Good evening, ladies and gentlemen and thank you for standing by. Welcome to the StoneCo First Quarter 2021 Earnings Conference Call. By now everyone should have access to our earnings release. The company also posted a presentation to go along with this call. All materials can be found at www.stoneco.com on the Investor Relations tab. Throughout the conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted free cash flow. These are important financial measures for the company, but not all financial measures are defined as 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 for our formal remarks, excuse me, I would like to remind everyone that today’s discussion might include forward-looking statements. These statements -- these forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company’s expectation. Besides, we would like to remind you that the Linx acquisition is pending regulatory approval by the Brazilian Anti-trust Authority and management comments are based on only on publicly available information. Please refer to the forward-looking statements disclosure on the company’s earnings press release. In addition, many of these risks regarding business and disclose in the company’s Form 20-F filed with the Securities and Exchange Commission, which is available at www.sec.gov. Please note this event is being recorded. I would now like to turn the conference over to your host, Rafael Martins, Vice President of Finance and Investor Relations Officer at StoneCo. Please proceed, sir.

Thank you, Operator, and good evening, everyone. Joining us here today we have Thiago Piau, our CEO; Lia Matos, our COO and Chief Strategy Officer; and Marcelo Baldin, our CFO. Today, we will present our operational and financial metrics for the first quarter 2021 results and discuss some that we are observing in the second quarter. I will pass it over to Thiago, so he can share with you the key messages regarding the quarter and future outlook. Thiago?

Thank you, Rafael, and good evening, everyone. While Brazil face the challenging situation with the second wave of COVID in the first quarter, we continue to work hard to stay close to our client and bring to them the best service and solutions we envision. We monitored our client activity closely, as well as how vaccinations and economic activity evolved in Brazil and in other countries. And based on our experience with lockdowns last year, recent client transactional data and learnings from the dynamics of countries or vaccines are widespread, we expect that once vaccination scale, which we expect in the second half of 2021, the economic recovery will be fast and although delayed, looks like Brazil is moving in the right direction. In order to be the fastest player when our economy comes back to normal levels, in the first quarter, we decided to increase investments in our operation. We have a high quality and solid core business in terms of growth, profitability and cash flow generation that continues to scale both in client base and CPV, while also increasing engagement of clients with new solutions. Our core SMB business presented strong growth metrics in the quarter and to-date. As Lia will detail shortly, our active payment client in SMB grew 67% in the quarter versus last year, achieving 857.8,000 active clients. 257,000 clients are active in our digital accounts, and of those, 188,000 use it as their banking domicile, settling all of their transactions in the Stone Account. Overall SMB TPV grew 45% in the first quarter versus last year, with strong acceleration in the second quarter to-date, TPV grew 121.6% in April and 111.2% in May up to May 20th. While April and May compare to weaker comps due to lockdowns in the second quarter of 2020,…

Thank you, Thiago, and Good evening, everyone. Thanks for joining us today. I want to start our presentation on page three by highlighting that Brazil went through a second wave of COVID in the first quarter of 2021, which impose commerce restrictions in several cities throughout the country. Those restrictions were felt by our clients, with average TPV reaching a low in the end of March. But similar to the behavior we saw in the comeback from the first lockdown in 2020, we already observed significant and quick recovery, with average TPV in May, achieving levels above January 2021. As Thiago mentioned, we expect that once vaccination scale, the economic recovery of the country will be fast. In page four, we show our decision to increase investments in the growth of our business. We want to be ready to accelerate growth when our economy comes back to normal levels. Indeed, when we compared to the previous quarter, we increase our sales team headcount by 24% and our marketing investments by 33% to ramp up our distribution capacity. We expanded tech headcount by 20% to further drive the evolution of our platform and solutions and we increase our customer service and logistics teams by 32% to continue to bring the best service to our clients as our operation continues to scale. In page five, I want to highlight the performance of our SMB business. From now on, when we refer to SMBs, we are referring to our brick-and-mortar SMBs, SMBs that sell online to Pagar.me and TON our micromerchants solution. We continue expanding our SMB client base, which has increased 67% year-over-year, reaching close to 858,000 clients in the first quarter of 2021, with quarterly net additional clients of 138,000. From those over 62,000 are coming from online and offline SMBs…

