Q4 2019 Earnings Call
Hello, everyone and welcome to that Mike <unk> earnings Conference call for the quarter ended December 31st 2019, after that equal Sunlit Investor Relations officer for my color anybody.
Our senior manager presenting today, it's Pedro Arnt, Chief Financial Officer. Additionally, it was one of humanity tee off when it got a Bible will be available during today's kewaunee session. This conference call is also being broadcasted over the Internet and is available to our Investor Relations section of our website I.
I remind you that management may make forward looking statements relating to such matters asked continues growth prospects for the company industry trends and product and technology initiatives.
These statements are based on currently available information in our current assumptions expectations and projections about future events, we believe that our assumptions expectations and projections are reasonable in view of the currently available information you are cautioned not to place undue reliance on these forward looking statements. Our actual results may differ materially from dish. These costs on this call.
A variety of reasons, including those described in the forward looking statements and risk factor section of our 10-K and other filings with the Securities and Exchange Commission, which are available in our Investor Relations website I know, we would like to remind you that during the course of this conference call. You may discuss some non-GAAP measures reconciliation of those major so the neo comparable GAAP measures can be found in our fourth quarter 2019 earnings.
Our press release available under Investor Relations website.
Now, let me turn out the call over to Pedro.
Hello, everyone and thank you for joining our fourth quarter 2019 earnings conference call.
Weve wrapped up another successful year with a strong fourth quarter.
Our business continues to deliver solid growth across both the commerce and Fintech divisions with good execution across multiple regions solidifying our position as a regional leader in the digital landscape.
These results have been achieved in the context of social volatility increasing competition and mixed macroeconomic performance throughout our markets.
Oh this highlights the immense opportunity still present as E commerce in digital financial services continue to penetrate the economies of Latin American countries.
As we've said over the years, we're still in the early stages of a long journey and our eyes convinced as ever in the value, creating potential of mercadolibre in the years to come.
With that brief intro, let's begin with our Fintech progress report for the quarter.
On a consolidated basis FX neutral total payment volume continued accelerating during the quarter to 98.5% year on year growth.
Why would also accelerated in all our main geographies.
This was mostly driven by off platform services, which accounted for 78% of total TPV growth.
On platform total payment volume in Argentina, and Mexico also accelerated on a sequential basis, reaching 107.6% and 53.4% year on year growth on an FX neutral based respectively, leading to total on platform payment volume growth.
A 46% on an FX neutral basis.
Off market place total payment volume represented 54.7% of total TPV during the fourth quarter and continued to grow triple digits on a consolidated basis, reaching an FX neutral growth of 175.8% year on year.
Let's now break this growth story down by initiative, starting with our M. Pos side of the business.
The M. Pos business continues to make strides as FX neutral TPV grew at 126% year on year on a consolidated basis during the quarter.
Additionally for the full year 2019, we had 3.8 million active merchants processing payments through our Mercado point devices on a consolidated basis.
Our impossible business in Brazil continues to accelerate in number of transactions, reaching 61.3 million during the quarter translating into a growth of 127.7% year over year.
The performance of our point pro device was a highlight.
Reaching peak sales during the month of November where we've seen a strong migration from point many devices to the more sophisticated type of devices the point pro.
During the fourth quarter point pro sales grew at 44% quarter on quarter as it gained awareness and continue to expand our sales efforts geared at targeting larger merchants still within the long tail segment.
On a consolidated basis, we reached 88.5 million transactions processed by or Npos devices during the fourth quarter, representing a growth of 160% year over year and 36% sequentially Q on Q.
Moving onto the wall it initiatives.
It achieved an important milestone during the fourth quarter with TPV, surpassing the 1 billion dollar mark reaching $1.3 billion and gaining share of volume in the off platform segment to 26% of total TPV on a consolidated basis.
The build out of both collectors and payers using our wallets services continues to fire on all cylinders.
During the quarter, we reached almost 8 million active payers and 2.4 million active collectors, representing a growth in users of 29.4% in the payers metric Q on Q and 51.6% in the collectors metric also Q on Q on a consolidated basis.
Another highlight during the quarter was improved user frequency in all geographies, reaching 7.7 payments per quarter with Argentina's still leading at 12 payments per unique payer during Q4.
Additionally, we are beginning to see both in Argentina, and Brazil, an increment in users carrying out multiple payment flows throughout the quarter.
Still on mobile wallet in Argentina during the fourth quarter, we have began to monetize wallet payments in that country, where they 60 basis point merchant discount rate.
We're not observing significant churn neither a cross merchant nor payers as such cost is still more competitive than funding payments with either debit or credit cards.
This is a positive initial validation of the potential of our wallet.
As a long term sustainable business model.
Within wallet. We're also encouraged by the execution in Buildout of our Q our network as it reached almost half a billion dollars and TPV during the quarter and represented 18 million transactions.
We're also proud to announce on this front that our Q. Our network has already surpassed the 2 million active pay or Mark in Argentina, and the 1 million active payer mark in Brazil.
Growth in Q, our payers was also strongly driven by our ongoing efforts to onboard merchants accepting mercadopago QR codes, and hence expand payment usage cases within the QR functionality.
During the fourth quarter, we had 1.6 million active QR merchants on a consolidated basis, representing a quarterly increase of 67.2%.
Roughly evenly split between Brazil, and Argentina are two main geographies at this point.
Growth in active collectors was also strong as we onboarded high quality merchants during the quarter such a Starbucks in Argentina 711 in Mexico as well as good performance from existing merchants, such as Mcdonald's Burger King Centermark and other lighthouse clients in Brazil.
During 2019 as part of her wallet initiative, we have ramped up distribution of prepaid cards to our users. These cards are linked to wallet account balances.
This card business is still in early stage, but beginning to ramp as we place greater resources behind the initiative.
Since inception, we have issued almost 4.5 million prepaid cards.
On a consolidated basis versus the same quarter last year, we've almost doubled the TPV processed on prepaid cards and also the amount of cards distributed and expect sustained strong levels of growth going forward.
Moving on to merchant services.
The business continues to grow at a healthy pace, both the numbers of transactions as well as in total payment volume delivering 95% year on year, FX neutral TPV growth as well as 95% year on year growth in the total number of payments.
