selling expenses the way we see it, given the nature of the business, there's a lag between upfront investments in sales teams and the resulting benefits. And the same is true for marketing.

So every time that we either hire new sales team or do a marketing campaign, we get the OpEx upfront and then it generates an increase in sales over time and it takes time to build this new portfolio of clients and to dilute selling as a percentage of revenues given the recurring nature of the business.

So, it's a different dynamic from a transactional business where you really get the revenues at the same time that you spend the money. The way that we see, we did an increase in investments in the 1Q due to Big Brother Brazil and also because we're building out the specialist salesforce.

So, it's true that when you look at the annual comparison for selling experiences, it increases, but I think the reason why we're really confident that we're going to see dilution in the coming quarters is because it's already happening. So when you look at the 1Q, selling was 17.2% as a percentage of revenues.

2Q, it's down to 16.4%, and as we mature the investments in the sales personnel that we hired, we're looking at the productivity and the numbers that are coming from those investments. We're confident that we're going to produce the bigger client base, the bigger TPV and then the dilution will follow.

Lia, do you want to add on the relationship versus the competitive environment?.

Sure. So Jorge, we've talked a few times about this. So I think in general terms, we kind of agree with you on the assessment of how the acquiring industry will evolve regarding growth. So big message is we're going to see less growth in the industry when we think about acquiring specifically over the next five years than we saw in the last five years.

But I think we see competitive dynamics play out a little bit differently from what you mentioned. So I think number first important message is as we emphasize in the Investor Day, and since then, there's still a lot of room for us to grow in financial services beyond payments.

And we've seen a clear trend around all players offering more complete solutions. So this is not something exclusive to stone. I think the overall industry has moved away from fewer play acquiring to more complete financial solutions offerings.

And given that we still have a large opportunity to improve monetization beyond payments and penetrate more on banking and on credit, this is how we see the investments in selling that we make. So this will drive better returns on our investments in selling in the long term. So that's how we see the equation.

I think the second piece of the answer revolves around what we've already talked about as well, which is as we have observed in recent quarters within acquiring, what we believe is that the trend will continue be one where players focus their growth within specifics niches of the markets, be those specific tiers of clients or specific regions.

So for example, incumbents as a group gaining more share in the key account space, even though as a group incumbents are losing share. Also, dynamics where we see regional pockets of growth and regional competitive dynamics playing out.

So I think that the message is, yes, in an industry that grows less in the future, we have to be better and better at assessing where the pockets of growth are. But as we continue to evolve our operating model, and we talked about specialist salesforce as one example of this, but it's not the only one.

We continue to make sure that we can stay ahead and really understand where these pockets of growth are within our focus, which is serving MSMBs and continue to grow and gain share within MSMB.

So I think as a result of these two factors, future growth rates in acquiring will be lower overall, and this is already implied in our TPV long-term guidance that we gave in the investor day. Just to remember, we talked about 13% CAGR in terms of acquiring TPV towards 2027.

So this is built into a dynamics of what we understand the industry evolution to be, but our focus is a lot more on growth as a result of more monetization coming from the clients that we onboard to our ecosystem..

Our next question comes from Gustavo Schroden with Bradesco BBI..

Congrats on the numbers and thanks for taking my question. Most of my questions were answered, but I'd like to explore a little bit to your guidance.

It seems to me that it is a little bit conservative at this point, because if you analyze for example, the TPV, it is running very healthy and I'm assuming that there is a seasonality in the fourth quarter maybe that will be I mean easily above this 18% growth deposit is also growing very fast.

Credit portfolio take rate is above the 2.49% as you expected. A net income is running, also assuming the seasonality in the fourth quarter is running to be above this R$1.9 billion for the year.

So why are you still like keeping this R$1.9 billion as a minimum? Do you think that it is a conservative approach should we indeed expect something above to bid on our R$2.1 billion for the year? That would be reasonable, that's my question..

Hi, Gustavo, Pedro here. Thank you for the question. I think, I'll try to provide the whole concept.

