Creditas financial results Q1-2024

São Paulo, 16th May 2024

Context of the business

Following the operational breakeven milestone achieved at the end of 2023, we are glad to announce our first profitable quarter in the history of the company. In Q1-24, we posted revenues of R$486mn, with record R$206.2mn gross profit, net income at R$1.4mn and positive cash flow generation.

Over the last 2 years we have been adapting our business to a new environment with a more discipline approach to growth. We have achieved remarkable results in margin expansion and business efficiency which now positions the company to open a new chapter combining growth and profitability.

Our vision of building a company that provides consumers with an easy, affordable, and fully digital solution to access liquidity and protect their most important assets is more relevant than ever. The market potential is massive and the geographies where we operate are significantly underpenetrated in high quality credit, insurance, and investment products. This provides Creditas with unlimited growth potential in a journey that is just getting started.

Collateralized lending is our core product due to the significant impact in the customer life and the strong economics provided to our business model. But beyond collateralized lending, we have been building a complete solutions ecosystem and have a long-term strategic commitment to build a complete platform around the customer assets:

• Collateralized lending: auto, real estate and payroll-backed loans

• Insurance: auto, real estate and payroll-related insurance

• Consumer solutions: supporting the customer through the asset journey including car services, mortgage marketplace, benefits card and salary advance

• Investments: investment funds (FIDCs), mortgage-backed securities (CRIs) and real estate investment funds (FIIs)

The transformation of 2022 and 2023

During the last 2 years, we have been focusing all our efforts in 2 things

1. Increasing our generation of Gross Profit

2. Reducing our investment in inefficient initiatives

In order to increase our gross profit, we have focused on repricing our lending portfolio which has allowed us to increase top-line revenues and increasing the cash flow generation capacity of our credit portfolios.

In addition to top-line growth, despite the high interest rates environment, we focused on optimizing cost of funding by reducing cash inefficiencies in our securitization vehicles. The securitization market has been robust and the incorporation of the partnership with Andbank to fund loans through retail deposits is also improving our overall funding cost. Finally, remaining disciplined on loan underwriting and ensuring improvements in our risk-based pricing has allowed us to keep improving our margins, resulting in a significant expansion of our gross profit.

Gross profit expansion was our north star as it allowed us to generate strong cash flow through our portfolio. In addition, we were laser-focused on selecting the investments that really mattered to us. We prioritized highly valuable initiatives that enabled the transformation of Creditas while we paused strategies that were not essential or that were not suitable for a high interest rate environment. Consequently, over the last 2 years we managed to move the company to profitability while still maintaining our growth trajectory. From this point, there’s plenty of growth to come and operational leverage will allow us to keep a disciplined self-funded growth for the coming years.

On the macro side, inflation continues dropping in Brazil, with the March IPCA reading coming at 3.93% for the last 12 months. The market expects inflation at 3.73% for 2024 and 3.60% for 2025. SELIC closed Q1-24 at 10.75% a drop of 100 bp since the end of 2023. Since then, BCB made a more moderate 0.25% drop starting a new cycle and signaling terminal rates could end a bit higher than what the market expected. Many factors are being taken into consideration, but the most important ones are probably related to (i) fiscal position in Brazil and the need to finance public deficit and (ii) USA keeping high interest rates for longer, which prevents emerging markets to lower rates to avoid potential currency impacts.

2024 and our plan moving forward

After building a solid foundation for our business with strong recurrence and high margins, we are now turning our attention to continue building our ecosystem. We have made significant progress in improving our user experience and automation in one of our core products: Auto Equity. Our customers have now a fully automated digital process to get liquidity from their cars in a remote transaction, doing the virtual inspection using their mobile phones. The result has been increased conversion efficiency and productivity. We are replicating some of the learnings in the product for the rest of our ecosystem which will allow us to grow our user base with higher margins and more customer engagement.

While we prioritize investments in user experience of our core products, we are also putting attention to improving our ecosystem around these products. As an example, car insurance is a product that we have built to scale, becoming the largest digital car insurance brokerage in Brazil. We see tremendous potential in connecting the car insurance onboarding process with our lending underwriting. This will require significant effort to create a seamless customer experience and we are committed to continue our investments to address this very clear customer need.

These investments in our ecosystems together with a solid economics foundation allow us to position the company to start a new phase of growth and profitability. With gross profit margins now at 42.5% in Q1-24 (withing the 40-45% steady-state range that we anticipated 2 years ago) we can move the company to a target annual growth rate of 25%+, while remaining profitable. In this new phase we will prioritize our technology investments in user experience as a mechanism to grow efficiently and deliver a best-in-class onboarding process for our customers.

Financial results

Quarterly results for the period Q1-2023 through Q1-2024

Operating performance

Q1-2024 revenues posted R$485.6mn compared to R$491.8mn in Q1-2023, a 1.3% decrease alongside the reduction in portfolio growth rates (-5.2% YoY reduction) as we complete a cycle of restricted volume growth (origination of R$596mn in Q1-24 vs R$668mn in Q1-23). Portfolio under management reached R$5,582mn compared to R$5,891mn in Q1-2023; since March, we have reaccelerated volume growth as the company can now self-sustain portfolio growth.

We continue to be very restrictive in our Auto Finance product while mostly keeping our standard policies in Car Equity, Home Equity and Private Payroll loans, where we are seeing low volatility at this point in the cycle. Given the low loan-to-value of these products, we believe our product category is ideal to maintain resilience in the current environment.

After seeing our Gross Profit margins bottoming in Q2-2022 due to aggressive pricing, impact of the sharp increase in SELIC and the impact of IFRS provisioning frontloading related to our high growth strategy, we are experiencing an acceleration in Gross Profit, which has increased 250% since Q2-2022 from 12.1% to 42.5%. Gross Profit benefited both from continuous loan portfolio repricing and lower cost of credit since, despite record-high inflation and interest rates, we have not seen any deterioration of credit quality and our portfolio remains highly resilient.

