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Stoneco LTD (STNE) Q1 2021 Earnings Call Transcript

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STNE earnings call for the period ending March 31, 2021.

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Stoneco LTD (STNE 6.63%)
Q1 2021 Earnings Call
Jun 01, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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.co 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 our financial measures are defined as IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information appear in today's press release.

Finally, before we begin our formal remarks -- excuse me, I would like to remind everyone that today's discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Besides, we would like to remind you that the Linx acquisition is pending regulatory approval by the Brazilian Antitrust 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 are regarding business and disclosed 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.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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 trends 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?

Thiago Piau -- Chief Executive Officer

Thank you, Rafa, and good evening, everyone. While Brazil faced a challenging situation with the second wave of COVID in the first quarter, we continue to work hard to stay close to our clients and bring to them the best service and solutions we envision. We monitored our clients' 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 that vaccines are widespread, we expect that once vaccination scales, 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 operations. 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 clients in grew 67% in the quarter versus last year, achieving 857,800 active clients. 257,000 clients are active in our digital accounts. And of those, 188,000 use it as their banking domicile, selling all their transactions in the Stone accounts. 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 20. While April and May compared to weaker comps due to lockdowns in the second quarter of 2020, we still see strong growth acceleration when looking at a two-year CAGR of 42.5% and 50.2% annual growth, respectively, in April and May to date. In terms of revenue and profitability in our core SMB operation, our take rates decreased from 2.2% in the first quarter of '20 to 1.9% in the first-quarter '21 due to additional provisions on our credit product caused by commerce restrictions. Excluding these effects, we believe our take rates would have been 2.22%.

Even though we have experienced BRL 116 million impact in revenue reduction, our credit portfolio grew and remains healthy, reaching a risk-adjusted return net of funding cost between 1.5% and 1.9% on a monthly basis despite the short-term impact from COVID. We continue to evolve in our strategy to fund our product with third-party capital and thus limit our exposure to credit risk. We have recently concluded another issuance of FDIC, raising additionally BRL 340 million in third-party capital. In total, we have now available BRL 833 million in third-party funding to be disbursed in our credit operation.

Regarding our vision and product evolution, we are building a complete financial operating system for SMB. In the past, we took the approach of building separate solutions as it was the best way to grow fast, learn about the market and gather client feedback. We have now decided to integrate our solution set. And we have already migrated approximately 70% of Stone SMB client base to our new platform.

Regarding our software strategy, we will continue to invest in and acquire brick-and-mortar POS and ERP solutions built by great people and focused on strategic verticals where we have great chance of integrating our financial operating system and executing on the digitization of commerce in order to help our clients to sell online. The acquisition of Linx, which is still pending antitrust approval, is a big step toward our vision and will broaden our vertical coverage, as well as expand our set of digital solution. With this acquisition, we will reach BRL 1.1 billion annualized pro forma revenue in software. By executing both on the Stone SMB core business and our software strategy, we believe that we will be in a much stronger position to capture the evolution of the approximately BRL 4.7 trillion GMV of household consumption.

We seek to be the player the best help our merchants to do business and reach consumers. To that extent, our investment in Banco Inter and the commercial partnerships we are building will be very accretive in terms of learning and new experiences. We are very confident in the growth of our card business and excited with the opportunities ahead. We will work hard as protagonist in the financial and commerce revolution of our country, finding the best people we can and serving our clients with maximum care and devotion.

With that said, I will pass it over to Lia. Lia?

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

Thank you, Thiago, and good evening, everyone. Thanks for joining us today. I want to start our presentation on Page 3 by highlighting that Brazil went through a second wave of COVID in the first quarter of '21, which imposed 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 4, 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 compare to the previous quarter, we increased 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 increased 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 5, 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 on life to agri and TON, our micro merchant 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 addition of clients of 138,000. From those, over 62,000 are coming from online and offline SMBs, and close to 77,000 are coming from TON, a strong acceleration when compared to last year. With the strong growth in TON, we are excited with the opportunity to become a relevant player in the micro merchant space.

The number of open digital banking accounts increased to over 658,000, 30% higher than the previous quarter and 5.4 times higher than the first quarter of 2020. Clients with an active digital banking account reached more than 237,000 demonstrating an increasing level of engagement. From now on, we will only disclose the number of active accounts. Also, within these accounts, more than 188,000 clients are already using Stone as their main settlement accounts.