And I think we emphasize in our Investor Day, I think, we transition to a policy of providing annual guidance, unless there is an extremely material change in the business or in the macro environment, I don't believe that we anticipate, revisiting our guidance by mid-year.

And also, when we look at the numbers, I think the guidance as you mentioned, the guidance provided for the year, they're kind of a set, they set the floor for our key indicators. So for most of these, we are indeed seeing more positive trends. I think, you're right. And we do expect to exceed our targets, but I think it's part of the game.

So the only metric, as you mentioned that may prove more challenging is really Card TPV as we are really witnessing stronger growth in peaks transactions, which were not included in the TPV metric. We provided for guidance despite being monetized in line with net MDRs for debit transactions.

So PIX QR Code penetration in the market within our client base has been higher than we anticipated when we set our guidance in November last year. So this would affect our overall volume mix to address Card TPV specifically on debit and more on PIX QR code. But in general terms, I think we're keeping the guidance as I mentioned before..

Very clear. And just to follow-up here, very clear your point about the Card TPV and the PIX potential impacts and about interest rates. Anything that you see here that could change or could impact their guidance as now we have a different environment or different expectations for rates? Anything that you could comment here would be great..

When you think about interest rates, they're going to be a drag on second half.

Again, first half, I think the expectation was that interest rates would decrease when we look now they're expected to increase on the second half, but we need to keep in mind that when we did the Investor Day and provided the guidance in November the interest rate curve was not that low as well.

So there is a negative headwind there, but it's not really material and not enough to change the guidance..

Our next question comes from Yuri Fernandes with JP Morgan..

Quick one of Rio Grande do Sul. I think this was a topic you discussed in the past quarter. You were giving grace spirits, like subscription free for some clients. Any impact to this quarter? Like what was the final number here and how Rio Grande do Sul, how your earnings would have behaved? That's the first one.

And a second one on, I think already explore a lot the bank initiatives, but just on the pause, it's I know you are testing these remuneration for deposit to put these on your the pilot test is, on your release. If you can provide more color on timing, what you plan to do the risks of cannibalization of your deposit free of free of yield nowadays.

So just some color on the remuneration of deposit strategy here..

I’ll kick off with the Rio Grande do Sul question. I'm happy to say that the impact was smaller than we initially anticipated. And I think this is really thanks to the swift recovery of TPV in the affected region. So good news on that side.

But overall, we really experienced a negative impact of approximately R$150 million on our TPV in ballpark numbers around R$10 million on our overall results.

And just a quick note that this impact was not only due to the TPV reduction, but also because of the series of actions that we really, really took to support our clients during this critical time when they most needed us. And I'll pass it over to Mateus..

In terms of the remuneration of deposits, we're still testing. I think we started to disclose on the balance sheet the amounts that we have with time deposit with merchants. We're going to see that's really immaterial yet. And we're basically still testing to ensure that we don't cannibalize the economics of the current banking offering.

So in terms of timing, I think that during the next quarters, we'll gradually extend the pilots to a larger base, but it should only start to make a difference in the balance sheet and in the results next year. I think we shouldn't expect anything big for 2024 on that front..

Our next question comes from Renato Meloni with Autonomous Research..

My first one is related to the credit portfolio. Given the large success that you had so far, and look at the guidance, I think it'd be interesting to explore a bit what went well and what was ahead of your expectation here.

And also, if you could maybe provide some KPI or some way to look at the growth for the upcoming years up to the 2027 guidance that you provided. My second question is somewhat related to this, but it's about financial expenses. You've been able to keep them relatively low by using a lot of your own cash generation.

But then going back to your comments on the large growth opportunities that you have, and the potential cash usage of that. Do you see financial expenses growing further? And then if that's the case, if it's there a timeline they expect for that to happen..

So first on the financial expenses piece.

