PagSeguro Digital Ltd. (PAGS) Q4 2022 Earnings Report, Transcript and Summary

Good evening. My name is Nihuge, and I will be your conference operator today. Welcome to PagBank PagSeguro's webcast results for the Third [sic] [Fourth] Quarter 2022. At this time, all lines have been placed on mute to prevent any background noise. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro’s website at investors.pagseguro.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Eric Oliveira, Investor Relations and ESG Director. Please, go ahead.

Hi everyone. Thanks for joining our fourth quarter 2022 earnings call. After the speakers' remarks, there will be a question-and-answer session. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro’s current assumptions, expectations, and projections about future events. While PagBank PagSeguro believes that the assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagBank PagSeguro’s presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagBank PagSeguro’s most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank PagSeguro’s investor relations website. Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from, or as a substitute for, our financial information prepared and presented in accordance with IFRS as issued by the IASB. For more details, the foregoing non-GAAP measures, and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures, are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.

Good evening from Sao Paulo, everyone, and thanks for joining our webcast for the fourth quarter 2022 results. Tonight, I have the company of Alexandre Magnani, our CEO, Artur Schunck, our CFO, and Eric Oliveira, Head of Investor Relations and ESG. Before I turn to Alexandre, I would like to share a quick overview of our journey, as we completed 5 years as a public listed company last January. After that, I will share the main 2022 achievements and comment about our ESG initiatives. Going to Slide 3, we share the 5 years key performance indicators for our company, and the 3 years key performance indicators for PagBank, our financial services and digital bank unit launched in May 2019. Our company truly experienced an exponential growth and scale over the years, including millions into the financial system, initially through payments, and then through digital bank and financial services. We have been successfully unlocking new addressable markets in payments and financial services, always balancing growth and profitability. Starting with PagSeguro data, our TPV grew 9x in 5 years, reaching BRL354 billion, and we have the largest payment’s network acceptance in Brazil, accounting for more than 7 million active merchants. PagBank, our financial services and digital bank business, has been growing consistently in all important metrics, increasing engagement, unlocking cross-selling opportunities, and leveraging our banking license to reduce our cost of funding. PagBank TPV increased 19x, with total deposits growing 10x, surpassing more than BRL20 billion. Our credit portfolio grew 7x, reaching BRL2.7 billion, still very small compared with the opportunity we have ahead of us. And finally, even with all investments in our organic growth and the macroeconomic challenges such as interest rate increases, inflation, and uncertainty about consumer spending, not only in Brazil, but around the world, our profits grew 3x. And our equity position increased from less than BRL1 billion in 2017 to almost 12 billion in the end of 2022. On the chart in the right of the slide, we can see that 52% of the 2022 equity figure is composed by retained earnings, fully reinvested in our organic growth. Going to Slide 4, we can see some of our 2022 achievements. We successfully implemented our repricing to offset financial expenses increase. At the same time, we had strong deposit growth, which helped to reduce our funding costs and helped to diversify our funding sources. We also have been successfully diversifying our payments business and 2022 marked the consolidation of our HUBs initiative to extend our best-in-class services to small and mid-sized clients, and PagBank consolidated as the second largest digital bank in Brazil, with 28 million clients. In credit underwriting, we took the right decision in Q1 2022 to shift our underwriting from unsecured products to secured products. By doing so, we were able to unlock new growth avenues such as the payroll loans and credit cards backed by CDs and account balance savings, improving our gross profit in PagBank. Finally, our disciplined capital allocation led to a significant improvement in operating and investing cash flow generation, paving our path to further explore the opportunities in Payments and Financial services in the Brazilian territory in the coming years. Moving to Slide 5, our natural call for disruption and value creation led us to set a high bar for deliveries in ESG. In December 2022, we released our second sustainability report, where every stakeholder can follow our main initiatives and positive impact in society. One point to highlight here is that our financial inclusion has been massive, through a safe and hassle-free platform, empowering clients, employees, and communities. With that, I finish my presentation and pass the word to Alexandre Magnani.