The number of clients using our working capital solutions also grew significantly. The number of clients using credit increased threefold year over year reaching more than 102,000 in the first quarter of 2021 and the percentage of clients with prepayments grew from 62% in the first quarter 2020 to 67% this quarter, a 5 percentage points increase. Moving over to Page 6. We show the TPV evolution of our SMB operation, which grew 45% year over year in the first quarter and has accelerated to 122% in April and 111% in May up to the 20th of the month.

Looking at a two-year CAGR to normalize the effect from weaker April and May in 2020, we see our SMB clients TPV accelerating growth in May to over 50% two-year CAGR, even with the impact of COVID in 2020 and 2021. In Page 7, we highlight the performance of our credit operation in the quarter. Our take rates decreased as a result of an increase in our credit provisions and financial incentives to clients due to commerce restrictions imposed by COVID second wave. This measure brought a negative impact in our results of BRL 116 million or 35 basis points in the SMB take rates.

With that, our take rates in SMBs decreased from 2.2% in the first quarter of 2020 to 1.87% in the first-quarter 2021. If we were to exclude these effects, we believe our take rates would have been 2.22%. Even though we have experienced this impact, our credit portfolio has grown and remains healthy, with monthly returns between 2.1% and 2.5% or between 1.5% and 1.9% when we already discount the funding costs. The total credit portfolio grew from BRL 1.5 billion in the fourth quarter of 2020 to BRL 1.9 billion in the first quarter of 2021.

We continue to evolve in our strategy to fund our products with third-party capital and thus limit our exposure to credit risk. As of the second-quarter 2021, we have concluded another issuance of FIDC, raising an additional BRL 340 million in third-party capital. We now have a total of BRL 833 million available in funding to be disbursed in our credit operation. This second FIDC was raised at a cost of CDI plus 3.76% versus CDI plus 4.88% in the first issuance, lowering our marginal cost of funds by 112 basis points.

As we show on Page 8, the traction and engagement of our EDC platform continues to increase. The heavy users of the platform, defined as clients being active in payments, credit and banking products reached 7.7% of the total in the first quarter of '21 compared to 5.3% in the previous quarter and only 0.4% one year ago. Also, we saw more clients being active in at least two financial solutions with the number growing from 34% in the fourth quarter to 41% in the first quarter of 2021. On Page 9, we discuss our vision and product evolution.

As Thiago mentioned, we're building a complete financial operating system for SMB online and offline. We have gotten to where we are today, by developing different solution sets to help our SMB clients with their financial needs. We built the ABC platform to help brick-and-mortar SMBs with an integrated payments, banking, and working capital offering. This was an important step to drive the activation of new financial solutions beyond payments.

We have already migrated approximately 70% of the SMB client base to this new platform and continue to see increased engagement. At the same time, we have enabled SMB clients to sell online through our Pagar.me platform. More recently, we launched our TON solution for micro-merchants. And we have also acquired additional solutions to help our clients with value-added services, such as reconciliation and loyalty.

As we have increased scale in those solutions, looking ahead, we have taken the challenge to integrate Pagar.me SMB and TON product into the unified experience of the ABC platform. As shown on this page, I want to highlight the elements of this platform in four feature sets: money in, in which we enable our clients to collect money from their sales and cards, and other noncash payment methods, such as fixed wire transfers, boletos, and vouchers. We're evolving to enable reconciliation of all payment methods and providers, as well as online sales with risk management and chargeback disputes. One of the most mission-critical needs of our clients is working capital, and we address those needs, both through prepayment and loans.

Once our clients cash in their sales using our platform and can take working capital solutions to help them grow their business, we want to help them with a complete set of money-out features, such as build, tax, and boleto payments, wire transfers, peaks, and card to pay other business-related expenses and with broadcast. We are working hard to launch our payroll feature, so our clients can pay their employees in a simple way. As our solution evolves, we will offer value-added services integrated to our core platform, such as loyalty and CRM. Now I want to show you some metrics to illustrate the evolution of these fronts.

In Page 10 and 11, we show engagement metrics of the current users of the platform. While our TPV grew 45% when compared to the previous year, banking money and volumes, which include mainly Ted, PIX, and boletos, grew 4.6 fold year over year to BRL 2.6 billion. Finally, our total account balance grew five times, reaching nearly BRL 614 million in the quarter. In money out, prepaid card TPV grew close to five times year over year, reaching nearly BRL 290 million in the first quarter, driven by increasing penetration and adoption of cards within our overall client base.

