Q2 2022 Mercadolibre Inc Earnings Call

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Hello, everyone and welcome to the earnings conference call for the quarter ended June 30th 2022.

So sure Investor Relations Officer.

Today, we will share our quarterly highlights on video.

He will begin our live Q&A session with our Chief Financial Officer of digital Art, and Chief Executive Officer of Mercado Pago.

A minute.

I remind you that management may make forward looking statements relating to such matters as continued growth prospects for the company industry trends and product and technology initiatives.

<unk> are based on currently available information and our current assumptions expectations and projections about future events.

While 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 those included in this conference call for a variety of reasons, including those described in the forward looking statements and risk factors section of our Form 10-K for the year ended December 31st for 2021 and any of Mercado Libre, Inc. Other applicable filings with the Securities and Exchange Commission.

Which are available on our Investor Relations website.

With that let's begin with a summary of our results.

Okay.

Okay.

Yeah.

Okay.

Hello, everyone.

I'm pleased to present some of the highlights and key messages regarding the performance during the second quarter of 2022.

Despite a challenging macroeconomic scenario, we delivered a strong quarter across all of our businesses our marketplace achieved consistent results. Despite the challenging environment for retail businesses with a gross merchandise volume of over eight $5 billion delivering solid growth.

Year on year, despite tough comps for the second quarter.

We reached over 40 million unique buyers during the second quarter with sustained levels of engagement and items sold per buyer with a diverse seller base and then efficient logistics network for a wide variety of items, we have a differentiated user experience and product assortment.

To keep growing and drive further online commerce penetration throughout Latin America on the Fintech side.

<unk> continues to grow and gain relevance in our ecosystem delivering strong results in Q2.

G P V surpassed $30 billion for the first time growing both in acquiring and digital wallet.

Mercado Pago reached 38 million unique active users growing across all geographies.

Credit continues to grow its credit book, reaching more consumers and sellers and delivering unimportant ecosystem make effect for engagement and loyalty.

With sustained healthy trends in the second quarter. The credit business continues to contribute to our operating margin expansion as a consequence of the consistent performance in commerce and Fintech, we delivered record results in net revenues and EBIT with.

With strong improvement in cash generation during the second quarter revenues for Fintech have surpassed $1 billion in the quarter for the first time ever as our Fintech products gain more relevance in our ecosystem in commerce revenue growth comes mainly from our strength.

And third party marketplace categories.

And the expansion of our advertising business, our gross profit margin expanded year over year and quarter on quarter as we scaled our businesses and delivered operating leverage across most cost of goods sold.

As a result of this our operating profit reached a record in the quarter with operating margins that were Directionally in line with last year's as we continue to balance investments, mainly in product and technology and the credit business with.

With cost leveraging across other operational expenses for <unk>.

Second quarter closed with net profit in our three main segments, including Mexico and.

And with improvements in net income margin year over year.

We also optimized our cash conversion cycle, leading to improved cash generation for all business units and strong cash from operations results. We will continue to target growth with the correct profitability and cash generation profile.

This will mean balancing our focus on the long term with a commitment to constructing sustainable businesses with scalable financial models.

A more detailed customary comment on the second quarter operational and financial highlights.

Is now available in a management commentary letter.

To shareholders, which we release on our Investor Relations website before initiating the live Q&A sections of Tonight's earnings.

We want to share with you some additional news and achievements from the quarter. Our marketplace continues to grow and technology has an important role to improve the experience of our buyers and sellers.

Applying continuous improvement to selection search and discovery.

Our apparel section, we now have improved filters and brand searching.

We expanded the melee places network enabled for reverse logistics to improve the shopping experience for our customer.

We also keep improving our delivery service throughout Latin America, the Meli Air network reduced our delivery times by two to six days in the north northeast and Midwest regions of Brazil in line with improvements in our buyer experience our loyalty program had been growing reaching millions of subscribers.

And strong year on year growth after reaching levels.

Highest on the program users have higher frequency G M D and retention enjoying multiple benefits from free shipping special discounts and offers to access to content streaming partner.

Our loyalty program also plays an important part and connecting and raising engagement both in Mercado Libre and Mercado Pago offering benefits in all of our services for our users.

On the Fintech side, our credit business also played an important eco systemic role as a tool to provide our merchant base with working capital and our consumer base with personal loans and credit card.

You continue to provide these solutions for our ecosystem, we recently announced new funding partnerships to expand credit lines in Brazil and Mexico.