Thank you, Ricardo. Hello, everyone. After Ricardo shared our main achievements for 2022, I would like to share our highlights only for the fourth quarter, beginning in the Slide 6. Our investment philosophy to balancing growth and profitability while keeping a disciplined capital allocation led us to report the highest EPS in PAGS’ history, 36% higher than the same period of 2021; strong revenue growth above 20% versus 4Q21, reaching almost BRL4 billion; cash earnings of BRL410 million, almost 4x higher than 4Q21; and BRL9.8 billion in net cash position, further boosted by our efficiencies in OpEx and CapEx. In payments, our strategic pillar to grow in a profitable and efficient way, while we continue to diversify our merchants’ base, resulted in BRL94 billion in PagSeguro TPV, with 33% coming from HUBs; and 1.3 billion in gross profit, 14% higher than 4Q21. In financial service, we have continued diversifying our revenue streams through the consolidation of PagBank. Gross profit of BRL131 million, 70% higher than 4Q21 and 3Q22; 28 million clients accounting for BRL21 billion in deposits; and BRL2.7 billion in credit portfolio, with increasing exposure to secured products. Finally, our two-sided ecosystem, which is just in the early stages to fully explore synergies related to lower transaction costs and lower cost of funding through our closed loop, led to more than BRL200 billion in TPV, PagBank and PagSeguro; 10% in market share of PIX transactions; and new features to further increase our cross-selling with clients, SMB Payroll Platform and Automatic Savings from account balance. Moving to Slide 7, we present our client base and cash-in evolution. Our number of PagBank clients more than doubled in comparison to 2020, moving up from 13 million to almost 28 million in two years. Active clients accounted for more than 16 million, where 60% of consumers, and 50% of merchants considers PagBank their primary account. Our growth in cash-in reached BRL38 billion versus Q4 2021, led by PagSeguro TPV growth and PIX transactions. As a result, Slide 8 reveals our deposits growth and their respective annual percentage yields. Deep diving, we were able to reach an important milestone this quarter, especially in such an uncertainty scenario related to credit market, given the recent events, and the interest rate trends in Brazil in 2023. The ongoing improvement in products and service levels, combined to the seasonality, led to a strong account balances growth. Total deposits reached 21 billion, BRL1.3 billion more than 3Q22 and BRL12 billion more than 4Q21. The increasing share of account balance in the quarter allowed us to reduce our PagBank CDs distribution through third-party partners, reducing costs related to distribution fee and the APYs in PagBank CDs, driving down our costs related to deposits without harming our go-to-market strategy to attract new clients and further engage the current ones. Account balance APY in 4Q22 reached 69% of the CDI, the Brazilian interbank rate, an increase in comparison to the previous quarter. This increase was mainly related to a higher number of days our clients kept their savings in PagBank. APY on total deposits reached 96% of CDI, a lower level in comparison to the past two quarters, reflecting the higher share of account balance and the downtrend in APYs for PagBank CDs. Moving to the next slide, I would like to share two features that we recently rolled out to our clients. Thinking about the challenges of Brazilian merchants to manage the direct deposits of paychecks for employees, we launched our SMB Payroll Platform fully integrated in our PagBank app and in our iBanking platform. Merchants can count with this feature to organize and schedule paycheck payments for their employees with a hassle-free solution. This is an important achievement for our array of financial services, especially for small and mid-sized businesses with multiple owners and employees. Another feature is the new version of our automatic savings. Initially, it was launched for merchants, where they could define a percentage of their sales to be invested in PagBank CDs. Now, merchants and consumers can also schedule automatic savings according to their account balance, facilitating the investments from other cash-in sources such as PIX, salary portability and other sources of deposits. With this product, we reinforce our commitment to the financial inclusion and education, while we foster the PagBank account engagement. Moving to Slide 10, we also would like to share a few updates about the ongoing improvements in our service levels. During the past two years, our teams have been working hard to increase client satisfaction, while promoting additional cost savings, through processes, automation and optimization. On the left side, we can see our improvements in customer care. On the top left, our contact rate decreased 49% in two years, an important metric as it represents a reduction on clients’ problems with our products. On the bottom chart, we have also reduced the average service time by 29% in the same period. On the right side, we shared an update about our logistics operation, a key department for service levels. It is important to highlight that our operation is already extremely efficient, which poises additional challenges, but it did not prevent us to look for even better service levels. The average time for POS delivery went down 10% in 2 years and the average time for POS replacement decreased 25% in the same period. Even though pricing remains one of the most relevant factors for merchants’ decisions about their acquirer option, we observe that service levels has become more and more relevant in clients’ decision. Before I turn over to Artur, let me talk about our credit portfolio. As we have been discussing over the past quarters, the company decided in early 2022 to reduce the credit underwriting of unsecured products and balance its portfolio with secured products. This decision opened new addressable markets for us, especially in consumers, with payroll loans to retirees and public sector employees. At the same time, we increased our provisions considering the asset quality of unsecured products. As time passes by, we were able to reach BRL2.7 billion in outstanding credit portfolio, where secured products increased its share from 7% in 4Q21 to 40% in 4Q22. The diversification of our credit portfolio contributed not only to our business diversification, but also to reduce the provision for losses, lowering our exposure to high-risk clients. Additionally, we launched a disruptive credit card where clients can tie their credit limits to their investments with PagBank, further promoting financial education, while we manage the risks. We have no rush to grow materially our credit portfolio in the short-term, given the uncertainties of the macroeconomic outlook, but our ongoing improvement in credit models, process, collections, and client risk assessment will potentially speed up our appetite in the future. Now, I will pass the word to Artur, to present our financial results.

Thanks, Alexandre. Hello everyone and thank you for joining us tonight. I will continue the presentation, in Slide 12, with our Q4 2022 and annual results. First, talking about the fourth quarter results, total revenue and income reached almost BRL4 billion, growing 22% year-over-year. This performance was slightly lower than last quarter, due to higher share of debit card transactions, less credit limits available in the market , and Soccer World Cup impact. Gross profit, neutral of FX, grew 18% year-over-year and was stable versus last quarter. Financial expenses decreased by 7% quarter-over-quarter, due to 5 working days less than Q3 and the replacement of expensive funding lines to lower cost sources. On top of that, total losses decreased by 30% on a quarterly basis, driven by lower level of provision for credit delinquency requested by secured credit products. I also would like to highlight that PagBank gross profit improved 72% versus last quarter. Once again, operating expenses grew less than total revenue and income yearly growth, showing 230 basis points of operational leverage. Controlling costs and expenses is a recurrent process under our DNA and a key component of our superior execution. Adjusted EBITDA closed at BRL788 million, up 29% in comparison to the last quarter of 2021. EBITDA minus CapEx increased by 53% versus Q3 2022 that represents a cash earnings of BRL410 million. Net Income non-GAAP achieved BRL411 million and net income GAAP increased 35% year-over-year, reaching the highest profit in PAGS history, totaling BRL408 million. This represents an earnings per share of [BRL1.24] [ph] in the quarter, [BRL0.33] [ph] or 36% better than Q4 2021. During the last quarter, we repurchased 1.9 million shares under our buyback program. Our strategy and focus continue to better balance growth and profitability, targeting to improve shareholders’ return. On a yearly basis, PAGS closed 2022 with BRL15.3 billion in total revenue and income, an increase of 47% versus 2021. Gross profit totaled BRL5.5 billion, an increase of 19% year-over-year, even with a significant increase of almost 4x in financial expenses and with total losses growing 48% over the year, due to additional provision for delinquency on credit products. As a result, non-GAAP net income reached BRL1.6 billion, while GAAP net income amounted to BRL1.5 billion, an increase of 29% when compared to 2021 and representing an earnings per share of BRL4.57 or 30% higher than last year. Moving to Slide 13, PAGS’ TPV grew 19% year-over-year, totaling BRL94.3 billion during the quarter, better-than-expected, given the negative impact of the Soccer World Cup on business days and credit limits constraint in Brazil, but with a good performance on holidays. Total revenue and income grew faster than TPV growth, reaching BRL3.7 billion or plus 25% year-over-year, due to the positive result from the massive merchant’s repricing done in 2022. As a result, gross profit reached BRL1.3 billion, an increase of 14% when compared to the same period of last year. In the slide 14, PAGS’ TPV reached BRL115 billion in Q4 2022, [28%]] higher than Q4 2021, reinforcing the customer’s engagement on PagBank account that resulted on a strong deposits growth and increase of cash-out through day-to-day banking services. PagBank’s total revenue grew 7% year-over-year, ending the quarter at BRL329 million, and slightly lower than Q3 because of our focus on secured credit products, which have lower APRs and longer duration in comparison to unsecured products. On the other hand, gross profit reached BRL131 million, an increase of 71% year-over-year, mainly due to our diligent credit underwriting of secured products, that naturally leads to lower provision for losses. In the next slide, in the first chart on the left side, operating expenses reached BRL621 million in Q4 2022, up 7% year-over-year. This amount represents 15.7% of PAGS revenue versus 18% in the same period of last year and stable when compared to last quarter. The improved efficiency has come from Personnel and Marketing expenses leverage, as well as the contribution of PagBank and HUBs’ revenue growth. In the right chart, financial expenses closed at BRL855 million versus BRL403 million in Q4 2021. Around 90% of this increase is explained by the hike of SELIC rate and the remaining portion was related to higher TPV volume, prepayment of receivables to merchants and credit card mix. These effects were partially offset by the lower cost of funding as we leverage our banking license and increase PagBank deposits combined to lower spreads negotiated with capital markets. We continue to focus on improving our funding processes, diversifying sources, and extending terms to support the company’s growth. Financial expenses was our biggest challenge during 2022, as we will see in the next slide. However, the Brazilian Central Bank has been keeping interest rate stable. The last interest rate increase was in August, and we expect for 2023 an average rate of 13.75% per year versus [12.53%] [ph]per year in 2022. The graphic in the Slide 16 is to illustrate how PAGS results evolved during 2022. Revenue growth was strong, mainly explained by PagSeguro’s TPV growth and our successful repricing process. Cost efficiency and operational leverage captured also contributed positively for the yearly performance. Financial expenses was the major impact over the year, representing an increase of more than BRL2 billion into PAGS costs and expenses. D&A and POS write-off also impacted negatively on our results, which we expect to decrease as a percentage of revenue in the coming years. Another impact came from total losses, mainly related to raise on provision for credit losses during the year that is expected to reduce in 2023. All-in, we reported all-time high figures, with net income non-GAAP increasing by 12% when compared to 2021 and net income GAAP increasing by 29% versus 2021, totaling BRL1.5 billion. In the next slide, adjusted EBITDA minus CapEx reached a positive amount of BRL410 million, more than 3x versus Q4 2021. Cash earnings represented 10.3% of PAGS revenue, reflecting management’s focus on maximizing LTV to CAC ratio by reducing POS subsidies and adding more valuable merchants into the ecosystem. In the following chart, CapEx to revenue ratio reached 9.5% this quarter versus 16.8% in Q4 2021 and 12.4% in Q3 2022. This decrease is driven by lower CapEx related to the strategy of being more selective in merchants’ acquisition to leverage PagBank and the increase of HUBs and PagBank revenue. On the bottom chart, depreciation and amortization, including POS write-off, totaled BRL336 million, representing 8.5% of PAGS revenue. On slide 18, PAGS net cash balance ended the fourth quarter at BRL9.8 billion, increasing almost BRL1 billion year-over-year. At the same time, we have been improving our capital structure, and diversifying funding sources to support volume growth, with deposits now representing around 67% of our third-party funding source. To conclude our presentation, I will turn back to Alexandre for the final comments. Thank you.