Thanks, Lia. Starting on page 19, we show that, as Lia said, given the volatility in commerce activity as a result of a pandemic, we have decided to increase provisions for expected losses, which together with financial incentives to our clients has impacted negatively our consolidated revenue in the first quarter of 2021 by almost R$116 million and our adjusted net margins by 5.2 percentage points. Our consolidated take rates ex-Coronavoucher decreased from 1.81% in the first quarter of 2020 to 1.63% in the first quarter of 2021, with a 23 basis points negative impact from the effect I just mentioned. This was a similar level of take rate compared to last quarter when we reported a 1.64% take rate ex-Coronavoucher. Total revenue and income grew from R$716.8 million in the first quarter of 2020 to R$867.7 million in the first quarter of 2021, a 21% increase year-over-year. In terms of margins, we had a 21.6% adjusted net margin this quarter. We are already seeing much better trends for our topline in the second quarter as indicated by Lia before. Moving to slide 20, we show the evolution of the number of active payment clients, TPV and revenue. Despite the COVID impact, our payment client base grew by 34.5% when compared to the first quarter of 2020 reaching 722.3000 clients excluding TON. TON has reached 190.3000 active clients, posting a record net ads in the quarter of 76.6000 clients. Our consolidated TPV grew by 35.5% in the first quarter 2021 for the second quarter due to the strong performance in the first months of the period and easier comps we expect a significant acceleration in the TPV group. On slide 21, we discussed our operating leverage and profitability. Our operating leverage was impacted by lower revenue due to the increase…

Yes, sir. [Operator Instructions] And the first question will come from Jorge Kuri with Morgan Stanley. Please go ahead.

Hi. Good afternoon, everyone. Congrats on the numbers. I wanted to ask two questions, if I may. The first one is on the provisions you took for your lending business. How do we get comfort that the amount of provisions taken is enough to cover some of the extraordinary risks that have surfaced due to COVID? Is there a way for us to get what -- how the NPL ratio has moved or what is your coverage ratio, meaning provision sitting on the balance sheet vis-à-vis the current non performing loans, any guidance on how those metrics look like and we would be helpful in trying to get our arms around potential more provisions going forward? And my second question is on and thank you for the 2021 outlook page. From that page, the take rate of 1.85% and 2%, I wanted to get a little bit of color on what drives each of those two numbers. Is it just purely your expectation on, if mix is better than we’ll get to 2%, if not, is 1.85% or what’s driving those two numbers, so we can also, as the year progresses, figure out if you’re likely to come at the high-end or the low-end of those two numbers? Thank you.

Hello. Can you hear?

Yeah. Yeah.

Yes.

Yes.

Yeah. I can hear you.

Sorry about that. Rafael was answering you, but I think that you are not listening. So I will take the first question and the second one too. Thank you for the question. So, first, regarding provisions in our credit products. There’s two really important methods, we are very confident with the level of risk adjusted return net of funding costs that we are showing and we decided to open the cohorts for you to see the impact on different cohorts from the first quarter 2020 to this quarter 2021. And basically, when you see the second quarter 2020 cohorts being mined [Technical Difficulty] We already received 82% of the cash flows of that quarters and we think we did everything we needed in terms of provisions because of the second wave of COVID. So we are very confident with the level of provisions with it. We think that it’s all done in terms of making sure that the book took all the impact of the second wave into account. In terms of take rates, the two main drivers here is really our ability to scale the SMB operation was you’re seeing that we are increasing growth on May and we decided to show the two-year CAGR growing 50% regardless of the impact of COVID in 2020, 2021 and our ability to further penetrate additional working capital solutions in which we are doing well. So we decided to migrate clients to our new platform, which is much seamless to our clients to take all their monies and their working capital based on those volumes. We will be ready for the new dynamic of the registry of receivable now on June 7th and with more collateral we can provide more working capital to our clients in the form of prepayment and credit and working capital products. So we are very confident with the range that we have provided, and as always, we are much more committed to the top of the range as we always did. So very confident with the provisions and the level of take rates and client based growth that you have provided.

Thank you, Thiago. Thanks for that clear response.

Thank you, Jorge.

The next question will come from Tito Labarta with Goldman Sachs. Please go ahead.