Banking money out volumes composed by best-fixed boleto payments, grew 5.7 times year over year, reaching close to BRL 9 billion in the first quarter. Our working capital solutions also continue to scale with credit portfolio increasing to BRL 1.9 billion. While we increase the percentage of the portfolio being funded with third-party capital, up from 4% in the fourth-quarter 2020 to 17% in the first-quarter 2021, as I already mentioned. As of today, we have BRL 833 million in third-party funding for our credit solutions.

Additionally, in prepayments, we were able to grow the total prepaid volume in the segment by 38% year over year fulfilling all our clients' working capital needs during this challenging environment. Moving on to Pages 12 and 13. We show how our vision and software has evolved. Back in the second quarter of 2019, we communicated our vision to investors.

And since then, we have taken several steps in the direction of helping merchants of all sizes with their work phone tools to drive their digitization and grow. As Thiago already mentioned, we have taken the approach to invest in and acquire POS and ERP software businesses with two main opportunities for value creation: number one, to upsell financial services; and number two, select segments where we could help drive the digitization of commerce. The acquisition of Linx, which is still pending antitrust approval, is a big step in achieving our vision and will broaden our vertical strategy, as well as expand our set of digital solutions. On Page 13, we highlight where we are in the evolution of our vision and how the Linx acquisition will enhance our software ecosystem.

In POS and ERP solutions, our current ecosystem covers retail, food, and service verticals for SMBs. With Linx, we will expand to new verticals, such as fashion, pharma, and gas stations, and gain strength in mid-large clients. Our strategy will continue to be driven by expanding presence in strategic verticals through M&A and continuing to support organic growth within each vertical. Additionally, with Linx, we will enhance our presence in digital by helping large brick-and-mortar merchants to go omnichannel through Linx as OMS, as well as SMB and mid large retailers to sell directly to their consumers through e-commerce platform marketplace gateway and food delivery apps.

We help our clients engage with social media and with Linx simple products, we will expand the offering of engagement tools and help merchants better attract and engage with new consumers. Moving to Page 14. We bring some numbers that show our evolution in software. Our pro forma revenue reached BRL 55.2 million in the first quarter of 2021 with organic growth of 43% year over year.

If we include numbers from Linx, pro forma revenue would have reached BRL 285.8 million, growing 16% year over year. In annualized terms, our combined revenue would have reached over BRL 1.1 billion. From this quarter onwards, we decided to exclude from our reported numbers of subscribed software clients the SMB clients using our reconciliation and loyalty tools since those solutions are being integrated in the ABC platform and will be treated as value-added services. With that, we have reached 133,000 clients in the first quarter of 2021.

Combined with Linx, total client figures would have reached 202,000 in the quarter. On Pages 15 and 16, we bring the evolution of our client base and pro forma revenue by segment. But from those, I would like to highlight two important data points. First, we reached BRL 174.7 million pro forma revenues in POS and ERP solutions with 47,900 clients and SMBs.

And second, we reached BRL 1.6 billion in GMV in digital solutions, considering both e-commerce platform, OMS, and food delivery apps. Finally, we seek to be the player that can best help our merchants to do business enrich consumers. Our investment in Banco Inter, that we discussed on Page 17, and the commercial partnerships that we intend to build with them will be an important step in that direction. For those not familiar with Banco Inter, it is a leading digital bank in Brazil with a growing 10 million active client base and a complete suite of products and services to individuals, including banking, marketplace, credit insurance, and investments.

We're investing up to BRL 2.5 billion for a maximum of 4.99% stake in Inter. Also, we will have a seat on their Board, and we will be entitled with the right of fresh refusal for a period of six years and according to certain price thresholds in case of change of control. We have already engaged with Inter team regarding commercial partnerships such as to connect Stone merchants to intershop their fast-growing marketplace, driving the digitization of strong merchant base, and providing a multichannel journey for intershop consumers to enable a seamless mobile payment experience between inter consumers and store merchants, both online and off-line. And to leverage interest funding capabilities to increase efficiency in Stone's working capital solutions, as well as give into our clients access to new investment opportunities in fixed income through the offering of FIDC.

We're excited to work closely with Inter's team to drive the conversion to its consumers and stones merchants, and we will update you in the future about advancements in our commercial partnerships. Lastly, on Page 18, I want to give a quick update on Pagar.me key accounts, our fintech-as-a-service business. We continue to see short-term headwinds in TPV and revenues and expect this trend to continue in the short term. That said, we want to highlight that this is a more volatile business.