Thanks, Artur. Before we conclude our call and begin our Q&A session, I would like to recap our guidance and results for 2022 and our business priorities. Last quarter we shared our guidance for Q4 2022 and full-year 2022. When comparing guidance and results, we saw revenues growing at 47% year-over-year, very close to our guidance. The mismatch was mainly related to a higher-than-expected share of debit cards in Q4 2022, leading to a better-than-expected TPV at a lower take-rate. Our net income was in-line and above guidance in non-GAAP and GAAP basis, respectively, mainly driven by our repricing and operational efficiencies, closing 2022 with the all-time high figures for the tree metrics: Total revenue and income, net income GAAP, and non-GAAP basis. Important to highlight that during the pandemic, we decided to provide quarterly guidance to increase investors visibility about how business was evolving, during this highly uncertain period. From now on, we decided not to share guidance to avoid short-term oriented view that is disconnected from how we manage the company, focusing on long-term, and fully explore the opportunities we have ahead of us in financial services and payments, always balancing growth and profitability. We will keep improving our communication and investment deck to address important topics with analysts and investors about our equity story and clarify potential questions about business development. It has been proved how resilient our business is, independently of the economy, industry, or regulatory changes. Our investment philosophy of balancing growth and profitability has not changed, and the opportunities remain extremely compelling for our company. Looking ahead, our main focus are: grow profitably in payments and keep increasing our market share in key segments; foster PagBank engagement to diversify revenues and increase revenue per customer; develop our two-sided ecosystem, providing a unique and superior value proposition; improve models and processes to reduce losses and costs; and execute disciplined capital management to improve EPS and cash flow generation. Now, we have ended our presentation, and we will open the Q&A session. Operator, please.

Thank you. [Operator Instructions] Our first question first comes from Mario Pierry, Bank of America.

Congratulations on the quarter. Let me ask you two questions. I know you're not providing guidance, and I'm not looking for specific numbers either. But just wanted to get a sense from you, how are you seeing the operating environment in Brazil for this year? Especially recently, I think [indiscernible] reported that they were forecasting volume growth of about 14% in 2023. I was just wondering if this number makes sense to you, if you think you can maintain your market share, gain market share or not? And also, related to the competitive environment, how are you seeing prices behaving in Brazil? Do you think you have room to continue to raise prices or are we getting to the point where clients would suffer if you continue to raise prices and if you're seeing anyone trying to anticipate a decline in interest rates in Brazil when trying to reduce prices ahead of that? Thank you.

Thank you for the question. Good to hear you. Let me start with the big picture that you asked, and then we can go to the part of the prices and so on. So as you said in the question, [indiscernible] is expecting demand to grow between 14% and 18%. So, we only had 2 months at this point. So, it's hard to say that – let's say, okay, it's going to be higher than that or lower than that because we only had January and February, but we are working to keep growing payments in a profitable way. Market share, to be honest, is a consequence. We are looking for growing our TPV in specific segments, which is the long tail micro merchants and the SMBs. So, of course, we are not disconnected from the whole economy, from the whole cards industry. But so far, we saw January and February according to our business plan. So, that's what we had in the January plus February according to our business plan. Talking about the prices, we didn't change the prices for the longtail in the past years, and we don't plan to do that because we just want to keep simple. And looking forward, although a few months ago, we expect the interest rates to go down. And then what do you see today is the insulated to keep stable. So, we don't see increasing prices for longtail at this point. But if you think about SMBs and other niches that we have in our base, there are some opportunities in some segments, some niches that we could increase prices, if necessary, in the short-term. Also, we don't have any plan to decrease prices ahead of possible interest rate decrease because you don't have the visibility at this point. Once we have visibility, we can discuss here. But at this point, all the data that we have and now the interest rates, [indiscernible] future, we see the interest rates are at the same level that we have today, which is 13.75% per year.