Hi. Good evening. Thank you for the call and taking my question. A couple of questions also, I guess, one on the margin and the impact from some of the additional investments that you did in the quarter? Would you say those investments, I guess, in your headcount, it was that a one-time in 1Q and that should go away? You showed in, I think, in slide 26, there was about a 5% impact to margin, if you could just help to think about that going forward? And then, along those lines, I guess, is there more recurring level of margin, closer to what you show here like around that 36% giving you like another 9% impact related to COVID and provisions? And how quickly can you get back to those levels given the take rate seems to be increasing from here now? And then second question with the partnership with Banco Inter, thanks for the color on that. Is there any interest to get closer to the consumer, in the slide, it seems you want to offer a complete platform for merchants and then Inter can have complete platform for consumers? But I guess maybe, particularly as you’re growing TON more, do you need to have more products for the consumer, is that any part of the rationale there is strictly just to benefit your merchant base? Thank you.

Thank you, Tito. Can you guys hear me now?

Yes.

Sorry, for the previous question, my mic was not working. So answering your first question, Tito. We’ll continue to invest in our business, of course. But I think that in the first quarter, this was unusually high in terms of impact in margins, because of the lower revenue because of the provisions. So I would say that we see margins going up already in the second quarter and the margins in the first quarter do not represent what we see as a steady state margin So we’ll -- and also this quarter as we disclosed, we have invested a lot in our business, even though we are going through this COVID scenario, right? Because basically we don’t think that -- those movements should influence our ability to invest in the long-term. But again, there is -- we are seeing margins going up again in the second quarter.

And Rafael, if I can just compliment on this topic on investments, I think just to re emphasize that we are really excited about continuing to invest in growth, right? So the mindset here for investments in the first quarter, Tito, was really to front load investments to be able to grow in the second quarter -- in the second half of the year and throughout 2022. So I think this is a very important message to come across as we continue to be very confident regarding growth looking ahead. And I -- and moving on to your question regarding Inter, I think, just to talk a little bit of about what we see in terms of this deal. We admire a lot the Inter team. I think they have very similar culture and vision as we do and they built a great business focus on consumer. So same industry, but very different business model focused on different client segments as us. But we have -- as we have been working a lot to drive the digitalization of our merchants, we’ve been learning with them a lot about how to think about that commerce revolution from the consumer perspective. So a lot of what we want to build together with them with these commercial partnerships has to do with really bringing this conversion of helping to drive the digitization of our merchant base by connecting our clients to InterShop. And helping InterShop consumers, on the other hand to undergo this more multi-channel, omnichannel journey of consumption, so that’s really where the mindset is and we think there’s a lot that we can build together with them.

Lia, just to add some points here. Tito, thank you for your question. So I think that as we always said, levels around 25% to 30% margins are healthy levels. So we are committed to this range. As we always said that we think that in line with this, we have healthy margins, but we are always searching for new avenues of growth. And if we can find ways to grow faster, then margins will be much close to the bottom of this range. And if we can, if we don’t find too much avenues of growth margins we’ll be upper, but we are always committed to help margin levels, as we said before, and we will continue to find new avenues of growth and balanced growth and margins at the same time. It’s not very easy to do it, but I think that with discipline, we can do it. And yes, we expect margins to go up on a quarter-over-quarter basis. We think that we have these huge, almost one-time affect of the COVID and provisions that, as I said, I think that everything we should have done we did it in the first quarter. Now we expect margins to go up to the levels we are used to help. And regarding Banco Inter investment, I think, that as Lia said, we like the team, we like the culture and what they are building. We think that we have now a better opportunity to learn more about the financial revolution from the consumer perspective. We said last quarter that we want to be a protagonist in the convergence between consumers and merchants ecosystems. So we think that we will have the ability to be close and to learn a lot. Thank you Tito for the great question.

Great. Yeah. Thank you, Thiago, Lia and Rafael. It’s very helpful. If I can just have one quick follow-up on the Inter again, but kind of linking it to the Linx, I don’t know how much you can comment there. But just given this whole omnichannel experience and with Linx you’ll get some more software. How important is like the InterShop to that whole omnichannel experience for your merchants?

Great questions, Tito. So difficult to talk about Linx yet, we are still waiting for anti-trust for regulatory approval. But that we are working hard to make sure that we help our clients to sell more through digital channels. So to digitize their inventory and sell-through digital channels is something that we want to do, we are really working hard on that direction. So the combination of being present in the POS and ERP solutions with the OMS and the eCommerce platforms and being close to a marketplace, help us in that direction. So it’s a time to learn and work hard. But we believe that the next phase of the business will be about helping clients to sell online. So all the movements we did, they are going to that direction. So I think that we will always have a very strong core in financial services and we are evolving our core platforms and we believe that the SMB space is the best space in the market. But we are evolving the business towards helping our clients to sell more. And I think that those two investments give us a lot of learning and we can work hard with both teams to try to make this work.