Weve continued adding active merchants to our online payments offering outside of the meli marketplace being able to deliver over 350000 net new ads for this business versus the previous quarter.
Continuing a quick update on the credit business Mercado Credito overall, the credit business has continued on a steady pace of originations during the quarter as we continued strengthening our value proposition for both online and offline merchants as well as for our buyers. Consequently.
Our credits portfolio grew 92% year on year in us dollars to $212.6 million on a consolidated basis.
Additionally, we reverse negative bad debt ratios from prior queues in Brazil, reducing by half our default rates quarter on quarter.
The improvement in bad debt was a consequence of strengthening our risk models on new cohorts, while at the same time intensifying and improving our collection efforts.
We continue moving forward with our credit product rollout throughout the region in Argentina, we launched personal loans, where users can solicited credit line for Mercado leave it not associated with a specific product purchase in Mexico, We launched consumer credits with encouraging results as the product already.
Accounted for 32% of originations in that country.
We've also continued expanding funding sources for our credit business during the quarter.
In order to be able to further scale these businesses without using our own balance sheet in Argentina, we securitized, our first consumer credit Trust, while in Mexico, We launched our first trust with Goldman Sachs to fund our merchant credit loans.
We feel enthusiastic about our credit business in Mexico, given the combination of low banker is Asian rates and the high demand, we see for credit products like the ones, we offer to both merchants and consumers.
We've also made meaningful inroads on the customer retention and loyalty front during the quarter more specifically, we've started integrating that Gallo Pago wallet uses in products into our loyalty program Mercadopago those.
We've expanded loyalty rewards to QR payments and other usage cases, with Mercadopago, where historically discounts endpoints were exclusively geared towards free shipping and other benefits only for marketplaces.
They should help increase our engagement and retention within our ecosystem as well as enhance our couponing and cross selling capabilities.
Still on the engagement and retention front, we've also launched our discount central product, which offers our user base. Both merchant funded discounts on items on our marketplaces as well as discounts for our buyers purchase through our mobile wallet, both online and offline differentiated by loyalty level.
During 2020, we aspire to progressively add more benefits to our program to enhance the value proposition to our users and also leveraged the data we are generating so the we can not only personalized customer experience. Even further but also enabled us to create targeted marketing campaigns to increase our bonds with our users.
Finally on Fintech during the fourth quarter, we've reached a commercial agreement with Paypal the builds upon their investment on Mercadolibre, They announced on March 12th of last year.
We are beginning to explore together how to unlock more payment options for millions of Brazilians and Mexican Paypal buyers as well is boosting our reach an international scale by expanding payment options for our own users abroad, leveraging the global scale and merchant depth of Paypal.
We are pleased with the comprehensive nature of our partnership and look forward to continued collaboration with Paypal.
Let's now move onto some of the high points for our marketplace business, starting with net promoter scores as they've improved significantly during the quarter as we continue the improvements to our logistics network that are resulting in faster delivery times, and consequently higher customer set.
As faction.
Versus last year net promoter scores increased by 13.3 percentage points and 3.3 percentage points versus the third quarter of 2019.
Consolidated GMB accelerated to 40% growth year on year on an FX neutral basis, driven by performance in Argentina and Mexico.
At $3.9 billion, it was our strongest quarter ever highlighting the still nascent stage of ecommerce penetration in the region and continued run rate for long term growth of our business.
Brazilian growth this quarter was sequentially flat at 23.4% on an FX neutral basis year on year.
This slightly above market growth was impacted by weak Black Friday seasonal campaign performance in November and December stemming primarily from our decision to prioritize ROI and not invest as aggressively as we did in Q3 around those campaign.
Yes.
And to slow down in our consumer electronics and auto parts categories.
Despite this we also saw multiple positive signs.
So the item growth accelerated to 25% year on year up from 18.5 during the prior quarter.
We've also began to see acceleration in categories, where we see opportunity to gauge penetration since they under index, our consolidated market share such a cell phones televisions among others.
And the number of unique buyers also continues to show improvement accelerating sequentially to 25% year on year during the fourth quarter.
We remain focused on driving growth through user experience improvements incremental logistics capabilities expansion of selection and price competitiveness, We trust that our business in Brazil still has enormous growth potential going forward as we improve on those key drivers for long term success.
Moving onto Mexico growth in that market was very strong during the quarter GM via accelerated to 53% year on year on an FX neutral basis.
Successful execution was attributable to three main initiatives fulfillment operations that continue to scale and deliver improved delivery times marketing investments that in contrast to Brazil did a company an aggressive seasonal promotional campaign and continued improvements in product assortment as live list.
Things grew almost 80% year on year, reaching 48 million.
Argentine G.N.V. continued to accelerate for the second consecutive quarter on an FX neutral basis, reaching 109.4% year over year.
And 31% year on year in us dollars.
Excellent performance during promotional seasonal dates improvements in marketing campaigns efficiency and the inflationary pass through effects to item cost when measured on a local currency basis explained the solid GMB growth, we delivered this quarter in that country.
Frequency of items sold continues to improve in all geographies with Mexico, leading the way with the frequency of purchase of six point 13 purchases per unique buyer, representing an 11.2% improvement quarter on quarter, mostly driven by a higher penetration of Arkansas.
Tumor package good categories, and the general increase in items of lower value due to the relaunch of our shopping cart feature.
CPG initiatives continue delivering two X the growth of the marketplace.
Consolidated unique buyers continue to deliver a healthy clip of growth accelerating in all major geographies.
Assortment also continues to deepen surpassing 270 million live listings during the quarter.
In this respect it is important to highlight that Brazil, Reaccelerated, it's live listings growth after more than three quarters of deceleration.
During the fourth quarter official stores represented almost 15% of total GMB.
We are feeling increasingly confident about becoming a key partner to traditional brick and mortar retailers and consumer brands on their omni channel strategies.
Vishal stores are contributing in the transportation of our platform to become an increasingly more attractive shopping destination with deeper branded assortment.
In Brazil, we Onboarded 60, new official stores during the fourth quarter, including Apple Michelin under armour career for among others.
In other regions. We are also adding relevant new official stores, such as Electrolux in Chile and show me in Colombia.
Moving onto another critical flywheel of our enhanced marketplace logistics.