Okay. No, that's clear. Let me ask then a follow-up with regards to the overall health of the system. We continue to see your client base decline. I think it's four consecutive quarters here that we have seen lower client base. Can you break that down between the SMB and the micro merchant segments and talk about mortality? Because, again, we're starting to see that on the credit side, like the corporates in Brazil are starting to have some problems, financial problems, because of the high rate environment, weak economy, et cetera. Is that what explains as well, the decline, in your client base?

So Mario, the decline in our base – the majority of this declining is in nano merchants. Nano merchants are responsible for a very, very small part of our TPV, less than 3% for TPV. So if you look at the number of merchants, although we are decreasing our TPV is growing, growing on a yearly basis, growing on TPV promotion. If you look at the year figure, we are growing faster than the industry. And of course, the profitability are reaching record levels, as you could see in the presentation. So, although the net adds or the active merchant base is a metric that everyone follows, the fact that we are losing nano merchants, it doesn't correlate with financial metrics. So, we are looking for clients in these key segments, which are micro merchants with some levels of TPV and SMBs where we have profitability in payments, and we have opportunities to cross-sell and to penetrate PagBank. So, that's why the – if you ask me the active merchant base looking forward, there could be a down trend, but we are not concerned with that because we're losing clients that they have very low TPV, low probability of PagBank penetration. And that's why even losing this client, we are growing TPV 40% year-over-year and reaching record levels of profitability. Regarding credit, we took the right decision in Q1 2022 to shift our credit from unsecured products to secure products. Today, we have 40% of our credit portfolio that is secured. We expect that to reach 60% in the short-term in the following quarters. And so that's why even with this credit crisis we are seeing in Brazil, even in the corporate. We are not seeing our NPLs having problems because we have the full collateral for this part of our credit portfolio. So, that's the overall picture that I have in terms of credit. What could have happened in Brazil in Q4 is that some banks decrease the limits for the credit card holders they have, and that's why, to some extent, could constrain consumption, people that had some limits in credit and now they have a lower limit because some banks are decreasing. And if you look at the results from banks, the quarterly call from some banks, we're seeing some NPLs going up there. So, that could be the impact for us. But in the acquiring business, I'm saying, I mean, people with lower credit to spend money. But overall, we don't see this crisis in corporate generating any problem in our credit portfolio or any other operation related to PagSeguro PagBank.

Okay, perfect. Thank you very much.

Our next question comes from Bryan Keane, Deutsche Bank.

Wanted to ask about the PagBank revenues and the delta to volume. I just want to make sure I understand the delta. And do you expect – or when do you expect maybe the delta between the gap between volume to revenue growth to close in PagBank?

Thank you for the question. I guess we are talking about the volumes of PagBank TPV and correlate that with the revenues.

Right, right.

Yes. A large part of this TPV in PagBank, they are not monetized because it's based on people sending money from PagBank and sending money to PagBank and or from PagBank to someone else. So, that's the nature of this money flow coming in, coming out, cash-in and cash-out. And we do not monetize that. It's more like important for engagement and this kind of stuff, but the revenues are based on transactional when people pay some bills here or spending money with our cards, interchange or related to credit. Those are the three main drivers for revenue. So, what we had in Q4 is that as we are having this shift from unsecured products to secured products, the duration of these loans are higher than what we had in unsecured products. So, we had a decrease in revenues related to credit, and that's why the revenues went down BRL10 million in PagBank in Q4, compared to Q3. So, we cannot correlate that, Bryan, because we are seeing people using more and more bank account. That's why you see deposits are growing so [and so on] [ph]. So, making this math as a percent of TPV doesn't mean too much, to be honest.

Got it. Got it. And my second question is just on the rates and the financial expenses. Obviously, that higher rates pressured the profitability all year. Can you talk a little bit about how much additional pressure you expect in the financial expenses this year that could pressure net income margin? And then secondly, you mentioned the possibility of cutting rates if rates dropped and not actually keeping the benefit from a rate drop. Can you just make sure you can explain how you guys would go about doing that? Because I was under the assumption that you guys would be able to benefit from lower rates into the profitability would improve. Thanks.

Hi, Bryan. This is Ricardo. I will start with the second question, and then Artur can help us with the first part of the question as it relates to financial expenses and the rates. If the interest rates goes down, our financial expenses will go down. And we do not expect to decrease prices automatically. The dynamics or the moving parts here will be the following: In longtail, we had the same rates since 2016. I mean the past years is exactly the same rates, the prepayment, MDR and so on. So, if the rates – the interest rate goes down, we're going to recover margins in longtail in the next business day. In the SMBs, we will not decrease price automatically. We'll try to keep advantage of this decrease in cost and keep the same levels of MDRs and prepayment so that we can have a better margin in SMBs as well. Of course, there will be some clients that will contact us asking if they could have a better condition or a better price, and some clients will not do that. So, the same dynamic that we had when the interest rates went up and we weighted a little bit to increase prices, we're going to have the opposite movement at this point. The interest rates go down, and we will not decrease the price automatically for SMBs. So, on average, we should have some benefits in the SMBs as well because not everyone will decrease prices in the next business day. It's going to take a while, and some of the clients probably will not even decrease the price for a long time. So, in longtail, we're going to receive the benefit automatically. And in SMBs, we'll try to have the benefits as much as we can. Of course, it depends on competition, depends on many variables, but there could be some advantages. That's for sure. Because when you have 7 million clients who have everything. You have clients that we call in the next business day and clients that don't even pay attention to that in detail. And Artur can help us in the financial expenses for 2023.

Yes. Bryan, regarding to financial expenses, we will see in 2023 the expenses higher than 2022 because of two reasons: The first one is the volume growth of our prepayment business. And the second point is related to average interest rate for the country that in 2022 was 12.5%. And in 2023, we are expecting at this point that we will be stable during the year at 13.75%. So, based on those two things, the expenses that we are expecting for 2022 will be higher in nominal terms versus 2022.