Great. Thank you, Thiago. Very helpful.

The next question will come from Rayna Kumar with Evercore. Please go ahead.

Good evening. Thanks for taking my question. I have two. The first one is, could you help us think about how free cash flow or adjusted free cash flow could work for the remainder of the year? Obviously, you already addressed the heightened capital expenditure is in the first quarter. But how should we think about it for the remainder of the year? And my second question is, if you can help us frame the evolution of converting your client base into heavy users, which use payments, banking and credit. Clearly, there is an important dynamic supporting revenue growth acceleration here and we know that rates was 8% in the first quarter, up from 5% in the fourth quarter. So is there a target penetration rates that you have in mind for this year and next? Thank you.

Thank you, Rayna for your question. Rafael here. So let me answer your first question regarding free cash flow. So this quarter we had an unusually low free cash flow because of higher CapEx. Always when we have opportunities, commercial opportunities with suppliers, we advance payments and that’s what we did this quarter. But when we look for the year without those seasonality we really intend to have a high conversion rate, cash conversion rate as we had in previous years. So our business is a cash generative business and we expect that to continue in the future. So when you look at our adjusted net income and you see our free cash flow, we do expect it to have high conversion rates.

And maybe I’ll take the second question Rayna regarding heavy users. I think that’s a great question. The two big elements here, Rayna, are about our customer service operations and how we interact with our clients on a very day-to-day basis and very effectively and about technology and product. So we talked a little bit in the presentation about how we are -- we have migrated already 70% of our clients to the experience of the ABC Platform. And what happens is through the experience of this platform, our clients can access digitally all of their solutions, all of the financial solutions that we offer through that experience of the ABC Platform. So once we onboard a new client, it tends to be the case that they start with us to a payments relationship, right? But over time, that payments relationship evolves to banking, loans and other solutions. So the fact that we can interact with them to the customer relationship team and the fact that they have this integrated experience through the ABC platform are really the two big elements that will drive further penetration of heavy users in our overall client base looking-forward and we are very excited that this evolution continues to happen on consistent basis.

And Rayna, Thiago here.

Very helpful.

… let me add some quick comments. Regarding CapEx, we always -- and free cash flow, we always had a very strong cash conversion rates in our business and we expect to keep the level of conversion rate that we have. And this quarter, we have an impact of the deal we made with Grupo Globo, because basically, we are buying the ownership that Grupo Globo had in TON migrating this ownership to the StoneCo level. And under this we are prepaying the marketing investments with the cash that we have received from Grupo Globo. So it’s a really net effect is almost zero, but we have to recognize this as a CapEx, but we raise the capital from them to do it. And regarding the heavy users, I think it’s really about investing more and more in technology to make sure that the convergence between the solutions are very strong and a very simple product. That’s what we are building into this new financial operating system that we started with the ABC Platform. And you can see that now, we have 15% of our SMB clients with credit using our credit product already. But we disclosed the new metric, which is 6% -- 7% of our clients use prepayments. So you can see the potential of working capital in our client base and we still have some clients that they don’t use credit or prepayments with us because they use in another bank. With the registry of receivables, we will have the ability to offer more prepayments and by seeing the collateral, we can have better working capital products for them. So if we have the best products, if we have the best service, if we are devoting to make the life of our clients better, I think that engagement with our solutions will increase. So it’s about devotion to product, customer service and making sure that we deliver everything on a very simple way with the best service possible to our clients.

Very helpful. Thank you.

The next question will come from Craig Maurer with Autonomous Research. Please go ahead.

Yeah. Hi. Good evening. Thanks for taking my questions. Couple questions, first on competition, while it’s hard for me to see any real improvement in the actual offering from incumbents. I am curious on your view, on the threat from embedded finance from the likes of companies like, InBev, who are going to sounds like start to offer financial services directly to merchants who are buying their goods? Second, if you could comment on what the take rates look like on the non-acquiring TPV that you’re seeing through your cards or through bill pay or other things? And lastly, cost of sales looked to be up significantly as a percentage of TPV or percentage of transaction revenue, so maybe a comment or two to help think about how we should look at that going forward? Thanks.