We continue to have a wide free shipping offering in our marketplace with 62% volume purchased and roughly 50% of units being delivered at no shipping cost to consumers.
Mercadoenvios managed network penetration reached 43% on a consolidated basis.
We have also opened nine additional service centers in Mexico, and nine in Brazil, allowing us to have faster delivery times and lower cost of transportation.
Additionally, during the fourth quarter, we opened 335 drop off points in Brazil for our merchant base.
These drop off point to make it easier to onboard merchants to our managed network as they eliminate the need for pickup at her merchant location, thereby helping us to continue to decrease our reliance on more expensive and less reliable drop ship solutions.
Geographically, our Brazilian fulfillment operation almost doubled its penetration versus the prior quarter, reaching an average quarterly penetration of 12%.
[noise], Argentina doubled its fulfillment penetration, reaching 10% of totaled ship volume, while Mexico also would continue scaling this service, reaching 42% penetration.
Another key point in Brazil is that we were able to continue to diminish our dependency on a single carrier.
In fact during the quarter, we lowered our exposure to our largest carrier by 12 percentage points versus the prior quarter.
In 2019.
Our flex solution.
Where we leverage logistics capabilities of our existing merchants is now available in Argentina, Brazil, Colombia, and Chile, and we look forward to rolling out. This service during the first quarter of 2020 in Uruguay as well.
Flex in Argentina, where it first launch reached 12% of items shipped for the entire country with almost 60% of those deliveries being done same day and 40% next day.
The success of this service in Argentina is encouraging us to further leverage this type of shipping solution into other regions in order to lower delivery times and costs even more.
On a consolidated basis, Mercadoenvios continued improving logistics capabilities.
During the fourth quarter, we reached an important milestone as we are now delivering over half of our volume through mercadoenvios in less than 48 hours.
Mainly driven by improvements in Brazil, five percentage points Q on Q, and Argentina, nine percentage points Q on Q and have lowered total delivery times by nearly 20% year over year.
In relation to average cost per order. We've also continued to improve unit cost lowering it by 14% quarter on quarter, driven by a broader penetration of smaller Threepl partners, where we've renegotiated contracts to reflect our increased volume and also performed enhancements to our network design.
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In Brazil alone, we reduced on average one dollar per order as a consequence of the implementation of these operational improvements.
Before moving onto a review of our PNM for the quarter I'd like to take a minute to speak about the progress we've made around our branding investments that meaningfully increased during h. two of 29 team.
Having started the branding journey during the second half of last year and recognizing it the building a brand is a long term initiative, we're already starting to see a positive evolution in the brand equity of Mercado Libra with positive growth in the overall brand power indexes in Mexico, Brazil and China.
Really well, maintaining a high value gap versus the competition in Argentina in Uruguay.
Additionally, branding initiatives have impacted significantly certain relevant brand attribute perceptions, such as quality trust and time of delivery in our major geographies.
Now that I've covered the main highlights in business capabilities for the quarter, let's move onto our financial results.
Following our capital raise in 2019, we've continued to invest behind growth initiatives, which include sales and marketing.
During the fourth quarter gross billings continue to maintain strong momentum growing on an FX neutral basis, 59.1%, while 36.4% in us dollars.
Consolidated net revenues grew faster than gross billings, both on an FX neutral basis, and a U.S. dollar basis growing to 84.4% year on year, and 57.5, respectively, and reaching $674.3 million as we continue to optimize ship.
Being subsidies and costs minimize contra revenues from free shipping programs.
As you'll recall, our growing logistics operations is a core part of our long term strategy.
Gross profit was $308 million, representing 45.7% of revenues during the quarter down from 47.8% a year ago.
This 211 basis point margin compression was driven for the most part by warehousing cost from our fulfillment operations and the incremental inventory cost from the robust sales of M., Pos devices, which were partially offset by collection fee improvements sales taxes and hosting fee efficiencies.
On a sequential basis, the 142 basis point margin compression is explained for the most part by incremental shipping subsidies to promote adoption of our logistics network during the fourth quarter.
We've included a detailed breakdown as we do every quarter of these and also the Opex margin evolution I'm about to cover in the slides that accompany this presentation.
Operating expenses ascended to $377 million or 56% of revenues versus 48 during the fourth quarter of 2018.
On a sequential basis operating expenses increased by only $11 million, which resulted in sequential margin improvement of 479 basis points, mostly attributed to efficiencies in marketing expenses and improvements in bad debt ratios.
Operating losses declined to $68.9 million.
The 479 basis point improvement that I, just explained plus the 142 basis point gross margin contraction covered earlier in Cogs lead to a sequential improvement of 337 basis points and EBIT margin.
Moving down the piano, we saw $21.2 million and financial expenses, mainly attributable to secured financial loans and interest expenses from our trust related to our factoring in Argentina interest income increased by 88.4% year on year to 26 point.
And dollars as the result of the equity offering during 2019, which generated more invested volume and interest gain and a higher float in Argentina as well.
Net loss for the quarter ascended to $54 million on a per share basis. All this resulted in a basic net loss per share of $1.11 cents.
Reflecting back on 2019, we remain very encouraged by the performance of our business overall and remain excited about the opportunities that lie ahead of US our company continue to hold its position as the largest regional ecommerce and payments platform hitting multiple milestones during the year.
Jim V a $14 billion growing at 34% on an FX neutral basis.
TPV of $28.4 billion growing at 92% on an FX neutral basis.
Revenues of $2.3 billion growing at 92% on an FX neutral basis.
Achieving 44.2 million unique buyers.
11.2 million unique sellers 71.1 million unique payers 15 million unique collectors.
And delivering net promoter scores that improved by three percentage points.
Year on year in commerce and by 7.3 in payments.
In delivering these results we've sought to maintain a manageable and sustainable balance between growth and investment which for the full year led to a net loss of $172 million.
We believe we are investing appropriately behind the right growth initiatives building superior experiences and products for our consumers and merchants, while staying focused on our long term goal of democratizing commerce and money throughout Latin America.
The sustained momentum we see gives us the confidence to move onto a phase.
Where we continue to prioritize growth, but with greater focus on driving cost efficiencies and scale benefits.