That's helpful. Just a quick one. Is there still repricing benefit you will see positively in fiscal year 2023 or did that benefit in Slide 16, the [668 million] [ph], was that just a fiscal year 2022 phenomenon and you won't see a benefit of repricing in fiscal year 2023?

Bryan, there are some moving parts here again, as you can imagine. We will have some benefits in repricing, as I mentioned in the previous answer to the other analysts. We are looking at some issues that we may reprice in the near term. But on the other hand, we have a change in the mix. SMBs are gaining share, and SMBs, they are good business because they have 5x more volume than longtail, but they have a lower take rate. So, if you look in absolute terms, we should have benefits. If you look as a percentage, our net take rate or percentage of the revenues, probably we're going to have this pressure because of the mix. So, we have these two big moving parts here. We're pricing from one hand – from one side, and the change in the mix, SMB growing faster than other clients and then pressuring a little bit take rate. So, those are the moving parts here. But as we said before, we expect the EPS accretion in 2023 versus 2022. That's what we are working for.

Great. Thanks for taking the questions.

Our next question comes from Josh Siegler, Cantor Fitzgerald.

I was wondering, so far year-to-date, have you seen any notable changes in the micro merchant behavior either in volume or how they're interacting with the platform? Thanks.

Thank you for the question. No, we didn't see any change in the micro merchant's transformation change. Of course, we are trying to penetrate PagBank as much as we can. So, we see some segments or some clients that are using PagBank more and more, as you could see in the deposits figure that we presented. If you make the math between the average account balance for a client, you see that we grew almost 100% year-over-year. So, that's a good change in behavior for micro merchants, and that's all. And that's – average TPV is also growing, but no big changes that we could comment for you.

Okay. Understood. And then I'd like to focus on the payroll platform a little bit because it seems like it represents a significant growth opportunity for the company. How are you thinking about the overall impact that this can have for PagSeguro?

Well, that's great. I mean we have this payroll platform because we have some clients that would like to use PagBank to pay their employees. And of course, they don't want to come here and make 30 wire transfers, 50 wire transfers, 100 wire transfers. They just want to have a spreadsheet or a file that can just upload. And then with one click, they can do that for up to 2,000 employees. So, the idea is to have more clients using us as the primary bank for their businesses. And of course, we're going to try to make this cross-sell for their employees as well. So, the idea is to have companies using us to pay their employees so that we can also try to bring their employees to work with us and increase the account balance that we have here because more money coming in, the more money flowing through our ecosystem, the higher the probability of this money to stay with us. And then we have all the benefits with the deposits and lower cost in deposits that we gave some disclosure in the presentation. So, the idea is more related to engagement and to make businesses to use PagBank as their primary account.

Understood. Appreciate the color. Thank you.

Our next question comes from Pedro Leduc, Itau BBA.

Thank you for the incremental disclosure. I want to dig into the financial expense line a little bit more, but for this quarter, specifically down 7% sequentially. And within that, the securitization of receivables line was the main contributor, down a lot sequentially 30%. Can you help us understand this perhaps a little bit more filling the gaps between – was it a lower prepayment share from working capital? It seems like it was a little bit less. And of course, we had less credit this quarter. Maybe it was a lower duration that you securitized or much lower cost. So, just help us fill in this line for the quarter, financial expenses, and watch through the securitization down, that will be great. Thank you so much.

Thank you for the question. It's Artur speaking. So, related to the Q4 2022 expenses that we have compared to Q3, so the first point that helped us in these expenses in the quarter was related to the 5 working days less in Q4 in comparison to Q3. The second point was related to share of debits in comparison to Q3. Higher mix of debit cards helped us in this working capital needs. And also, the most important point to reduce the cost for us was related to deposits. We increased the number of deposits in Q4, mainly related to the balance accounts from our clients in PagBank account and also because we have a banking license in our group, so we can use these deposits to fund our merchant's prepayment operation. On top of that, based on the results that we obtained across the year and across the whole year since the IPO, that accounted BRL5.2 billion. We also helped us to change some expensive lines to better sources to fund the corporate operation.

Okay. Super. And a follow-up on the securitization costs. Of course, you have several ways to securitize your receivables. How did you see those costs, I think percentage [indiscernible], maybe during the fourth quarter? And how are you seeing it if different now in the first quarter post the credit event that we have in Brazil? Has it changed overall for you? Thank you.

Yes. Related to account securitization, we saw during 2022 a reduction in the spread that we are paying for the banks to advance these receivables to them. And especially in Q4, we also see – we also saw some reduction in comparison to Q3, in comparison to Q2. So, it's better to us that we have a good negotiation with the banks. And for Q1 2023, we are seeing almost the same costs that we are paying for Q4. So, there is no concern about the AR securitization that we have with the banks at this point.

Great. Thank you very much again. Congrats.

Our next question comes from Domingos Falavina, JPMorgan.

Two quick ones. The first, you had some reversals, right, in stock-based compensation and was running 30 million to 40 million. My question is, what's kind of a normalized level that you guys think makes sense for that expense line into 2023? And if you did mention that in the quarter, I missed – sorry. I'm sorry, I had some connection issues. And my second question is bank figures came out, right? And the total year for TPV grew about 30%. But December year-on-year was growing at 12%. So, we are obviously seeing a major deceleration on the back of what you guys lastly mentioned of lower credit limits to the banks. And I mentioned in total credit that was prepaid, but then it has other headwinds, such as PIX and others. My question is, while you don't have any guidance for next year, what would be your best guess for industry TPV growth next year? Do you guys think it grows above 12, [12 to 15, 9 to 12] [ph] length, could provide [indiscernible] guess for us, it will help as well.

Domingos, thank you for those questions. I will answer the first one related to the non-GAAP adjustments that we have this quarter. So, first of all, it's important to say that we have accounting reclassification from non-GAAP to GAAP in terms of capitalization of long-term incentive plan for R&D, specifically for R&D. It's a noncash impact. So, it's important to mention that it's a noncash impact. So, we have classified some expenses related to amortization that was booked in the wrong place, that was affected in the non-GAAP previously. And now in Q4, we adjusted that reclassifying from non-GAAP to GAAP. On top of that, we concluded the year, missing some goals that we had in the long-term incentive plan. And so, we reverted the provision that we booked before. On top of that, the share price reduced from Q3 2022 to Q4 2022 from $13.22 to $8.74. Based on that, we also had a reversion of the provisions that we booked until Q3 2022. Related to 2023, we are expecting to [bag] [ph] to the same level that we had in Q3 2022, around BRL30 million, BRL35 million or in the year BRL150 million.