All of these initiatives that potential is our ecosystem are a result of our tech DNA and execution.

We believe times like this are ideal to invest and create sustained long term differentiation leveraging technology and we will continue to invest in technology and in hiring engineers throughout the next quarter.

We grow we watch closely our impact in the communities and environments around that that is why we just launched another round of investments in our preservation program changed an era of America, and Brazil, and Mexico to preserve a Latin American Biofuels and bio diversity.

As always the best is yet to come.

Great. Thank you I think we can now jump to the Q&A portion of the call operator.

Thank you again to ask a question from the telephone. Please press star one one again that star one one to ask a question.

Our first question from.

From the line of Irma sugars.

Goldman Sachs. Your line is open.

Yes, Peter.

And team congratulations on the results just a sort of two questions. If I may 1st on just profitability I think a very strong margin as you've laid out and thank you for the additional detail that you've disclosed them across our business lines.

Helpful.

I was just curious sort of how you would encourage the market you've provided very helpful feedback on that in the past and I just love to hear some updated thoughts on how you're thinking about sort of the cadence of investment from here and how we should think about operating margins from here I know you don't guide, but just sort of conceptually sort of the balance between investing and growing and if I may.

Just a quick second question on the advertising business again very exciting opportunity when.

When you think about sort of the main drivers. What are you would you encourage us to think about is it more about sort of getting more advertisers engaged onto the product.

Is it is it sort of the spend that you're capturing from those advertisers is it specific pockets or a specific product categories that you're focused on probably a combination of those but maybe if you could just lay out which areas you're most focused on in terms of driving advertising revenues higher. Thank you.

Okay.

Thank you very Matt let me take them in reverse order. So you are correct I think advertising is beginning to scratch the surface of its potential there is room to increase the number of advertisers across many product categories, but obviously as we grow into more and more categories.

And equally important as we grow our first party business, which has a much higher attach rate of advertising in terms of percentage of Gms that should also help there's room for increased engagement for advertising and all of this always driven by technology, So new format.

And new positioning throughout our different ecosystems, we started experimenting with advertising in the Mercado Pago world in the Mercado Pago App.

And we have other formats that we can launch going forward. So I think this continues to be an opportunity that we're very enthusiastic about and as I always say is a very high margin one with EBIT margins in the high <unk> low eighty's.

In terms of.

What we're focused on going forward.

Correctly, we don't guide I think we've shown that we have a good grasp right now of the cost structure in Mali, we continue to invest in a few critical areas like product development work.

We're not looking for operational leverage, but we continue to deliver solid improvement in gross profit. If you look at each one and so I think I'm confident in our ability to continue to balance cost management with investing in growth where there is the greatest uncertainty goes.

Forward is just what happens to the health of the consumer in Latin America, but so far everything we've seen despite I think concerns around the consumer having been around in the second quarter as well we've continued to deliver solid results and I think the consequence of that is to the.

Best of our assessment, we've accelerated our share gains in Q2.

Yeah.

Thank you.

Thank you. Our next question comes from the line of Andrew Rubin of Morgan Stanley .

Andrew Rubin. Your line is open hi, thanks, very much for the question I. Appreciate the additional disclosure you gave around the credit portfolio was hoping if you could dig in a bit more on how you've seen performance by the main product line card consumer and the merchant loans.

Just a bit more color, how you're thinking about trends both in loan performance and growth of those segments would be helpful. Thank you.

So Andrew I think that the overall when we look at our portfolio. There are let's say nine main segment.

Argentina, Brazil, and Mexico on the countryside on that part of the market.

Yes.

Merck Johnson with more Merck jump into consumer.

And all of those nine segments are profitable and have remained.

Similar to what we saw in prior quarters. So we are very very happy with that performance.

Tim would be credit card, which is a smaller product.

We are still within the first year, we launched a year ago, but is not yet profitable.

But according to what we expected.

All have been very positively.

In the filing we will make will provide extra information that will be more follow through.

We do.

Yeah.

Okay.

Thank you. Our next question comes from the line of Marcelo Santos of JP Morgan Marcelo Santos Your line is open.

Good evening. Thanks for taking my questions. First question is if you could talk a bit about the profitability ex credit. So you said Pedro debt.

Gross margins are improving but how do you see the business excluding the credit should that part also see profitability Peruvian and how were the gains in that front and the second.

Question is.

How relevant is credit to Jim V generation Nowadays could you give some ballpark idea on.