Hi, Craig. Thiago here. Thank you for the questions. So I’ll start first in the competition part. I think that we still compete with the big incumbent players here in the market. Those are the players that we see day-to-day and we face competition. But I think that we have the ability to increase client base and increase engagement of the solution really because of the quality of the products and the services we offer. So if we think in terms of acquiring business itself, competition is what has always been, so take rates in acquiring has a small decrease, but much more than offset by the results from the additional solutions. That we’re so focused about providing more engagements with new solutions being the credit and additional prepayments the most relevant in terms of monetization. But we are putting a lot of efforts to increase our ability to create more engagement in the Money-In features and Money-Out features. We want to be present in the life of our merchants in all the financial needs they have. And when we see some effect on take rates, there are two things in terms of acquiring, first is that, we have higher debit mix, that’s one. And we have a slight mix shift towards bigger SMBs that they have a little bit lower take rate, but they have a much bigger LTV and we always start relationship through the payment first. So as we grow our client base fast, you have a wait in this payment’s first type of relationship, that then we’ll upsell working capitals to them. So that’s why you see the dynamics of take rates going up not in the speed of the client base, but coming up fast as you see increasing prepayments and credit and all the working capital solutions. The take rates in the money -- the banking Money-In and Money-Out today is still small, but the most important strategy now is to create more engagement. So we want to scale the Money-In and Money-Out features as fast as we can and then we will have many more -- much more ability to monetize those volumes. So we are working hard to create more functionalities to our clients, such as payroll for example, which will be a great avenue for us and we think we can deliver this in the second half of the year.

Thanks. And the cost of sales that were up as a percentage of transaction revenue and TPV?

Hi, Craig. Rafael here. So when you look at our cost of services, we do have many investments there, especially in customer service and technology team that it hasn’t -- it goes in that line, as well as software investments. So when you look on a year-over-year basis, those are the main effects. When you look on a quarter-over-quarter basis we have also investments new solutions like TAG, our registry of receivables and also banking, right? So those are the main effects that we see in that line is not only a transactional like technology transactional costs, but also those costs that I’ve just mentioned.

And Craig…

Yeah. Thank you, Rafael. Very helpful. Yeah.

… last comment, just to be precise, so we expect to keep increasing take rates on our SMB operation, based on that experience of creating more engagement with solutions increasing client base. So we expect the take rates on the SMB operation will continue to grow and competition is mainly with incumbents today.

Thank you very much.

Thank you, Craig.

The next question will come from Jeff Cantwell with Guggenheim. Please go ahead.

Hi. Thanks for taking my question. Can you hear me?

Yes.

Okay. Great. You’re always very thorough in your prepared remarks. Thanks very much for that. Maybe let’s just think about, can you tell us more about what you’re seeing in the current operating environment and help us understand what’s been driving that improvement in TPV in April and in May versus March? I wondered if you can drill down on that for us, because we’ve been focused on what’s happening with your core, call it, ex-Coronavoucher growth in TPV? Is it SMB driven, where do you think you’re gaining market share right now and is there any noticeable change in mix debit versus credit? Just trying to get a sense of what happened since the end of the first quarter? Can you help us get a sense for why you feel the company is moving past the bottom, so to speak? Thanks.

Hi, Jeff. This is Lia. Thank you for the question. So regarding TPV evolution, the more recent TPV evolution, I think, like, we said in the beginning of today’s presentation. What we’re seeing is the fact of this fact that when restrictions ease the comeback tends to be fast. So, yes, the TPV growth has been driven by SMBs largely and we do expect that as restrictions ease that this comeback will continue to come and it will be fast and that is why we emphasize the fact that we’re investing continuing to grow our operation. So I think that -- that’s kind of what we can highlight in terms of the color of TPV growth.

And Jeff, Thiago here…

Okay. I guess…

…so that the growth of TPV is mainly based on the SMB operation scaling fast, if it wasn’t for the second wave of COVID in the first quarter, the growth would be much stronger. But we expect this growth in terms of a client base and TPV to increase. I think we have more engagement of our clients. Our clients nowadays are a little bit bigger, which is much better for us in terms of our ability to help them with the needs they have. So the evolution of TPV and the growth that you’re seeing April and May is mainly driven by the comeback of the volume from the SMB base. If it wasn’t for the lockdowns and the second wave of COVID in the first quarter, the growth would be much bigger. So we expect to increase growth along the year.