Through our piano and the P. now of the larger more consolidated countries we operate.
This will be one of our main objectives for 2020.
Before wrapping up the earnings call.
I'd like to add one more comment.
We are proud to communicate that this year will be the first in which we will release, our sustainability report simultaneously with our annual report.
Our commitment to sustainability has a strong connection with how we envision our business serving all our stakeholders and also reflects that we take sustainability matters seriously.
The report includes our sustainability metrics on key initiatives that include diversity, social inclusion labor practices energy consumption greenhouse gas emissions and waste management amongst others.
We feel we've delivered another great year, and our 2019 results leave us on a strong footing to pursue our strategic objectives in 2020 and beyond.
We remain focused on disciplined execution against our priorities and moving our business forward.
As 2020 begins we find ourselves operating at a macro environment characterized by greater variability in that respect we see that we have a well diversified portfolio of products and markets in which we operate which should leave us on firmer footing should economic conditions change.
We remain committed to our long term financial and operational objectives and are confident that the strength of our business flexibility of our balance sheet and operational discipline will allow us to continue delivering value to our shareholders.
We look forward as always to keeping you updated on our progress next quarter and would like to take your questions now.
[noise] to ask a question you will need to press star one of your telephone to withdraw your question press the pound cake. Please standby well, we compile the culinary roster.
Our first question comes on line <unk> lots of Adam.
Barclays. Your line is open.
Hey, guys. Thanks for taking the questions two questions from us. So first can you elaborate on the competitive landscape in Brazil, you talked about lower ROI in November and December is that due to seasonal promotions are a more sustained at a competitive activity. Let me talk about you know all the transient.
And in that context, and then into growth rates that just seeing currently in Brazil.
Reasonable proxy for how we should expect you to manage the business going forward. Thank you.
[noise] identified so let me take it in reverse order the first part when we referred to the decision to invest less aggressively around seasonal campaigns because of ROI that is.
In part a consequence of how aggressively traditional retailers invest around Q4 seasonal campaigns. Both further online businesses and their off line businesses, which does change the ROI profile of investing as those points. So I don't think it's one or.
The other the ROI around the seasonal moments is very much driven by the level of investments of others.
[noise] on general competitive trends I think like we've always said I think to look at this as a zero sum game is probably missing the bigger picture. This is still early stage I think what we need to remain focused on our the initiatives we have put in place since the third quarter.
To see if we can reaccelerate growth in Brazil, I think we said last quarter and we reiterated in the tone of the remarks this quarter that although we are still growing above the market, we aspire to be able to trigger and fine catalysts to grow at a faster clip than low twentys.
And that's a lot of the stuff, we're working on continuing to focus on our logistics efforts, which are showing phenomenal results, although not necessarily flowing through in G.N.V. certainly flowing through to units cost time of delivery in NPS and then other areas. We've been working on the launch of our one p. sales.
Private label improvements in net promoter scores as a consequence of a lot of the things we're doing and then aware gmtv numbers and if and when they begin to react going forward, we'll have to cover that as we gave you guys quarterly updates throughout the year I think right now we're confident with a lot of the initiatives.
But clearly as you can see from the numbers and they are what they are.
They aren't yet impacting in any acceleration versus prior quarter of Brazilian GMB.
[noise], Okay. Thanks very helpful.
Thank you. My next question comes from Mike Olson of Piper Sandler Your line is open.
Hey, Good afternoon, just one question for me you mentioned it briefly but could you talk about how you're thinking about weighing the balance between growth and profitability just across the board in the coming quarters, specifically I guess is there potential to drive leverage and maybe the marketplace business. As you continue to invest in payments or are you thinking about mix.
There and then.
Maybe more directly should we expect the company to return to breakeven or operating profitability sometime and you know the next few quarters or four to six quarters or how would you think about that thanks.
[noise], okay with the usual clarification about us not guiding let me walk you through some of our thought process and thanks for asking the question in terms of a matrix of decisions because we look at the business first of all in different geographies.
And obviously, our geography is very different stages of development and have different level of scale. So larger geographies in more mature markets. As you can see from how we try to manage the piano in the fourth quarter, we're more focused on.
Always prioritizing growth.
But greater focus also on sustainable.
Piano tiles, and you see that in Brazil, where the equilibrium between growth and profitability, perhaps ways more than other markets towards the the bottom line.
And then on top of that Theres, a second layer to the matrix, which is our payments business in our retail business that are very different stages of development and obviously, we're seeing incredible results and many of our fintech initiatives and want to make sure that we continue to invest behind those so it really is a geo.
Geo and product by product decision I think in general terms as some of the larger markets and especially on the marketplace gain scale and gain a certain level of maturity. They begin to get greater focus on bottom line management as well I think if you look at some of the.
Yes towards the end, that's the phase where were and if we think of 20 versus 19 still growth is the most important thing. We also have to make sure that we're nimble to react to competitive scenarios, but there is greater focus on trying to start to drive some operational leverage from the size that a lot of these businesses already.
Hi.
[noise] great. Thank you.
Thank you. Our next question comes from Edward Yruma of Keybanc. Your line is open.
Hey, good evening and thanks for taking the question under this isn't the part merchant discount rate I guess, what drove the decision in that market and how quickly you think would be than its other market and as a follow up how does it change the profitability profile.
Thank you.
Thank you please repeat the question.
Yeah. The question was in regards to charger.
I guess.
Yeah.
Yes.
You expanded.
[noise] [noise]. Thank you.
Great. So let me take a stab at that.
So.
We've always [noise].
Sorry about that can you hear me now assure that one some of these businesses reached enough traction that we introduce a monetization model to it in Argentina, clearly was the first market, where we launched the wallet in the queue. Our network it's gained significant traction.
As we disclose some numbers in the prepared remarks, and so we felt confident that it was the right time to launch a monetization model. There it's important to that monetization model still make the wallet in the queue are the most cost effective settlement for merchants, so a lot of that price.
Thing is is driven in comparison to other payment networks, but we felt it was time to start charging the results. So far are positive we continue to see strong traction. Despite the 60 bips of MDR.
And it's a first step towards improving the profitability of that business I don't think you should read into this as Fintech will become you know immediately profitable there's still investment behind wallet, but it does validate I think the direction of this is something that even with them on.