As a reminder, our Gross Profit margin is neutral to the level of interest rates in the economy but has compression and expansion depending on the speed of change in interest rates (impacting cost of funding while loan repricing lags due to the duration of our loan products) and speed of growth (impacting IFRS provisioning frontloading). The upward trend in Gross Profit started in Q2-2022, coinciding with SELIC rate reaching 13.75% after bottoming in Q1-2020 at 2.00%, and will continue during 2024, as SELIC is expected to continue falling and our portfolio repricing continues happening. As we mature as a company, we are creating the mechanisms to eliminate this fluctuation of margins in the long term by (i) being discipline to transfer changes in costs to customer pricing, (ii) issuing pre-fixed funding notes to match with the short-term loan book, (iii) increasing the portion of the portfolio with natural rate matching and (iv) having a clear framework to decide on the hedging of potential interest rate mismatches. We expect credit quality to remain strong during this part of the cycle, with additional tailwinds as the situation normalizes, interest rates trending down, and unemployment remains under control. The unemployment rate, which hovered at 12-15% in 2016-2021, remains at 7.9% in the quarter ending Mar-24.

Over the last 12 months we have been able to increase gross profit from 25% to 42% (R$123mn to $206mn) thanks to portfolio repricing while keeping credit costs stable. We are optimistic about continuing this trend over the coming quarters, keeping gross profit margin at our target steady state of 40-45% as our newly originated loans at higher prices increase the average portfolio profitability. The phase of lowering SELIC has accelerated this process and we expect to continue running at our steady-state gross profit levels in 2024.

In the chart below we overlap interest rates (SELIC) and inflation rates (IPCA). In the previous monetary cycle, when inflation reached 10.71% in 2016, SELIC stayed at 14.25% for 14 months; it took the BCB 9 months since inflation’s peak to start the interest rate reduction cycle. In the present cycle, it took 15 months since inflation peaked (12.13% in Apr-2022) for the BCB to start reducing interest rates, even after inflation had fallen to below 4%. Now, we expect this trend of falling interest rates to continue.

Below Gross Profit we recognize 3 types of costs: (i) Customer Acquisition Costs (CAC) that, despite generating gross profit over many years due to the long-term nature of the loans we originate, we recognize upfront, (ii) overhead costs, mostly related to product technology, a cost that unlike some incumbents, we do not currently activate and (iii) other financial income and expenses, as well as income taxes. As we continue building our portfolio, the impact of both CAC and overhead comes down on a relative basis as we get operational leverage thanks to scale. Operational leverage is going to becoming critical in this new phase as we continue growing our revenue base to absorb existing overhead that will grow at a significantly lower pace. In addition, improvements in user experience will continue paying off as we see Customer Acquisition Costs, including both distribution and production costs, falling due to higher conversion efficiency and productivity per employee.

In Q1-24 we have continued to reduce both CAC and G&A costs. Costs below Gross Profit have come down to R$205mn in Q1-24 from R$252mn in Q1-23, a testament of the team’s focus on increasing productivity and efficiency. Our slower growth strategy for 2023 helped us to bring efficiency to our operation as we switched focus from hyper-growth (210% year on year growth in Q2-22) to temporary stabilization at this point of the cycle. With the company now on the right path to continue delivering profitable growth, we will be refocusing our attention to long-term value-creation.

Thanks to this discipline around expenses, and despite the gross profit compression experienced with the increase of interest rates, we have been able to reverse our net losses from R$363mn in Q4-2021 to profitability in Q1-24. As we accelerate the expansion of gross profit and continue gaining operational leverage, we are confident that we will deliver sustainable growth throughout 2024.

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Definitions

We present all our financials under IFRS (International Financial Reporting Standards). The key definitions of our financial and operating metrics are below:

Portfolio under management – Includes (i) Outstanding balance of all our lending products net of write-offs and (ii) outstanding premiums of our insurance business. Our credit portfolio is mostly securitized in ring-fenced vehicles and funded by both institutional and retail investors. Our insurance portfolio is underwritten by 14 insurance carriers.

New Origination – Includes (i) volume of new loans granted and (ii) net insurance premiums issued in the period. If new loans refinance outstanding loans at Creditas, new loan origination reflects only the net increase in the customer loan.

Revenues - Income received from our operating activities including (i) recurrent interest from the credit portfolio, (ii) recurrent servicing fees paid by the customers from the credit portfolio related to our collections activities, (iii) up-front fees charged to our customers at the time of origination, (iv) take rate of the insurance premiums issued, (v) other revenues from both lending and non-lending products. (Note: before Q2-2023 we were reporting revenues from cars sold which, giving the change in strategy, are not included since Q2-2023. In Q1-24, the historical series was updated to reflect minor reclassifications under IFRS).

Gross Profit- Gross Profit calculation adds or deducts from our revenues (i) funding costs of our portfolio comprising interest paid to investors and (ii) cost of credit including credit provisions and write-offs related to our credit portfolio which, under IFRS, are significantly frontloaded to account for future losses. (Note: In Q1-24, the historical series was updated to reflect minor reclassifications under IFRS).

Net Income - Net income deducts from our Gross Profit (i) costs of servicing our portfolio, including headcount, (ii) funds’ operational costs (e.g., auditors, rating, administration fees, etc.), (iii) general and administrative expenses, including overhead, (iv) customer acquisition costs, (v) taxes, and (vi) other income and expenses. We currently don’t activate any of our technology investments, which include third party providers, third party platforms and the salaries of our product technology team. (Note: In Q1-24, the historical series was updated to reflect minor reclassifications under IFRS).