Got it. Got it. Great. And then my other question was, I guess, this is a high level one, but why increased investments now. I guess the question is what’s the calculation that you’re making about the future normalized environment, it seems the timing of these investments and this new product launch the unified financial operating system and somebody announced partnerships in Linx, I guess, the point is that, those will drive faster rates of topline growth for you guys, which makes sense? So I just wanted to see if you can tell us more about this timing and where these investments can turn into incremental revenue opportunities for you. Could you maybe highlight some of the areas where you’re seeing opportunities in the market? Thanks.

Great, Jeff. That’s actually a great question. So it’s mainly two factors, Thiago here speaking, one is experienced and learning from the first wave of lockdown last year. So last year, when COVID hit and lockdowns happens, we decided to resize our operation and the operation was smaller. So once the client base came back, we were short in terms of our ability to serve and extend the client base. And we learned that that lockdowns are affects that happens, it’s very, very tough, very tough and we want to be the fastest player when the economy bounce back and we are learning from other countries that once you scale vaccination, then the economic recovery is fast. So I think that we are the right direction of investing more in the operation. I think that the growth of April and May show that it makes sense. So we will continue to invest in our operation. We have balance, as we always say it, always say margin and growth. But based on the experience of last year and the data that we are seeing from our clients and this year the impact was much less than last year. So our base were reducing volumes around 20%. We decided to keep investing to be the fastest player when the economy bounce back and we keeping in this plan. And it looks like by the clients data that this is the direction that we should continue to follow.

Okay. Great. Thanks for all the color. Appreciate it.

Thank you very much, Jeff.

Thanks Jeff.

The next question will come from Jamie Friedman with Susquehanna. Please go ahead.

Great. Thank you very much for taking my question. I just had two quick ones. The April and May TPV growth rates look great. How should we think about Q2 take rates? Are there still any major voucher impacts that we should be thinking of? And then the second question is when it comes to active clients, it looks like for 2021 you’re now targeting about 950,000 excluding TON. Can you talk a little bit about the cadence for those in like how those adds work through Q2, Q3, Q4?

Hi, Jamie. Rafael here. Thank you very much for your question. So regarding your first question on take rates, yes. So we do expect take rates to go up in the second quarter. I would say that the first quarter was sort of the bottom in terms of take rates. Coronavoucher volumes, there could be but not very relevant as we saw last year, but so that, that’s pretty much a trend that we are seeing. That’s why we are very comfortable in providing the guidance that we did and also take rates for the full year between 1.85% and 2% and we are already seeing this in the second quarter.

Okay.

Let me add some comments here, Jamie. So two things, as we are -- as we gave you some visions about the take rates for the year. We obviously expect a significant increase in take rates in the following quarters. We are seeing the take rates in the second quarter has a relevant improvement compared to the first quarter. We don’t expect to have too much Coronavoucher this year. So the take rates ex-Coronavoucher or with Coronavoucher should not be too different this year by what we expect. And Pagar.me will continue to grow volume, maybe not in the pace that we were using last year, but we will continue to grow volume. So when we say that we expect to have in this range more close to 2% take rate, take rate is basically the SMB operation increasing the LTV, increasing the engagement of new solutions. So, yes, we expect relevant increasing in take rates in the second quarter and onwards to the fourth quarter of the year.

Great.

And Jeff, I believe you made a question regarding active base at the end of the year, right?

Yes. I did. Thank you.

Yeah. So just to address that point. So, yes, we provided this guidance of 950,000 clients by the end of the year excluding TON. And you asked about the cadence of that, we do expect that this cadence -- that the net adds will continue to increase throughout the year, right? So we emphasizing the message that Thiago talked about, we expect that restrictions will ease more and more as vaccinations become more widespread in Brazil. And once that happens, we really are front loading for growth. So we expect to reach the end of the year at about 3.5000 agents…

Right.

… on the streets in the fourth quarter of 2021 and so we expect this cadence of net adds to increase throughout the year. Regarding that number, there are two effects that we also want to talk about which is important, which is of course, there was an impact from the first -- the second wave lockdowns in the first quarter. And we are driving some of the net adds of Stone into TON, the smaller client base, right, some of the inside sales client that provide much better economics in the TON offering than in the Stone offering, so that also impacted that number -- 950,000 number.

Okay. Thank you very much.

Thank you, Jamie.

The next question will come from Mario Pierry with Bank of America. Please go ahead.