And that the representativeness to our earnings is very small despite being more relevant in TPV. Although we will continue to evolve programming key account offering to a broader set of features such as banking as a service and credit as a service. Pagar.me focus will be inclined toward digital native SMBs and the integration with the ABC platform. In the first quarter of 2021, TPV increased by 21% to BRL 18.2 billion.

In the second quarter to date up to May 20, TPV has increased by 26% year over year. Take rates have decreased from 1.1% in the first quarter of 2020 to 0.8% in the first quarter of 2021, a decrease of 30 basis points, mainly a result of lower prepayment rates, which were impacted by lower CDI rates in Brazil. Take rate net of funding cost has decreased from 0.55% in the first quarter of 2020 to 0.45% in the first quarter of 2021, a decrease of 10 basis points. With that, I will pass it over to Rafael, who will discuss our financial results in more detail.

Rafa?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thanks, Lia. Starting on Page 19. We show that, as we have said, given the volatility in commerce activity as a result of the 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 BRL 116 million and our adjusted net margins by 5.2 percentage points. Our consolidated take rate, 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 BRL 716.8 million in the first quarter of 2020 to BRL 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 top line 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 impacts, our payment client base grew by 34.5% when compared to the first-quarter 2020 reaching 722,300 clients excluding TON. TON has reached 19,300 active clients, posting a record net adds in the quarter of 76,600 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 that period and easier comps. We expect a significant acceleration in the TPV growth. On Slide 21, we discuss our operating leverage and profitability. Our operating leverage was impacted by lower revenue due to the increase of credit provisions and financial incentives to clients, headwinds from COVID-19 in our volumes, and as Thiago mentioned, our decision to keep investing in our business, aiming to accelerate growth.

Also, financial expenses increased as a percentage of total revenue and income due to the combination of a higher base rate in the country mark-to-market from short-term investments and the revenue impacts that I just mentioned. With that, our adjusted net margin was 21.6%, roughly in line with the first quarter of 2020. Now going over in more detail on each P&L line item on Page 22. We see that we had stronger growth in our revenue from transaction activities, which grew 40% year on year, and also in subscription services and equipment rental, which grew 50% year over year.

Both lines presented higher year-over-year growth than we saw last year in the first quarter of 2020. Our financial income revenue line grew 2.6% year over year, mainly due to the higher provisions in our credit business and declines in prepayment rates in Pagar.me key accounts, which were influenced by lower CDI rates in Brazil. Our cost of services reached BRL 239.7 million or 27.6% of total revenue and income, an increase of 6.7 percentage points over the first quarter of 2020. This increase was mainly due to higher investments in our technology and customer support teams, costs associated to our software solutions, higher data center costs to support our operation, and the increase in the unit cost of chargebacks.

When compared to the previous quarter, cost of services as a percentage of revenue increased 6.3 percentage points, primarily because of operational deleverage from lower revenue, higher investments in new solutions, brand fees related to the increase in the unit cost of chargebacks, higher POS depreciation, mainly in TON as a result of significant increase in its client base and higher investments in our customer support team. Administrative expenses were BRL 117.6 million or 13.6% of total revenue and income, 3.2 percentage points higher than the prior-year period mainly due to the expenses associated with our software solutions. When compared to the previous quarter, administrative expenses increased from 12.2% of total revenue and income to 13.6%, mainly due to lower revenue. Selling expenses were BRL 162.8 million for the quarter or 18.8% of revenue, 3.2 percentage points higher than in the prior-year period, mostly explained by higher marketing investments, mainly in TON.

Compared to previous quarter, it increased 4.8 percentage points as a percentage of revenue, mostly explained by the lower revenue, the increase in our sales force headcount and higher marketing expenses. Financial expenses were BRL 92.5 million, a decrease of 37.7% compared to the prior year, mainly explained by lower cost of funds driven by both the lower base rate and higher use of own cash to fund the prepayment operation, which more than compensated the higher volumes in the quarter. When compared to the previous quarter, financial expenses as a percentage of total revenue and income increased from 6.4% to 10.7%, mainly explained by lower revenue and higher cost of funds explained by the higher Brazilian base interest rate. Other operating expenses were BRL 41.5 million in the quarter compared to BRL 3.5 million in the first quarter of 2020.