It is Asian model overlaid onto it.
Still continues to work very well and it also does guide our thinking in terms of other markets. So the expectation should be that as other markets reach a certain level of merchant acceptance and wallet user we will follow a.
A similar path to Argentina and launch an initial level of monetization on top of that.
Great and one quick follow up if I may you had some nice improvement in trend on on the on the Brazilian credit business. I know you had some issues the charge offs last quarter I guess, what drove the improvement and have you changed your underwriting standards in that market. Thank you.
[noise] deals while also.
After having did the.
Oh, let's see on inquiries into the full rights in the prior Gordon is what we need Wills remodeled and we used to all of we did the new models on the one hand and that improved significantly the the.
The full grade in the new cohorts and also we made more imports more collection efforts, we've strengthened the connections engines and the collection beam and both things drove the increase in performance in grades in the fourth quarter.
Great. Thanks, so much.
Thank you. Our next question comes from Andrew Obin of Morgan Stanley. Your question. Please [noise].
Hi, Thanks for taking my question. So it seems like you guys have made it pretty big push forward with Brazil logistics also the the brand marketing and making a lot of progress there I'm. Just wondering how you think about the timing for pay back on these initiatives I know maybe during the peak Black Friday promotion period, maybe it gets law.
Last but any signs of of an uplift and an impact from these initiatives. After we get passed that that black Friday period. Thank you.
[noise], So I think we need to separate both of those the investments in logistics are certainly long term.
Investments in what I mean, my long term, it's not that we don't see any lift I think we're already beginning to see the different impact of everything we've done logistics cost per unit has been coming down.
Delivery lead times have been reducing and you we do see flow through of all that in the net promoter scores, we didn't necessarily see over the last two quarters. The subsequent acceleration in GMB, but there are lots of data points that we think are a reflection of all then.
Network logistics built out that's occurred even the re acceleration in units is partially driven by.
Improved logistics capability of boxes, and lower cost on logistics the marketing I think we said when we started the acceleration in spend that we were going to focus on creating brand marketing primarily for Pago, but also aggressively for them.
Marketplace to communicate some of these new benefits and these new product features related to Meli, you did see in Q4, a slight tilt towards more pago than in Q3, so although the overall numbers.
Moved slightly down when you look at between payments and end market place, there's actually an uptick in brand investments for payments, where you're going to see the impact of all that in payment volume and wallet and some of the metrics, we shared and the marketing spend on marketplace, primarily in Brazil was actually down.
I don't quite a bit sequentially. It was up in Mexico, that's usually one quarter behind in terms of sequencing and also when it earlier stage market. So the impact from the marketing I would say, we still need to hold off on that and see whether all of those brand investments on marketplace.
Eventually can be another factor to accelerate GMP are not not something that we saw this quarter in the case of Brazil.
The the remnant from the previous quarter. If you look at Mexican topline growth it was extremely strong.
Again, how much of that to attribute to logistics to marketing not always that easy to isolate but Mexico did have very strong JV in topline numbers.
[noise] very helpful. Thank you.
[noise]. Thank your next question comes from Stephen Ju of Credit Suisse. Your line is open.
So yeah. Thank you. So can you talk about your efforts and the I guess, the FMCG consumer package goods I guess more the everyday household goods categories.
My recall there has been a push to do more in this segment a few years ago, but you know where are you now in terms of this as a percentage of via at this point and.
As a result, though are you finding that this is helping you to have a more engaged by our boosts with perhaps a faster purchase velocity.
It also I think a building on I guess your earlier comments about the logistics for you talk about the footprint expansion plans in 2020 or in Brazil.
Perhaps the other regions, particularly as you look down or look to take down to dependency on the single carriers and ultimately where do you think that dependency could go to longer term. Thanks.
Great. So yes.
Mcg category or the CPG categories, I think are beginning to.
Just show some some interesting signs, especially in Mexico.
It's it's basically growing at two X year on year in terms of units in that category in Mexico. It still smallish, the mid single digits, Argentina, as well, but growing incredibly well and slowly beginning to become more and more relevant there's still a lot of.
Work, we need to do there in terms of both the user experience, but also sourcing of product we've began in Mexico to mix marketplace inventory with one p. inventory in CPG, as well, which makes us more competitive and gives us more control over the category. So I would say that.
Still not as large as we aspired to be calm and it is a high frequency category as you indicated but definitely showing signs of life.
In Mexico, where we started.
Now in the process of replicating that to Argentina, and Brazil that are I would say a phase behind where Mexico is.
[noise] on logistics footprint.
Rollout.
Incremental warehouses in Brazil, I think we've signaled in the past probably two more.
For the next quarter's one in the north when in the south, but but there is a myriad of last mile hubs and sortation centers that are getting rolled out both in Brazil in Mexico, We gave an indication in the prepared remarks at the pace at which were adding these last mile nodes to the network.
And we really are beginning to see positive signs in terms of cost coming down and lead times accelerating I think a secondary benefit of this which is the one you're alluding to is that it also gives us the ability to rely less and less on any single carrier because as we control the network and the nodes in them.
At work, we can switch carriers on and off I think the endgame solution here is not necessarily to not use any single carrier even when we think of the state run carrier for many many routes. They are very cost efficient, but really what's important here is to not depend on any one single carrier. So I think if we.
I think long term, we'd like to weed aspire to be able to still use carriers that are cost efficient, but to be able to switch away from them if need be and I think we continue to progress very positively in that direction.
Thank you.
Thank you. Your next question comes from Marcelo Santos JP Morgan. Please go ahead.
Good evening. Thanks for taking my question two questions actually on the woman's physician off the wall is that you did in Argentina I was looking at the Brazilian website and it also shows that you were charging a fee. You think is the most 1% for money coming from the their wallets account and then there are different fees for the credit cards would you talk a bit to both introduction.
These fees in Brazil was this brought these are I was just lucky because I answered maybe testing screenos, knowing what everybody's be charged and.
My feeling is that the Argentina, and while it was way more advance who or what are your like Russia. Now will be introduced business is doing well do expect belt and the second question would be a bolt up official China disruption pursuit, you sell hearing with time and or your business with them, but.
Perhaps a lot of your sellers to source from China. So.