Hello, everybody. Good afternoon. Let me ask you just, let me go back to the credit business. And the Pagar.me [ph] provisions here, like just doing the math, right, you basically built provisions of R$116 million, this represents almost 8% of your average portfolio if I just look first quarter versus fourth quarter. So my question then is, was this a specific client that you had a problem with? Is this a specific segment? What are you -- what have you learned during this process? Why do we need to build so much provisions so quickly? Does it mean that you were under provisioning or you were too optimistic with your assumptions? Does it mean that you need to change your pricing going forward and does it change your appetite for lending? We did see a marginal slowdown in originations this quarter. Does it mean then that this should continue or are we -- do you think you’ve fixed the problem one-time event let’s go back to business as usual?

Hi, Mario. Yeah. Thanks for your question. Rafael here. So the provisions that we built, this is mainly provisions for older cohorts, right? So we have to have our best estimate when we have our numbers out. And of course, we didn’t estimate a second wave of COVID back in the past. So that’s why we are provisioning here. So when we look going forward we see newer cohorts. Despite having all this in our model and the COVID impact and so on, we see our newer cohorts with better returns. So, for example, as Thiago said, if you look at clients of the second quarter last year cohorts. We’ve already received back over 80% of the cash that we should receive and so we are comfortable with those levels. So it does not change our appetite for credit for growing our solution. We remain very optimistic about the prospects there. So just to remind you, that the market is really, really big. So our credit solution is really in the early beginnings. So the opportunity is big and the returns even net of those delinquency -- expected delinquencies that we have, we see returns are on 2% a month net of delinquency. So this is a very healthy return and we remain very enthusiastic about that solution -- working capital solutions for our clients.

Okay.

Mario just to compliment a little bit, Thiago here speaking. I think that the reason why we decided to open the cohort for different quarters is to show you that, the major impact was the first quarter of 2020. Basically at that time, our model was not ready to deal with lockdowns and what happens with certain types of clients when they are close to a big period of time. So some of our clients they’re not in business anymore. So we had to adapt our models through first quarter and the beginning of the second quarter. And I think that the adjustments we did was based on the learnings and the effects on the last year cohorts and I think that that’s done. It do not reduce our appetite for this product, as Rafael have. It’s actually the opposite, because when you go through such difficult environments and you can operate with a healthy level of returns. You can see that the worst cohort is 0.5% a month return, it increase your ability to provide more working capital to your clients, but we have to do it based on three things. First, is to create a product that our clients need, understand and like that’s the first thing, create a product that our clients see value and wants to take it to do more businesses. The second thing is, our ability to create these products with profitability that we feel safe in order to scale our operation. And the third thing is our ability to raise capital from third-party partners that can limit our exposure to credit risk and to funding. That’s why we are happy for our ability to raise more capital. As Lia said, we have now more than R$ 800 million is committed from investors. And I think that we are doing exactly what we did in prepayments in the past. We put some of our money in the beginning as kind of our working capital for this product and we will scale this product with third-party capital exactly like we did in prepayment. So actually very confident with working capital solutions and credit, I think that the learnings we had during the COVID, and the lockdowns was very, very valuable for the future.

Okay. If I look, right, at your loan book in the first quarter was about R$300 million, second quarter was about R$500 million. So you’re averaging about, let’s call it, like, R$450 million. And then now you have to increase your provisions by R$116 million. It just seems like a very large figure for the size of the loan book. So then I go back to the question, was this specific to one client or really it was across the Board?

Hi, Mario. No. This was not a specific to one client. So our client base is a very pulverized. If we look at client concentration for example, in credit is nothing is really, really small. So it’s really has to do with the lockdowns scenario that affected many, many thousands of merchants and no specific client or concentration there.

And Mario, just to give you another information, and I will triple check this with the team and we can connect offline then. But I think that the biggest size check that we give in terms of credit should be something around R$150,000 something like that. So we don’t have bigger clients, right? So I think that what we had in last year was really, we didn’t had the experience to deal with lockdowns and we have some segments that are very exposed to not selling through their brick-and-mortar operation, and we learned. So it’s not concentrated into one client or one segment. It’s much more about learning how to navigate through lockdowns with the credit product and I think that the returns we expect for this quarter represents the learnings we had.

Okay. Thank you very much.

Thank you, Mario.

The next question will come from Neha Agarwala with HSBC. Please go ahead.