Whats the penetration maybe for country or in a consolidated level of how many or how much of your marketplace sales are done through credit. Thank you.

Hello, Marcelo let me start with the second part of the question.

Regarding how relevant is craig because you'd be generating I would say.

It varies on a country by country basically is back in some countries.

It goes from mid single digits to low very low double digits.

Thanks.

Thank you our next question in terms of.

Sorry, sorry, sorry, there was a second part of the question there look the.

The operating profit that we delivered is is delivered from operational lever an improvement sequentially across most of our business units credits is obviously an important piece of that we've given some disclosures on interest margin. After losses, you can calculate our cost of funding.

The operating cost is fairly small there to get to your own assumptions on profit from in terms of EBIT dollars from credit, but it's still significantly less than that or maybe around slightly above a third of the overall number so the remaining numbers show grow.

<unk> in profit coming from the advertising business.

And some significant profitability improvements across the rest of them Mercado Pago products, who are either improving their EBIT generation or for some of the still money, losing projects that we're investing for the long term like the digital wallet or the digital core bank account those.

Our improving significantly their negative margins and we see a good runway towards eventually profitability there so don't assume that.

Our incremental EBIT is coming solely from the credit business not at all we're seeing good operational leverage sequentially across most of the product lines I think one last thought on this.

And where we are seeing the least amount of incremental EBIT. If we look on a year on year basis is Brazil marketplace, but that is primarily driven by expansion in.

Or actually the increase in interest rates that compressed some of the financing revenues on marketplace off marketplace, we've been able to pass those interest rate increases onto the consumer across most of the pago products on marketplace as you know the price of.

The pass allowed to see judo, we have not changed it.

For competitive dynamics and I think it's helped us.

Gained shares.

Okay.

Thank you. Our next question comes from the line of Kyle <unk>.

UBS Tayo process your.

Your line is open.

Yes.

Hello, everyone. Thank you. Thank you for the opportunity for asking questions I have two questions on my side. Please and also related to make adequate solution. The first one is regarding to asset quality. So we saw that your 90 days coverage ratio actually decreased quarter over quarter. So just wondering if this concern concerns you.

At some point and pulled the trigger.

Further increasing provisions going forward and what is the level of cohorts that you think would be a comfortable level, we felt higher growth level and then I will follow up with my second question. Please.

Okay.

So.

E.

The question was why has the coverage will go slightly.

Slightly down from quarter to quarter and the recent slowdown supervision on originations as.

Originations.

This generated a little bit from.

Originating credit provisions have come down a little bit Nonetheless, it's way over 100% 70%.

On top of that.

Are you a little more.

While at the.

And then color on.

I think that.

Throughout this year, we have seen we have been aggressive in being able to expand.

This is the riskier segments.

We have been able to grow that by.

Charging accordingly to those.

Does a higher rate and therefore our margin.

<unk> or even increasing the contribution for <unk>.

It increased quarter to quarter, having said that as we've seen from the bigger reason in the market in the current quarter, we are starting to be a little bit more cautious and on this study offering close to those segments, which we didnt riskier, which in the past we have ultra credit too.

Okay perfect. Thank you very much and the second question is related to the credit card business in Brazil, just if you could provide any details I don't know the level of Npls of this product and how this or at least how this compare to the overall industry in Brazil.

Specially did you sell banks and you also mentioned that this project is not positive yet in terms of margins.

So if you could measure when do you expect to start to become profitable and last but not least hawk call first of all you are an odd days in terms of increasing the pace of origination of this drug.

Again.

Okay. So you'll get some additional product to disclosures on loan performance in the Q Tomorrow.

I think with the credit card product that is basically less than a year old comparisons are not going to be very useful I think the way you build out a solid and profitable credit card business is over multiple years, and which has been the case of many of the neo banks. So this is very early for US we continue to see.

I see.

A product that will be very critical for our long term strategy and that we're continuing to invest behind obviously once we've distributed cards to the strongest end users we had the deepest relationships with in the earlier quarters, where now slowing down the rate of new cards, but it is still growing.

And we're seeing improving profitability as those earlier cohorts begin to clean up and perform better and better. So it's early I think we're going at the right pace, making sure that we have the right underwriting capacity and long term. This is still a critical product for us within our Fintech ecosystem.

Hmm.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Bob.

Bob Ford of Bank of America, Bob Ford. Please go ahead, thank you very much and diabetes, Netherlands, Bob Congratulations on the quarter and thanks for taking my questions.