Oh, you expect to see any fact from China, and how you think about the potential size of your exposure to that there's two questions. Thank you.
Hi, Mark said, all these goals, while though so with regards to wallet, yes, Youre, saying you know did you know it's on the does for our luck on money way later, one different when Brazil is in Brazil, we're giving away for free clearly got transactions do and those have a higher AMDR. So what we're doing now.
We started to does the flat fee of 1% regardless of the of the method and we see that is similar to what our competitors are doing so we're comfortable with that decision, but it's very.
Very early stage, we're just started to do it.
Hey.
Of course, when we have large merchants, who are doing a deal with us we can give them physical therapist for for a few months.
We expect the 1% results on the rights in Brazil.
Thanks.
Let me try to China, one I think theres two impacts from China. The first one is our cross border trade business. So our actual efforts to directly source global merchants a strong component of that is in China. We now have commercial offices in check.
No not business is still small with a lot of potential the market where it. It's it's gain the most traction is Mexico, where it represents about 5% of GMB that is done directly through our CBT product a very large number of that from China, so that probably will be affected but small.
I'll direct impact given that it's still.
Mid single digits of GMB I think the indirect impact you alluded to I don't know the answer to that I don't I don't think we've quantified or attempted to quantify what the potential impact could be.
Thank you very much.
Thank you. My next question comes from Gustavo Oliveira of your B.S. Your question. Please.
Thank you for taking my question I was actually quite surprised to see that the reduction in free shipping surface cost of 56 $5 million in the quarter.
That was particularly well below my expectations for Brazil, I think Mexico for set as percentage of gross billings more or less stable [noise].
And you also mentioned in your prepared remarks that the gross margin was actually affected by incentives to two.
To foster adoption.
Of the fulfillment centers could you. Please helped clarify maybe there was some a shift and investments from deadline for sheet free shipping costs to the Cogs line.
And whether that does is something that we should reverse going forward and whether that line on the free shipping itself was actually walked on an important driver for Mexico in terms of JMP and therefore, you could reverse that back to trickle swimmers just to clarify that the how your locating our investment in shipping.
[noise], okay perfect. So good questions.
First of all just to give you a sense of the consumer side to all of this okay. So I'll give you guys a sense of what percentage of G.M.D. is still sold at no shipping costs to the consumer.
So in Brazil that number was at 55%.
Versus 64% the prior year Q4, so that's about nine percentage points less of GMP coverage from fully free shipping that's probably going to be discounted shipping now that's what accounts for a large part of the savings in the free shipping program.
You look at that number for Mexico, it's actually pretty stable year over year. So one element of the decrease in a contra revenues from free shipping is simply the optimization of the amount of free shipping given out and we've done a lot of optimization over the prior four quarters.
The second element that you alluded to is the other piece to this story, which is as more and more of shipping is done from our fulfillment centers.
[noise], depending on the contractual relationship with the carriers and I'm, it's getting a bit technical here, but we can take it offline if you want and depending on whether the contract allows us to deem ourselves as a principal or an agent of the transportation some of those costs become cause.
Hence part of the gross margin compression is from what used to be contra revenues and now become shipping costs. The bigger gross margin compression is simply the actual cost of operating the warehouses and the growth of our fulfillment network, but there is some of this that goes from country.
Her revenue to Cogs.
Okay.
That's very clear, perhaps like I get more detailed suites, we die our team really Tom said, there I have just another question in Mexico and and.
And in Argentina, you actually had a much higher Jim be growing the clock, they're done in Brazil and in your prepared remarks, you actually nation that.
Ah you, where you what you are able to play the seasonality a bit I don't know, if it's a bit better than in Brazil, or perhaps with a better ROI than you otherwise you would have but you can break even for a more aggressive.
What can you learn from from from the experienced Youre seeing in Argentina, Mexico. It's the other countries, where you also have a higher one p. business, a larger lumpy business that in Brazil, as well or I don't know if there's any any other specific reason for you know better performance in this country that could allow you to.
Two to two to bring this best practice difference due to outgrow out there.
Yeah, So [noise].
I don't think it's a matter of better practices are better execution. That's always part of the story, but I think it's something else I think if you look at the flip side to the Mexico case. For example is the margin structure. So I think the way we looked at the Black Friday and the season.
No campaigns for Mexico is.
It's a smaller market than Brazil at earlier stage of Internet penetration and so we're still willing to be extremely aggressive and chase, perhaps lower our wise because we're still trying to build out that market. So what you have there is a ramp up in marketing spend Q on Q as a percentage of revenue and.
A very strong acceleration in revenue when you switch over to Brazil, and alluding back to a comment I made earlier that submarket, where I think the balance between growth and bottom line is somewhat more.
Balanced sorry for the reputation so in a larger market like Brazil, I think the expectation of the marketplace business is not so much focused on growth at any cost but growth at reasonable cost and what you saw in Brazil is flattish GMB growth year on year, but an improvement.
In margin structure for the marketplace, just because it's a larger market and we expect to start driving operational leverage there. So I don't think it so much a matter of learnings to apply from one to the other it's simply how we manage those businesses in different phases in a different sizes.
It does the just just a final one that one that's the one fee or make a difference I mean, I think you mentioned the consumer electronics investments in one fee in Brazil, you already have that more developing to into other countries I suppose.
Yes, so sorry, I forgot that and I think that's also a good point. So one p. give us whoever is retailing greater control over pricing and that is a very relevant factor during peak seasonal discounts or or holiday moments. So we try to offset that with certain discount.
<unk> terrorists reductions to sellers to try to incentivize them to be very aggressive on pricing, but certainly it suggests the carriage to try to influence seller pricing versus markets, where we have one one p. capability, where we can actually set price and just determine what to do.
So on gross margin so so yes.
We would argue that as our one p. business grows it will give us an incremental tool that we don't have today to compete around peak holiday season campaigns.
Thank you for their concur much.
[noise]. Thank your next question comes from Marvin Fong upbeat TRG your question. Please.
Hi, Thank you for taking my questions, though most of enough, but though just the on on the growth and collectors up 67%. It looked like just talk about the acquisition process for collectors do find that have driven more by your branding efforts on or fuel cells.