I think, like I said, even after the share buyback of R$1 billion, when you look at the adjusted net cash generation for the company, I think we're still going to be in a position where we continue to generate cash, and naturally, unless we have an additional decision to locate capital elsewhere, we're going to keep reinvesting and it's going to continue to be a positive effect on our financial expenses.

That said, when we look, especially for the dynamics of the second half of this year, I think the big factor that is going to change is really the effect of interest rates, when we look at the first half interest rates decreased substantially, and that naturally helps financial expenses.

Second half, I think the expectation now is that it's probably going to increase. So I think that's the main dynamic there. Interest rates in terms of the other dynamics, reinvesting cash generation and also with spreads, I think there are training really well.

Now in terms of the credits, I'll kick start talking a little bit about what went right versus what went wrong, and then pass it over to Lia to talk about the future. So like I mentioned in the beginning, I think when I look at the economics of the credit product, were really becoming increasingly confident with the profitability of the product.

I think that's an area where we were really cautious at the beginning given the results that we had in the first wave. So I would say that when we look at the core offering that we have of credit within SMBs, it's really training well and we're becoming more and more comfortable.

That's why when you look at the provisions as well, it has started to come down right from the 20% levels to 18%, and over time it's going to continue to converge towards our models.

I think, we've mentioned this a few times, but when you look at the portfolio, the R$700 million portfolio, the vast majority of that portfolio is really on what we call this core offering around SMBs. But of course, embedded in this number, we're running a series of tests.

So we're running tests on micro, tests on different profiles within SMBs, different kinds of credit ratings. And this is a continuous effort where we really test and learn a lot.

There are many mistakes that we did, many things that we got right, but I would say that net-net the main message here is that we're really optimistic around the economics of the product. In terms of challenges and opportunities moving ahead.

I think in terms of distribution, it's really a place where we have a lot to improve and there's a huge opportunity because like I said, when we look at the offering nowadays, it's still pretty much 40 digital.

So very low participation from distribution channels and this is probably going to be key to increase conversion and penetration in the future and therefore grow the portfolio.

Don’t know if you want to add Lia?.

No, I think perhaps I have, just to add a little bit on our perspectives on the longer term guidance, regarding the credit portfolio. Naturally when we consider this long-term guidance, it's guidance, it's not restricted to what Mateus is calling the core offer, which is working capital loans for SMBs.

So there's an extensive roadmap around other credit solutions. We talked about some products that we have started to pilot, so credit cards for both Ton and Stone the [indiscernible] product within SMBs, which is kind of an overdraft solution.

So the message is there's a big opportunity we have work to do in terms of building more relevant capabilities that will enable us to expand the product offering. So the types of credit solutions that we offer our clients. But we're confident with the guidance this year in the long-term guidance as well..

Our next question comes from Gabriel Gusan with Citi..

One quick question about peer to merchant fixed pricing. You guys seeing any pressure so far? Do you envision seeing pressure in the rates that you're charging? You are saying something similar to debit levels.

We hear from competition too, but we do understand that economics on that probably make better than the debit with less cost associated to that. So anything we share on that from..

So in terms of pricing, PIX P2M, basically we price it in line with debit net MDRs. It naturally depends on the client tier. So prices will be lower for bigger merchants, higher for smaller merchants. But essentially, I think that's the message.

It's naturally a win-win for us and for our clients because they pay less, we gain the same and it's accretive to our banking engagement. And I think that's the message. So there's a value add around offering PIX Dynamic QR code, because it greatly facilitates our client's ability to reconcile this as a payment method.

If they were to use sort of a P2P type PIX transfer, that would be a challenge, and that's very relevant within SMBs. So there's a clear value add around this offer and we don't see any pressure on pricing and that's kind of the dynamics..

There are no questions at this time. This concludes the question-and-answer session. Questions that were not answered will be addressed later by the StoneCo team. I will now turn over to Pedro Zinner, CEO at StoneCo for final considerations..

Well, I just want to thank you all for participating in the call and I hope to see you again in the next quarter. Thank you..

This concludes StoneCo presentation. You may now disconnect..