This difference is mainly related to unusually low share-based expense in the first quarter of 2020 related to lower tax and social charges provisions due to high depreciation of shares in that quarter and fair value adjustments of call options related to affiliates, labor contingencies, and tax claims, which together impacted other operating expenses in the first-quarter 2021. When compared to the previous quarter, other operating expenses were 54% or 4.2 percentage points lower as a percentage of our revenue. This lower figure is mostly related to a higher share-based expense in connection to the tax and social charges provisions resulting from the appreciation of shares in the fourth quarter, the BRL 10 million donation to help with the construction of a factory for the production of COVID-19 vaccines also in the last quarter and higher than usual POS losses due to the COVID-19 impact in SMBs in the fourth quarter. Turning to cash flow on Page 23.

We reported negative adjusted free cash flow of BRL 299.8 million in the first quarter of 2021 compared to a negative BRL 122.3 million reported in the first quarter of 2020. The adjusted free cash flow figure of the first-quarter 2021 was impacted by BRL 230 million in prepaid marketing expenses as a result of the agreement with Grupo Global, BRL 160 million in prepaid POS purchases, and BRL 46 million in prepaid software licenses. Important to highlight that the prepaid capex in the quarter was motivated by the opportunities to realize attractive discounts with suppliers. In addition to the first-quarter 2021 adjusted free cash flow figures, I would like to highlight some important recent events regarding capital allocation.

This year, we have completed our repurchase program as announced on May 20 having purchased a total of 3.6 million shares at an average price of $55.4 per share. From this number of shares, 18% was executed in the first-quarter 2021 totaling BRL 232 million. Also, in the second quarter of 2021, we sold most of our minority stake in Cloud Walk, a payment start-up in Brazil for BRL 209 million, realizing a gain of approximately BRL 200 million. On Page 24, I would like to highlight some key messages of today's presentation.

First, our core SMB business experienced strong growth in the first-quarter 2021, despite short-term impacts from COVID. Based on transactional data from our clients and examples of economic comeback in countries where vaccination is more advanced, we have made an informed decision to increase investments in our business. So we'll be ready to grow faster once our economy comes back to normal levels. Second, the strong signs of traction and engagement of current users of our ABC platform, coupled with digitization trends have encouraged us to continue evolving our solutions to create a unified financial operating system for SMEs, online, and offline.

Third, we are excited with the increased breadth of our bricks-and-mortar software solutions, as well as the steps we have taken in helping clients go digital and with how the Linx acquisition will enhance our ecosystem. Finally, we are confident with the continued evolution of our business in 2021, both in terms of our growth and our team's ability to deliver a strong value proposition to our clients. For these reasons, we have decided to provide you some additional outlook for the year of 2021, as shown on Slide 25. Our outlook excludes any impact from Linx acquisition as this transaction was not yet closed.

For the full-year 2021, we expect: between 1.4 million and 1.5 million active payment clients, including TON; approximately 950,000 clients, excluding TON; a take rate ex Coronavoucher for the full year between 1.85% and 2%; and a significant acceleration in total revenue and income growth compared to the growth levels we saw in 2020. With that said, operator, can you please open the call up to questions?

Questions & Answers:


Operator

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

Jorge Kuri -- Morgan Stanley -- Analyst

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-a-vis the current nonperforming loans? Any guidance on how those metrics look like? And 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, then we 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.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Hello. Can you hear?

Jorge Kuri -- Morgan Stanley -- Analyst

Yes. Yes.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Yes.

Thiago Piau -- Chief Executive Officer

Yes.

Jorge Kuri -- Morgan Stanley -- Analyst

Yeah. I can hear you.

Thiago Piau -- Chief Executive Officer

Rafael was answering you, but I think that you were not listening. So I will take this 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 message. We are very confident with the level of risk-adjusted return net of funding cost 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 be reminded, we already received 82% of the cash flows of that quarter, 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 we did. 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 as you are 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 and 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 money is and their working capital based on those volumes.

We will be ready for the new dynamic with the registry of receivable now on June 7. And with more collateral, we can provide more working capital to our clients in the form of prepayments 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 rate and client base growth that you have provided.

Jorge Kuri -- Morgan Stanley -- Analyst

Thank you, Thiago. Thanks for that clear response.

Thiago Piau -- Chief Executive Officer

Thank you, Jorge.