Tours, and just talk about that and do you have a sense of what the total number of collections possible in Brazil, and Argentina is thanks.
Hi, with regards to collect those efforts we are driving in three different ways on one hand were doing one on one deals with what we call led houses which are the very large companies such as Mcdonald's Herbert you noted Starbucks or supermarkets and so on.
Those going the other logged in terms of number of like those but they do out in terms of disability a number of side.
Then we have.
You want to more.
Hi, good strategy in specific neighborhoods needs of the Cds, we would target and though we have salesforce, which address these these areas of the CD and bring in lots of spots I don't usually we do those are the same doublets, providing discounts to consumers in those regions.
The third one is more marketing driven needs more if you want viral and its people who learn about Merck elbow and not excited about it on sub drying it due to product on their own those provide the but the vast majority Oh, yes. It does have oh, well at some point, but usually the lower.
Amount of transactions.
I'd say those though.
I don't want to give an idea what is it both the lumber off of collectively in the millions or tens of millions.
I think it's too early to Bill Ho Hum viral these will be.
Great. Thank you and if I could just one follow up your Mcconnell bundle <unk> loyalty program, you mentioned that could you just elaborate a little more on.
How that might look and how that's going to roll out or you're going to roll it out across all your three main geographies right away or are you that in one after the other could you just.
Help us understand the timing of that thank you very much.
[noise]. So the loyalty program. We think is is a very important component of what we need to build out over the next few years and so we're certainly not thinking it for any specific geography, there's always some sequencing that's more a consequence of product development and coating then stride.
Energy, but the idea really is to be able to have the loyalty program at least in the big three markets being rolled out.
You know as close to each other as possible. The first step on this is to make sure that we include payments and marketplace, which is what we began to do under a single loyalty program and where the benefits are also cross platform. So you can use discounts on the marketplace. You could also use discounts on coupons to pay on.
You are networks and that was the couponing central that we mentioned in the prepared remarks is early stage, but we think that this is a key differentiating factor given that we probably have the most complete ecosystem in the region and even in any of the specific countries right now of both a very large reid.
Tail business, but also a very large payments and fintech business.
Terrific. Thank you. Thank you bill.
Thank you. Our next question comes from Irma Sgarz of Goldman Sachs. Your line is open.
Thank you for taking my question, so just going back to to the growth that you're seeing to an earlier question in terms of new building on the collective side, but they're looking at the active paying side in a in the wallet deal Disney's sell some tremendous growth there could you just speak a little bit about about the acquisition channels. There is that just being driven sort of.
Partly by by merchant acceptance, the or or you marketing pain and is there are there any acquisition channels that you're leaning into little bit more and what do you generally see intend the thumb in terms of just the cost of maintaining that that customer that.
If payer within your within your environment, because there is obviously quite a bit of competition in the early stage in the market, but just so you said in the send a little bit of where you were where you are in that the investment cycle.
Thank you.
Hi, I'm, yes on the on Affairs I'd say, it's it's a combination of factors on the one hand is is that growth in merchant acceptance are mostly except those who these margins would pull that houses we provide lots of disability.
Beyond that then does things we're doing is in.
These downs.
Who consumers when the first time, they do a given transaction or we have as it is this concept on where we provide these gone to many of you from merchant.
We are able to Juno gate, the consumer and provide merchant are close to them and those are not in will be funded initially the were 100% fundamental Mccullough Libra no. There are new funded manrico lira, I mean, some proportion by by Mertens.
With regards to the will lose on Oh, well the Gulf of disease, and I'd say in Argentina, where we are let's say a year and a half into QR code payments, we have being able to drive down the that may cost us first <unk> as percentage of TPV growth plans are going to you're doing so.
On a indicated so Brazil, and Mexico, I'd say, we are earlier on and so so far we have not get focused on driving these these comes down but it's something that we will do as we move forward.
No one quick follow up if I may when we think about the monetization that you've started in Argentina now starting all sitting in Brazil should we still continue to things that most of that is just being a put back to to drive frequency and custom acquisition and and loyalty or should we start or.
Ready at this stage are seeing that dropped down to the bottom line. Thank you.
We are.
Well have better.
No I I was going to build on those of all those previous answer I think.
When we look at the level of discounting per mile.
Or that percentage of total transactions that required a discount or the average percentage discount on a transaction and we look at that for Brazil and for Argentina, We're actually seeing improvements and efficiencies over the last few quarters. So we're getting smarter.
At discounting.
And we're also needing to discount less to generate transactionality, which are both very positive trends the offset of that to your question going forward should we see that dropped to the bottom line is that we'd like to see acceleration in maps and a growing base of total maps so that.
Even at more efficient numbers per maps, you could see the total number grow and that was our point about wallet and especially because we are seeing positive signs is something that I think we're very willing to continue to invest behind even as we introduce a monetization model to that.
Okay. Thanks.
[noise]. Thank you our next question.
Comes from a line of John pellets Wami of Jefferies. Your line is open.
Thanks for taking my question I'm, turning to recent commercial agreement with paid to pay Pal can you discuss how you hope the agreement plays into your new customer acquisition, increasing conversion and overall user engagement across melisa overall, our marketplace. Thanks.
[noise] Hi, John we're very excited about the agreement with Paypal, We believe that will enable our aim is who by many times were without needing to if people like on account likewise it will enable many many it by users do by Merck.
<unk>. So I think it will be complimentary I think that how is it though is expected to drive extra volume more than it is already adding more more consumers or or pay is that we're very excited on we believe that you can be a significant driver for cross border of course.
Most of them sectionals them, where we see lots of unexploded potential.
Thanks, so much.
Thank you. Your next question comes from Motorcar Deutsche Bank. Your line is open.
Hi, Thanks for taking my questions a few from UBS. So quick ones one on the collective side <unk> impressive numbers everything and millions or billions are generally but when you can go up like a common consumer how much of that I wish they leave spend or average monthly spend is that own.
These collectors or better better where you have an agreement with and then on the bare side.
How much of your active buyers on what Cardona <unk>.
Our active players also.
And then a quick one on on on China, and North Lake on on the cross border trade, but like most other products a little if the middle products with little consumer electronics, and what have you ought essentially made in China. If the what do you know if the manufacturing volume itself a big visas on of the shipping volume declines how does that affect the.