Hi. Thank you for taking my question. I’ll quickly follow-up on Mario’s previous question. Could you give us a sense of what is the NPL ratio for your loan book around just a rough range and how that has changed to get a sense of if we can see any additional provisioning in the coming months? And then my second question is on proximity [ph] move to the SMB segment. I believe in the first half of this year, they have also been more aggressive in opening more hubs hiring more people on street. Has that in anyway impacted your merchants the client that you target and have you been hearing more about them from your merchants? So any color on the competition from proximity would be helpful? And then lastly on Inter, with this partnership, do you have an ambition to go beyond being the pure B2B player? And really developing a relationship with the end consumer, maybe not today, maybe in future years time, is that a vision that maybe you have? Thank you so much.

Hi, Neha. Thank you for your question. Rafael here. Let me answer your first question. So when we look at our expected delinquency rates, they’re a little above 10%, so around 12% or so. When we look at pre-COVID levels, last year we were talking about like 8%. So this is sort of the increased that we see. As I said, when we look at second quarter 2020 cohorts, we have already received over 82% of what we have lent. So that’s sort of the increase in risk that we have seen.

Neha, regarding your second question. This is Thiago speaking here. I think that regarding competition, as I said, competition is -- are in the same level that we have always experienced. Our biggest competitions are still with the bigger banks and incumbent players. We don’t like to comment too much about our competitors movements. We pay attention in everything but we keep our mind focused on serving our clients in the best way possible we can. And I think that we do have the best value proposition for SMBs based on the product, the service, the engagement we have with them. And I think that the growth levels we have showed our ability to be the major player in the SMB space. And we will continue to be protagonists in this revolution of financial services for SMBs in Brazil. So I think that -- those are the comments regarding competition. And about Banco Inter, it’s not that we are moving towards consumers, that we are learning how consumers interact with merchants in the best way possible so we can serve our merchants better. Because in the end of the day, more than helping our clients with the financial needs they have, we want to help them to sell more. And in order to help them to sell more, we need to learn more about consumers, but it’s always about helping our merchants to thrive and to grow. So this is about learning. This is about creating synergies. This is about helping our clients to sell through digital channels. And I think that we will have very positive evolutions of this partnership with Banco Inter and other partnerships that we can do with consumer facing companies that wants to be close to our merchant base.

Understood. One additional question on the credit, the average duration of your portfolio seems to be going up, it was I think seven earlier last quarter, it was eight this quarter, it is nine. So any color on that, what is the duration increasing and where should it normalize in the coming year? Thank you.

Hi, Neha. Thank you. So there is some affect there that, when our clients take the credit for the second time. So they have already paid us back fully and then they take the second credit for a second time. We usually extend a little more term for them. So that’s how -- that’s why we see that effect there. And of course, as we get comfortable, and as we learn, as Thiago said, we become, we release a little more, the terms the average ticket that is too small, a little below R$20,000, so that that’s something that we are evolving over time and that’s why you’ll see that number going up.

One additional comment, as Rafael said, about the duration of the product. So two things, one is, the average size we give is roughly about one month of sales of our clients and now we are seeing that our clients that pay entirely the products, a big percentage that they want a new offering of credit. So they are rolling over the operation, pay entirely the first month and taking second credit operation. And with that we increase a little bit the duration in order for them to pay on an easier pace for them and for their cash flow. Because if they pay entirely the first product and they took it again, we are much more comfortable of the risk of those clients. So we can let them pay with a lower percentage of volumes, because in the end of the day, we have much less NPLs from those clients. So it’s about adjusting the credit for the cash flow of the clients and always for the best clients we need to bring a better deal. So it’s about adjusting the product for the better clients.

What is the maximum duration that you’re offering?

Should be around 10 months, I don’t think we have much -- something much bigger than this.

I think average nine months so maximum 10 months.

Okay. Great…

Yeah.

Great. Thank you so much for the answers.

Thank you, Neha.

Thank you.

Thanks, Neha.

There are no questions at this time. This concludes the question-and-answer session. I would now like to turn it over to your host for final considerations. Please go ahead.

Hello, everyone. Thiago here. Just want to say a big thank you to everyone and a big, big, big thank you to our team and to the support to our investor. The support we have from our investors is amazing. But really the star of the show here is our team putting a lot of hard work in terms of serving our clients through difficult times. And you keep counting on us on hard work in helping merchants in Brazil to win the situation and become better. Thank you everyone. Bye-bye. See you next quarter.

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