Operator

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

Tito Labarta -- Goldman Sachs -- Analyst

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 sort of the additional investments that you did in the quarter. Would you say those investments -- I guess, in your headcount, was that a onetime in 1Q and that should go away? You showed in, I think, Slide 26, that was about a 5% impact to margin? If you could just help us think about that going forward. And then along those lines, I guess, is a more recurring level of margin, you know, closer to what you showed here like around that 36% given you had 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 on out? And then second question with the partnership with Banco Inter. 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 enter can have a 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? Or is it strictly just to benefit your merchant base?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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

Tito Labarta -- Goldman Sachs -- Analyst

Yes.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Sorry for the previous question. My mic was not working. So answering your first question, Tito, we will 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, this -- we are seeing margins going up again in the second quarter. 

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

And Rafael, if I can just complement on this topic on investments. I think just to reemphasize that we are really excited about continuing to invest in growth, right? So the mindset here for investments in the first quarter, Q2 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 moving on to your question regarding Inter, I think just to talk a little bit about what we see in terms of this deal.

We admire a lot the Inter team. I think they have a very similar culture and vision as we do, and we built a great business focus on consumers. 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 digitization 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 Inter shop and helping Inter shop consumers on the other hand, to undergo this more multichannel, omnichannel journey of consumption. So that's really where the mindset is. And we think that there's a lot that we can build together with them.

Thiago Piau -- Chief Executive Officer

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're committed to this -- to this range, as we always said, 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 will 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 in margins at the same time. It's not very easy to do it, but I think that with this print, we can do it.

And yes, we expect margins to go up on a quarter-over-quarter basis. We think that we have this huge almost onetime effect of the COVID 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 have. 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 evolution from the consumer perspective. We said last quarter that we want to be a protagonist in the convergency between consumers and merchant ecosystems. So I think that we will have the ability to be close and to learn a lot.

Thank you, Tito, for the great question.

Tito Labarta -- Goldman Sachs -- Analyst

Great. Yeah. Thank you, Thiago, Lia, and Rafael. That's very helpful.

If I can just have one quick follow-up on the Inter again, but kind of linking it to the length. I don't know how much you can comment there, but just given this whole omnichannel experience and will Linx you'll get to more software, how important is like the Inter shop to that whole omnichannel experience for your merchants?

Thiago Piau -- Chief Executive Officer

Great question, Tito. So difficult to talk about Linx yet. We are still waiting for antitrust for regulatory approval. But you know 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 e-commerce 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 toward 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.

Tito Labarta -- Goldman Sachs -- Analyst

Great. Thank you, Thiago. Very helpful. 

Operator

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

Rayna Kumar -- Evercore ISI -- Analyst

Good evening. Thanks for taking my question. I have two. The first one is, could you help us think about how free cash flow adjusted free cash flow could look for the remainder of the year? Obviously, you already addressed the heightened capital expenditures 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's an important dynamic supporting revenue growth acceleration here. And we know that rate was 8% in the first quarter, up from 5% in the fourth quarter. So is there a target penetration rate that you have in mind for this year and next? Thank you.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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 with advanced payments, and that's what we did this quarter. But when we look for the year without those seasonalities, 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.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

And maybe I'll take the second question, Rayna, regarding heavy users. I think that's a great question. The two big elements here are about our customer service operation and how we interact with our clients on a very day-to-day basis and very effectively and about technology and products. 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 to 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 through a payment relationship, right? But over time, that payment 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 to 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're very excited that this evolution continues to happen on a consistent basis. 

Thiago Piau -- Chief Executive Officer

And Rayna, Thiago here.

Rayna Kumar -- Evercore ISI -- Analyst

Very helpful.

Thiago Piau -- Chief Executive Officer

I'll add some quick comments. Regarding capex, we are -- in free cash flow. We always had a very strong cash conversion rate 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 Global because basically, we are buying the ownership the group 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 Global. So it's a really -- net effect is almost zero, but we have to recognize this as a capex, but we raised 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 convergency between the solutions are very strong in 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 was 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 for our clients.

Rayna Kumar -- Evercore ISI -- Analyst

Very helpful. Thank you.

Operator

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

Craig Maurer -- Autonomous Research -- Analyst

Yeah. Hi. Good evening. Thanks for taking my questions.

A couple of questions. First, on competition. You know, 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 nonacquiring TPV that you're seeing through your cards or through bill pay or other things? And lastly, cost of sales look 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.

Thiago Piau -- Chief Executive Officer

Craig, Thiago here. Thank you for the questions. So I will 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 solutions really because of the quality of the products and the service 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 are 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 the 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 effects 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 toward 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 payments-first type of relationship that then we will 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 increase in prepayments in credit and all the working capital solutions.

The take rates in the banking money and the banking 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 would be a greater avenue for us, and we think we can deliver this in the second half of the year.