So Domingos, regarding the growth of the industry in 2023, the best data that we have is the [indiscernible] data growing from 14% to 18%. So, we had a good January, February. We didn't have [indiscernible] in 2022. Now, we had [indiscernible] in 2023, so it's not comparable. We know that part of the government that they have is trying to increase consumption or will try to increase consumption. So, the best data that they have is to – the [indiscernible] data to grow between 14% to 18%. The industry as a whole will grow that. So, that's why we are basing our assumptions, that’s where we are working at this point. And if something changes, we can come back to you. But the assumptions that we have are those grow between 14% to 18%, the industry as a whole.

Super clear. Thank you guys.

Our next question comes from Neha Agarwala, HSBC.

Congratulations on the results. And I have two questions. First on PagBank. It seems like PagBank achieved good operational efficiency, plus benefited from provisions declining quarter-on-quarter. What other level do you have for 2023 to improve the profitability at PagBank because the revenues are going to be hit [2Q onwards] [ph]? And related to PagBank, you – most of the growth that you're talking about for the credit business is going to come from the secured loans portfolio, and you expect it to go to 60% of total loans, but what about the unsecured loans? Do you still think that the macro is not supporting to grow on the unsecured loan side and you want to be cautious or do you think that you can pick up growth maybe in the second half of the year? Just any color on that part would be very helpful. My second question is more longer-term. So, we understand that in the short term, you are focusing on the more profitable merchants, and you're happy to lose some of the [indiscernible] merchants. But in the longer-term, the longtail segment is, say, about [a third] [ph] penetrated. Do you think the nano merchants would, at some point, become profitable, and it would make sense to service them or given your experience in the segment now, you believe that this is not a segment that would become profitable enough for you to service them? So, anything about that from a more medium to long-term perspective would be helpful.

This Ricardo. I'll start, and then Artur can help us with the provisions and so on. So, we start from backwards. When you look at nano merchants, we see – as always, there are many moving parts here. There are nano merchants that become merchants because of the COVID, because of unemployment, because of pandemic. Some of these means that the mortality of these businesses, there are some nano merchants that got a formal job and decide not to work by themselves anymore. So, there are many moving parts. And that's why also the nano merchants base some point, we – it's not only one reason that it's going down. There are many reasons. Some people may shut down their businesses, they get a job and so on. Nano merchants, we think they could be profitable, but in such a way that we have PagBank account, they use the account, we can get the data, they have a [CD] [ph], we can have the benefit of the float and so on. But if you had to subsidize POS, the level that we have today in subsidies, the exchange rate between reais and dollars and so on, it doesn't make sense for us to invest in nano merchant with this risk of mortality and churn and so on that I mentioned because there is no payback. But we can work with these nano merchants in PagBank. We are happy to work with them. And to some point, we keep working with them to sell devices and so on, but we are not subsidizing the same levels that we had in the past that we had thousands of net adds or gross adds, and we didn't have payback. So, we were more disciplined in 2022, as we said in all the calls. And that's why we've got these record levels of net income. Talking about the unsecured products, we have the processes in place. We've been improving our models. We have a better team than we have in the past. We are investing in this department in the company. But definitely, the macroeconomic scenario doesn't help. We see even the banks that have a lot of experience doing this type of credit in Brazil. Not struggling, but have difficult with NPLs and so on. So definitely, it's not the time to go to the unsecured products. And by the way, we have a lot of demand for secured products. So, that's why we are growing 5% in terms of credit portfolio every quarter. The unsecured product used to be 35%, now it's 40%. So, we have demand for secured products. So, there is no reason for us to go to unsecured at this point. If we will be able to do that or if you do that in Q2, we've got to wait a little bit. But at this point, the best info that we have is that we don't have a plan to go to unsecured products in the short-term. So Artur, can you help with those provisions and so on?

Yes. In terms of provision, Neha, we increased a lot the level of provisions in Q1, Q2 and Q3. Now, in Q4, we could reduce the level of provisions – the level that we have is enough to support the losses that we are expecting for the next 12 months. During the year, we also worked to adjust all the credit models that we have. We adjusted the structure and also the processes. And on top of that, we have two other effects that create a good expectation for us in 2023. That is improved in the IFRS 9 provision model that we improved this year and create some comfort to us that we also have this right level for provisions for the future. And also, the secure products that now we are originating request less provisions for the future. So, we have a good expectation for PagBank in 2023.

Perfect. Thank you so much.

Our next question comes from Tito Labarta, Goldman Sachs.

A couple of questions also. First, good job on expenses. Is there room to improve further, particularly the admin expenses, selling expenses that were down in the quarter? Is there room to cut a bit more? And would that, in any way, impact the growth outlook going forward? And then my second question, just a little follow-up, I guess, on the take rate. I know you said your debit was higher and somewhat lower growth on PagBank from the secured credit, but it was a decline compared to 3Q – as the mix perhaps maybe normalizes and you get more credit, can that take-rate get back to where you were last level? Do you see any other pressure on the take-rate, just to think about how that can evolve from here? Thank you.

I will start with the take-rate, and then we can go back to the expenses. Yes, in Q4, we had a higher participation in the mix with debit transactions, debit volumes. So, people using more of that in Q4. We also had shorter duration in the credit card installments when compared to Q3. So, these two things affect take-rate, affect revenues. And also, as we said, the fact that we are shifting our credit portfolio from unsecured to secured, we are kind of postponing the revenues because the duration before for unsecured products was around 1 year, 12 months. And now, we have something that is in secured products 3x longer than that. So, that's why we are postponing the revenues, and that's the impact that we have in PagBank in terms of revenues. Looking for 2023, we are not decreasing prices in longtail. We had the same prices in SMBs. It's an ongoing process. Some clients will increase prices. Some clients will decrease prices. Some clients will negotiate. So – but overall, we're seeing a stable take-rate at this point. We are not feeling pressured to decrease take rates at all. But what we have here is the change in the mix. More SMBs work with us. More volumes come from SMBs. So, if you look at the weighted net take rate, it could go down, not because we're decreasing prices, but because SMBs are gaining share within our TPV. And as we mentioned before, it's good news because SMBs, they have more volumes than the longtail. So, overall, it should make sense in absolute terms. It should be better for us.