Sales in general are and how would you kind of looking at like a little the next couple of quarters. If that is a continued to decline in the immediate manufacturing or shipping Williams. Thanks.
So let me.
Let me work backward from from the third one like I said before I think we haven't really done any significant work around trying to quantify a potential slowdown in China or.
Increased problems from either Corona virus or whatever I think you're accurate in saying that a lot of the consumer electronics. The her sold globally have a Chinese manufacturing base. So we just don't know the answer to that question.
In terms of the collectors I think just to be very straightforward in terms of overall daily usage or share of family wallets.
Our our product is still immaterial I think it's showing extremely strong target traction and we're pleased to see when see growing in each one of the markets, but it's still very very early stage. So it's it's not a significant pay.
Portion of anyone's overall behavior and in part because we still need to continue to build out the merchant base. Although the merchant base is very solid like was naldo said in the millions already it's just not widespread enough. So that I could use my digital wallet to pay everywhere I go we aspire to continue to build.
That interoperability or business development deals could accelerate that but we're not there yet and in terms of cross sells her overlays I think we actually see that as an opportunity when you look at.
The payers on our marketplace.
That use them at a couple if I were wallet, there's still significant room to grow the cross sell there so.
Just to give you a directionally a notion of this but.
[noise] I don't think we've disclosed the number in the past, but but there's still a lot of room to still sell our wallet.
Capabilities to marketplace users and we think the loyalty program could be a very strong catalyst for that.
Thanks Federal a quick follow up if I may have been when you think off like.
Apple pay and we've seen that stuff like that on a little fortunes starting to accept Apple and Google bake. It into your was a using NFC up how how prevalent do you think that thought is right now or how aggressive on top of being who will pay those off or below or in Latin America.
Now I would say that at this stage.
For sure in Argentina, you are called payments is significantly more popular than NFC and.
I would say Indian it all the large Netherlands visa Mastercard are only now into the using NFC to Latin America. So I think that they do our gold's how they vary.
But if bus or growth, Doug we were seeing Tennessee. So so far we have not seen any trucks on from yoga will be or up with the let them.
Sure.
Thank you. Our next question comes from Ravi Jain of HSBC. Your line is open.
Hi, Thanks for taking my questions. The first one of them on logistics. You mentioned you opened a lot of drop off points and you also being fulfillment as you scale you know a managed network. How do you think the and as the mix between fulfillment on cross docking and which one would give.
The big competitor would want they do overtime.
And the second one is just a follow up on the on the loyalty program, you mentioned that who integrating the bugel wanted to come to the bone into the program should we also expect this to help fuel nine age you on investments into the one that can they get back though should we expect them to future Biennale investment on wanted to kind of improve.
Thank you.
[noise] they may take the fulfillment one.
So when we look at the relative user experience and and even the.
The preferred I think fulfillment.
Lucian for us.
Certainly fulfillment is better than cross docking because it eliminates the first smile all together so that accelerates lead times drives down cost gives us greater control in even greater lock in of the merchant because he's sending inventory to us so fulfillment is.
For most merchants infer most product the one we would like to push more aggressively and I think Mexico is a very good example of what we'd like to be able to emulate everywhere, Mexico already north of 40% of all sales are done from fulfillment.
So long term, we'd like to see that continue to grow and a higher percentage of fulfillment, we don't necessarily control all that cross docking has a role to play either an inventory that we don't want to hold because it doesn't turn fast enough where it has any specific complexity or for smaller merchants, where maybe sending inventory.
Ready to us doesn't make sense, what the end game make says we don't know we would like to push fulfillment as much as possible and we've we've seen very strong success in Mexico, and some really good traction in Brazil over the last quarter or so Brazil had been somewhat flat.
In single digits for Awhile, and Brazil has really been accelerating and is already in in double digits and the teens.
For the the quarterly average of the last quarter.
And with regard to loyalty I mean, but it will be able enabled us student blue are <unk> in two different ways, but they want to <unk>, we will be able we we'll we're starting <unk> employing rather than <unk>.
You use the wallet. So <unk>, we should be able to mundane you surveys yeah, we'd we'd an incentive that is more efficient to us because people will use the <unk> in order to gain more points.
<unk>.
<unk> I hear what we are able to do is who start sharing cost of acquiring consumers would mark.
We have started already in Argentina.
Has to pay 100% of the these guns and now a percentage of the these guns has been paid by Martin So as <unk>, who who <unk> yeah continue to grow in those countries. We hope will be able to push our efforts would mark up there too.
That's really has one last one if I mean <unk> give it an idea approximately how much I feel G.N. These consumer electronics, maybe in Brazil, or consolidate could just to get an idea.
[laughter].
Sure one second just so that we make sure we have the latest data.
It's it's consolidated high thirties low forties, if you look at C.E. widely defined as most electronics.
<unk>.
[noise] [noise]. Thank you are next question comes from John Coughing up <unk> airline is open.
Hi, Thank you for taking my call.
When it comes again, the you know I saw the in Brazil. It there's a very modest deceleration do how do you feel about this accelerating in the future is is possible in the so what would be the vehicles with which you would have to accelerate.
[noise], great. So I guess.
Full circle on the questions.
We continue to grow slightly above market, we'd like to see Brazil going faster than what it grew and we think there are a series of Lyvers that we've already been working on that potentially could service catalyst for this we're seeing improvements in that promoter scores were focusing on category.
Lori's, where our market share typically under indexes are overall market share. We've had some good success with one of the ones. We focused on Q3, which was television sets. So we're replicating a lot of that play book to a growing number of categories. As we mentioned in some of the earlier questions as we grow out.
Are one p. in private label offerings. Those should also allow us to be more aggressive on the pricing front, which could allow things to reaccelerates and then again. This is attacked place. So at the end of the day, we truly believe that the best user experience wins, and it's not or matter, who spending more marketing dollars or who's deeply did.
Counting products over longer periods of time, so again the numbers have been what they've been for the last few quarters. We continue to focus on making sure that were innovating on behalf of our consumers and hopefully we can see that accelerate in in the future.
Okay. Thank you.
Thank you, ladies and gentlemen, just couldn't close today's conference call. Thank you for participating you may now disconnect.
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