Craig Maurer -- Autonomous Research -- Analyst

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

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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 in 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.

Thiago Piau -- Chief Executive Officer

And Craig --

Craig Maurer -- Autonomous Research -- Analyst

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

Thiago Piau -- Chief Executive Officer

To 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 compensation is mainly with the incumbents today.

Craig Maurer -- Autonomous Research -- Analyst

Thank you very much.

Thiago Piau -- Chief Executive Officer

Thank you, Craig. 

Operator

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

Jeff Cantwell -- Guggenheim Securities -- Analyst

OK. 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 a little about what you're seeing in the current operating environment? And help us understand what's been driving that improvement in PPB in April and in May versus March. I wanted to see if you could drill down on that for us because we've been focused on what's happening with your core, call it, ex Coronavoucher your 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 first credit? Just trying to get a sense of what happened since the end of the first quarter, could you help us get a sense for why you feel the company is moving past the bottom, so to speak. Thanks.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

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 effect of this fact that when restrictions ease, the comeback tends to be fast. So yes, the TPV growth is being 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 operations. So I think that that's kind of what we can highlight in terms of the color of TPV growth.

Thiago Piau -- Chief Executive Officer

And Jeff, Thiago here.

Jeff Cantwell -- Guggenheim Securities -- Analyst

OK. I guess --

Thiago Piau -- Chief Executive Officer

So the growth of TPV is mainly based on the SMB operations 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 the client base and TPV to increase. I think we have more engagement of our clients.

Our clients now 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 in April, 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.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Got it. Got it. Great. And then my other question was, you know, I guess, this is a high-level one, but why increase 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 in this new product launch, you know, the unified financial operating system and some of the announced partnerships and Linx.

I guess, the point is that, you know, those will drive faster rates of top-line 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 opportunity in the market? Thanks.

Thiago Piau -- Chief Executive Officer

Great, Jeff, that's actually a great question. So it's mainly two factors, Thiago here speaking. One is experience and learnings 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 expand the client base. And we learned that lockdowns are effects that happens. It's very, very tough. But it's fast, and we want to be the fastest player when the economy bounced 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 in 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 said, 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're keeping in this plan.

And it looks like by the clients' data that this is the direction that we should continue to follow.

Jeff Cantwell -- Guggenheim Securities -- Analyst

OK, great. Thanks for all the color. Appreciate it.

Thiago Piau -- Chief Executive Officer

Thank you very much, Jeff.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

Thanks, Jeff.

Operator

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

Jamie Friedman -- Susquehanna International Group -- Analyst

Great. Thank you very much for taking my question. I just had two quick ones. The April and May TPV growth rate looks great.

How should we think about Q2 take rates? Is there still any major voucher impact 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, and like how those ads work through Q2, Q3, Q4? 

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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's pretty much a trend that we are seeing. That's why we are very comfortable in providing the guidance that we did and of take rates for the full year between 1.85% and 2%.

And we are already seeing this in the second quarter. 

Thiago Piau -- Chief Executive Officer

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 rate ex Coronavoucher or with Coronavoucher should not be to different this year by what we expect. And Pagar.me will continue to grow volume. Maybe not in the pace that we were used 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 rates, take rate is basically the SMB operation, increasing the LTV, increasing the engagements of new solutions. So yes, we expect a relevant increase in take rates in the second quarter and onwards until the fourth quarter of the year. 

Jamie Friedman -- Susquehanna International Group -- Analyst

Great.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

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

Jamie Friedman -- Susquehanna International Group -- Analyst

Yes, I did. Thank you.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

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 -- that the net adds will continue to increase throughout the year, right? So we reemphasizing 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 3,500 agents on the street 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 clients that provide much better economics in the Stone offering than in the Stone offering, so that also impacted that 950,000 number.

Jamie Friedman -- Susquehanna International Group -- Analyst

OK. Thank you very much.

Thiago Piau -- Chief Executive Officer

Thank you, Jamie.

Operator

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

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Hello, everybody. Good afternoon. Let me ask you, just let me go back to the credit business and the pickup in provisions here. Like just doing the math, right? You basically built provisions of BRL 116 million.

This represents almost 8% of your average portfolio, if I just look first quarter versus fourth quarter. So my question then is, you know, 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 the need to build so much provisions so quickly? Does it mean that you were under provisioning or you were, you know, too optimistic of 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'd fix the problem, onetime event, let's go back to business as usual?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Hi, Mario. 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, the market is really, really big. So our credit solution is really in the early beginning.