Yes. In terms of OpEx, what I can say is we are expecting expenses growth lower than revenue growth for 2023. And based on the layoffs that we applied in the beginning of January, marketing optimization and also leverage from the infrastructure that we developed in 2020, 2021, 2022 and also leverage coming from HUBs with more revenue more volumes with the same structure built until 2021.

Okay. That’s very helpful. Thank you.

Our next question comes from Sheriq Sumar, Evercore.

Can you hear me?

Yes, we can hear you.

Great. So, my question is on the market share dynamics. I see that you haven't provided updated stats for how much was it in this quarter. So, any color would be great on that. And secondly, how is the competitive dynamics evolved over the – like over the past year? And where does PagSeguro maintain the edge? And secondly, my second question is on PIX. Nice to see the market share gains, but are there any further investments that you need to make on the sales front or on the technology front? So, if you can provide some color on that would be great as well.

Hi Sheriq, when you asked about market share, I assume you are talking about the TPV market share in the acquiring.

That's right, yes.

Okay. Thank you. When you look at a yearly basis, when you compare 2022 with 2021, we gained 120 bps, 1.2% in market share. If you look at Q4 2022 versus Q4 2021, we are gaining 60 bps. In a quarter-over-quarter, comparison, which is Q4 2022 versus Q3 2022, we are losing around 30 bps to 40 bps. That's the main – the big picture here. So overall, if you look in a more longer-term, we are gaining share. Quarter-over-quarter, we are losing this small percentage of share. Market share is a consequence of what we are doing, but it's not our main target. We could increase our market share if we wanted to by decreasing prices and so on, but we want to have healthy levels of margins and work with clients that see the value proposition that we have in such a way that we have levels of profitability and reaching these record levels of net income that we saw in Q4. If you look at the market overall, we also see some moving parts here that the players who benefit from – in Q4 were those from big banks, two of them from big banks from – they are incumbents. And as far as we know, they got some advantage, some tailwinds related to big chain hotels, airlines and these type of merchants that we have lower or low exposure. So, in the segments that we work, we are happy with the share that we have. We are working with these clients, increasing TPV per merchant, increasing our net income. So, we'll keep working with the clients in a way that we think is better for the company. Market share is a consequence of what we're doing, but it's not our main target at this point. So, that's the main idea of market share. And related to PIX, we don't need to do additional investments to increase our PIX share. As we saw in the presentation, 9.8% of the PIX transactions in the country. This is very important for us because people use PagBank as primary account. People leave the money here. People leave the money in their account balance, which help us to reduce cost of funding. So – but going back to your question, straight to the point, there is no additional investments in technology to be made in order to increase our PIX share in the country.

Thank you so much. That’s helpful.

Our next question comes from James Friedman, Susquehanna.

Good results here. I was wondering if you could share at least some high-level thoughts on the margins. Is there, say, any reason that the company structurally can't return to the teens margins you enjoyed when rates were more favorable?

Well, James, it's – definitely, we have this – we had actually this headwind related to interest rates in the country in 2022, although we were able to offset that by repricing our base. So, that's the main picture. We had this headwind, and we repriced our base in such a way that it could offset this increase in financial expenses. Interest rate is important for us. It's an important driver for profitability because, of course, it affects our cost of funding. So, if this rate goes down from 13.75% per year to a level below that, we'd take advantage. So, how big is going to be this advantage, how big is going to be our or benefit, it's hard to say to you at this point. But definitely, if interest rate goes down, we should have better margins. And remember here that, as I mentioned before, SMBs are gaining share in TPV in acquiring. They have more volumes than compared to long-tail, but they have lower take rates. So, it makes sense in absolute terms to keep working with these clients, and we will keep investing on that. We launched the payroll platform and so on. But if you look as a percentage of the revenues, it's a kind of the headwind. So – and just to finish here, we – margin is not something that we are looking for as a main priority because we know that we are increasing our SMB's mix. And also, we are the most profitable company in our industry. So, if you compare us on a basis that you divide net income by TPV, you see that we are 3x to 5x more larger than our competitors. So, we have the highest profitability of the industry. We are growing. We are having records of profitability, as you could see in the presentation, the record in Q4, the record of the year, 29% higher than what we had in 2021 on a GAAP basis. So, we are happy with the profitability that we have at this point because we're balancing our growth with profitability. So – but going back to your question, if interest rate goes down, it should be a tailwind for us. How big is going to be this tailwind, it's hard to say.

And my follow-up, I think Alex shared some commentary about the investment in the HUBs. And I know that you had disclosed the HUBs as a percentage of the volume or revenue. Where are we in the HUBs investment journey? Is it now closer to the middle or the beginning or the end?

James, I'd say that we are more closer to the end because we invest in some HUBs, and we are – the HUBs that we might open in 2023 is going to be more related to small places or specific places that we see that you need to have an additional HUB, but we will not grow massively our HUBs the way that we grew in 2021 and 2022. So, we are working to increase productivity of our HUBs salespeople and try to get more clients in the HUBs, of course, but we are not planning to grow massively the number of HUBs, the same movement that we had in 2021 and the part of 2022.

James, this is Eric. There is no silver bullet, okay. I think the superior value proposition that we have is based on sales channels, logistics, PagBank fully integrated to the payment service. So, HUBs is just a sales channel that we are still exploring and increasing productivity, but at this time, I think most of the investments in HUBs are concluded.

Got it. Thank you both.

Our next question comes from Alex Markgraff, KeyBanc.

Can you provide just a bit more context on the upsell and cross-sell opportunity within the merchant base that you've been speaking around? Just kind of – just more or less what that looks like and if there's any way to quantify the opportunity there, that would be helpful? And then I have one follow-up as well.

We have a I would say, a very decent penetration levels in our merchant space when you think about PagBank. But you know there are some clients that are not using us as a primary bank at this point. So, half of them are using as a primary bank and half is not using. So, that's why we keep investing in the PagBank features, the example that we gave about payroll platform and so on. We launched debit cards few quarters ago. We are still working on to – for our clients to use more and more. So, I don't have to quantify to you how big is this opportunity. But I'd tell you that in the [merchant space] [ph], we have a very, very huge opportunity ahead of us because we see that the users as – the acquiring, they might use some features in our PagBank, but we are not a primary bank yet. Once we become the primary bank, have many, many tailwinds like account balance and take advantage of the [indiscernible] and so on. So, I don't have here a number to give to you. But the idea is to increase the penetration of PagBank and the usage of PagBank and some clients that – some of them, we don't have the features yet. Some of them, we need to make them to use. Some of them, we need to convince them to switch from their banks to us. So, when you have 7 million clients in that quarter, you can imagine that you have everything. Some of the clients, they use the feature – the way [indiscernible] launch some of them, they don't even pay attention. I mean a lot of work, but it's great that we have this huge base, 7 billion – 7 million clients explore. As we invest more and more in PagBank would be, I would say, we are going to have more value to offer to these clients.

Okay. That's helpful. And then my second question was just, kind of around PagBank customer add expectations. I know you're not guiding, but just very substantial net adds in 2022 as we look at some of the charts in the slide deck here. I guess just any, sort of thoughts as to how PagBank net adds could look in 2023 just given the really noticeable uptick in 2022.

Okay, Alex. So, it's kind of related with the previous question. So, we closed 2022 with 28 million clients, 16 million of these clients, active clients, and 60% of those are pure consumers. So, in less than 4 years, we were the second largest bank – digital bank in Brazil, and it's kind of natural, then we have this level of clients or the level of business the growth might slow down a little bit, but we expect to keep growing net adds PagBank in 2023. So, we will keep growing, probably not in the same levels that we had in 2022, but we will keep growing the number of clients in PagBank. But the most important thing is just related to our previous question, which is to penetrate more and more PagBank and making more revenues per client that – from the clients that we have today and from the clients that are using us maybe as a pass-through, and we need to convince them to use us more and more. So, that's the main idea. So, the net adds won't be as big as it was in 2022, but we also want to cross-sell more and more in the base that we have and keep it growing net adds as well.

Okay. Thank you.

Our next question comes from Geoffrey Elliott, Autonomous.

I wondered if you could give us an update on where you stand on charging for PIX. It looks on the website as if you're now offering three PIX on quite a few of your offers. And then secondly, an update on any shift from debit into PIX? Thanks very much.

Geoff, regarding the PIX, we – the regular price for longtail is 1.89%. So, it's 10 bps lower than debit that we offer for longtail. This kind of transaction could happen in online or it could happen in one of our devices that we just generate the QR code in the POS, and the consumer can pay with their mobile phones. To be honest, the base is very small. So, it is growing, but it's a very small participation in the mix of the transactions in TPV. Regarding to PIX and debit, we know that PIX is similar to a debit card transaction because it goes straight to your balance. We don't see that cannibalizing the clients that we have, maybe is cannibalizing part of the debit card transactions. But in Q4, for instance, we didn't see this kind of movement because debit card transactions increased in our base. So, people keep using debit cards. The usage is easy. It's safe. People know how to use it. They know if they have our problem, they have chargebacks and so on. So, we don't see that as a big transformational movement, although people are using PIX to replace wire transfers, replace cash, and replace bank slips, [indiscernible] in e-commerce. Those are the main features that people are using for PIX. And also, important to say that, as you show in the presentation, PIX was a very important headwind for cash-in in PagBank. So, we also [indiscernible] tailwind in PagBank. As you could see, the cash-in through PIX in PagBank was massive and grew like from BRL50 billion, BRL59 billion in 2021 to close to BRL150 billion in 2022. So, that's the overall picture about PIX.

Our next question comes from Jeff Cantwell, Wells Fargo.

I wanted to ask you if you could give us some high-level thoughts on revenue? We could see your revenue and income of about 4 billion over the past couple of quarters. 2Q was about [3.9 billion]. And so just curious if you can sort of walk us through whether 4 billion can grow. Clearly, there's a lot of moving parts to your model right now. So, we're trying to think through active users on the PagBank side, active merchants on the PagSeguro side and take rate and so forth. So, I was hoping you might be able to give us a little bit of color on the framework of how you're thinking about the plan going forward? Thanks very much.

Jeff, thanks. So, let me walk through the revenues and the best improvement that you have at this point. But we – of course, we had this small decrease in PagBank revenues because of the duration of the credit products that I mentioned before. So, we had this BRL10 million lower in Q4 versus Q3 in overall PagBank. We had a decrease about BRL50 million in acquiring in PagSeguro, mainly because of the increase of participation of debit and shorter duration for credit card with installments. So, those are the main drivers. So, that's why we're kind of flat quarter-over-quarter. In 2023, as we expect the volumes to grow, revenue should grow as well. And this component would be – PagBank we expect to grow because credit will keep growing, the secured products. And in PagSeguro, we should expect – we should not expect take-rate to go up because the participation of SMBs in the mix will kind of pressure this net take-rate to go down. But overall, revenue should grow. Talking about Q1, usually in Q1, TPV presents a decrease versus Q4 because Q4 is the high [seasonality season] [ph] with Christmas and Black Friday and so on. So – but we are seeing good trends in revenues in Q1 as well. So, overall, going back to your question, as we're going to have an increase in volumes, even with the higher participation of SMBs in the mix, we should see increase in the total revenues of the company for 2023.

Thanks very much for all the color. Much appreciate it. And if I could ask a quick follow-up, similarly thinking on the expense lines, what was interesting this quarter was the revenue came in, and we noticed that the selling line and the admin expense line were a little better versus our model. And so, I'm curious if there's a read-through there for 2023, in the context of your prior statements where 10% net income margin seems to be the gating factor. So, I was hoping to get either clarification or any additional color about how you're thinking about expenses/operating leverage for [indiscernible] going forward? Thanks very much.

So regarding to selling expenses, what we have in this – under this line is total losses, chargebacks, and provisions for credit losses as we reduced 30% in comparison to Q3. So, we see a great result on this line. And going forward, we also expect a good performance in the selling expenses line. So, you can check in the Page 19 in the earnings release this reconciliation of selling expenses. And so we are expecting for the future good performance in this line because we are working hard to reduce the chargebacks in the issuing, in the acquiring and also the credit losses because of the volume and the level of secured products that we have in our credit operation.

Okay, great. Thanks very much. Congrats again.

The Q&A session is now concluded. I pass the floor over to Mr. Dutra for his closing statements.

Hi, everyone. Thank you very much for the participation. Thank you for the questions, for investing your time to talk to us. If you have any problems with connections and so on, we are going to pay attention to that and evaluate what we should do to get a better connection for the next call. Thank you very much. Take care.

PagBank conference call is now concluded. Have a nice evening. Thank you.