So the opportunity is big. And the returns, even net of those delinquency, expected delinquencies that we have, we see returns around 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.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

OK.

Thiago Piau -- Chief Executive Officer

Mario, just to complement 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 type of clients when they are close to a big period of time. So some of our clients, they are 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 does not reduce our appetite for this product as Rafael have.

It's actually the opposite because when you go through such difficult environment and you can operate with healthy level of returns, you can see that the worst cohort is 0.5% amount of return. It increases 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 BRL 800 million 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. 

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

OK. If I look, right, at your loan book in the first quarter was about BRL 300 million. Second quarter was about BRL 500 million. So you're averaging about let's call it, like BRL 450 million.

And then now you had to increase your provisions by 116. 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?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Hi, Mario. No, this was not specific to one client. So our client base is very coverage. If we look at client concentration, for example, in credit, is nothing.

It's really, really small. So it really has to do with the lockdowns scenario that affected many, many thousands of merchants and no specific client or concentration there.

Thiago Piau -- Chief Executive Officer

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 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 have the experience to deal with lockdowns. And with 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.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

OK. Thank you very much.

Thiago Piau -- Chief Executive Officer

Thank you, Mario.

Operator

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

Neha Agarwala -- HSBC -- Analyst

Hi. Thank you for taking my question. I'll quickly follow up on Mario's question. Could you give us a sense of what is the NPL ratio for your loan book around a bit rough range and how that has changed? Does get a sense of if we can see any additional provisioning in the coming months? And then my second question is on possible move to the SMB segment.

I believe in the first half of this year, they have also been more aggressive in opening more hiring our people on the street. Has that in any way impacted your merchants, the plans that you target? And have you been hearing more about them from your merchants? So any color on the competition from Pax would be helpful. And then lastly, on Inter. With this partnership, do you have an ambition to go beyond being the pure B2B players? And maybe developing a relationship with the end consumer? Maybe not today, maybe in two, three years' time.

Is that a vision that you have? Thank you so much.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

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 are 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 increase that we've seen. 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.

Thiago Piau -- Chief Executive Officer

Neha, regarding your second question, this is Thiago speaking here. I think regarding competition, as I said, competition are in the same level that we have always experienced. Our biggest competition are still with the bigger banks and the 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 protagonist 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 toward consumers that we are learning how consumers interact with merchants in the best way possible so we can serve our merchants better. Because at 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 want to be close to our merchant base.

Neha Agarwala -- HSBC -- Analyst

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 -- related to this quarter, it is nine.

So any color on that? Why is the duration increasing and where should it normalize in the coming years? Thank you.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Hi, Neha. Thank you. So there is some effect 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 still small, a little below BRL 20,000.

So that's something that we are evolving over time. And that's why you see that number going up.

Thiago Piau -- Chief Executive Officer

One additional comment, as Rafael said about the duration of the product. So two things. One is the average size we give is briefly about one month of sales of our clients. And now we are seeing that our clients that pay entirely the products, a big percentage, they want a new offering of credit.

So they are rolling over the operation pay entirely the first one and taking second credit operation. And with that, we increased a little bit deterioration 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 we 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 products for the better clients.

Neha Agarwala -- HSBC -- Analyst

What is the maximum duration that you offer?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

It should be around 10 months. I don't think we have much -- something much bigger than this.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

I think average nine months, so maximum 10 months.

Neha Agarwala -- HSBC -- Analyst

OK. Great.

Thiago Piau -- Chief Executive Officer

Yeah.

Neha Agarwala -- HSBC -- Analyst

Great. Thank you so much for the answers.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thank you, Neha.

Thiago Piau -- Chief Executive Officer

Thank you.

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

Thanks, Neha.

Operator

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.

Thiago Piau -- Chief Executive Officer

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 of 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 and helping merchants in Brazil to win the situation and become better. Thank you, everyone. Bye-bye.

See you next quarter.

Operator

[Operator signoff]

Duration: 83 minutes

Call participants:

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thiago Piau -- Chief Executive Officer

Lia Matos -- Chief Operating Officer and Chief Strategy Officer

Jorge Kuri -- Morgan Stanley -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Rayna Kumar -- Evercore ISI -- Analyst

Craig Maurer -- Autonomous Research -- Analyst

Jeff Cantwell -- Guggenheim Securities -- Analyst

Jamie Friedman -- Susquehanna International Group -- Analyst

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Neha Agarwala -- HSBC -- Analyst

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