Really quickly what was behind the strong unique buyer growth rates in the quarter in Brazil, Argentina, and Mexico, given the reach of deceleration in the Congress and we found them very noteworthy and then can you can you also discuss the move into used card launch with <unk>.

In Mexico, and maybe more broadly the transition from a transaction or I should say an insertion based model to a transaction based model across classifieds and then lastly, how does your deal with Western Union change your strategy in remittances and maybe the functionality roadmap you're building out the Tyco in Mexico. Thank you.

So Bob I think again, when we look at the consumer backdrop, when we look at the general I think ecommerce market data and we look at our Q2 numbers. What we're seeing is the return on the investor.

Since that we've been carrying out over years in user experience and logistics and payments and credit.

I think that unique buyer metric as a consequence of that I think.

Consumers when they begin to get tighter in their wallet, they will probably focus more and more of their spend on places where they can find selection value and convenience.

And we seem to be gaining a growing number of that user preference and choice throughout Latin America. When you look at market share. So I don't think I have any specific call out marketing and customer acquisition has continued to scale actually as a percentage of revenue. So this is not an uptick in investment.

This is simply a consequence of everything we've done over the past multiple years in driving the best user experience possible.

The credit is experiencing in Mexico, I think as a small pilot with a company that we think does a great job in that space.

And I think it's similar similar deals that we have with financial institutions in Brazil. It continues to inform our understanding of that space and is potentially a space that eventually medical Canadian Doe could look to expand with a combination not just of these partnerships.

But also.

Building a product for securitized lending, which is an interesting space throughout Latin America.

In terms of the transition to a more transaction based.

Model within Classifieds I think we're still working on that we see the potential of that space, we see that it's a high traffic category within meli. So one that we should be able to cross sell very efficiently too, but I don't think we have.

Defined or have really figured out how we move into the transactional model some of our previous intense around reservations and whatnot I don't think have been the right solution. So in typical meli fashion, we will continue to iterate and think through the business model until eventually we find something that sticks and.

We can see a reacceleration in classifieds.

<unk> is a market that we've always identified as a large market, we think allowing remainders in the U S to be able to send.

Remittance is direct into our Mercado Pago wallet.

Which generates all sorts of use cases for the receiver. He can purchase you can then use as debit card you can pay utility bills.

He can use in store QR is an interesting solution rather than driving that consumer to have to go to a western union kiosk and extract cash it drives further financial inclusion so it's a win for Mercado Pago and its a potential added service for our partners.

We're pleased to have partnered with Western Union, but you will see other partnerships in this space as we look to grow our pie of the very very large remittance business.

Very helpful better. Thank you very much.

Thank you. Our next question comes from the line.

Oh, sorry, yes.

City.

<unk> Your line is open.

Hi, Thanks for taking the question just a quick one on my side I just wanted to pick your could you talk a little bit more about the <unk>.

Tom mistaken, we saw a slightly lower contribution sequentially. When you look through to the first quarter now into this quarter. It seems.

I don't know it seems like it.

If you could talk maybe if there is any any change here in the one piece strategy and talk about any changes or how you're seeing your relationship with.

Consumer electronics home appliances suppliers, I think could be interesting. Thanks, so much.

Yes, so when you when you referred to a contribution I assume youre, referring to the mix of total GMB coming from the first party business.

Yeah.

You are correct you are correct, we have decelerated that business somewhat I think I've addressed this somewhat.

Our <unk> business overall is still a business that is money, losing at the EBIT line.

And in the current market context, and as we've looked to tighten the screws and improve our efficiencies in terms of margin and also cash generation that business falls under the bucket of businesses that we continue to believe our long term critical but that.

We will grow slightly lower at a slightly lower rate given the current market context focus more aggressively on improving pure product margins and direct contributions and EBIT margins within the different one P categories and once those margins are again, either breakeven or positive or very <unk>.

Close to breakeven then we can reaccelerate growth there. So we're pleased with the direction of the <unk> business is growing again, we continue to see in our strategic long term, but given current market context, we thought it made sense to slow down growth a little bit as we improved operational.

Efficiency and got closer and closer to EBIT breakeven or even positive before we reaccelerate aggressively.

Understood Thanks for that.

Yes.

Thank you. Our next question comes from Marvin Fong of <unk> Marvin Fong Your line is open.

Yes. Good evening, Thank you for taking my questions and.

I wanted to.

I'll reiterate that you appreciate all the additional disclosure that you have made two questions. If I could on the Fintech side. So first question just looking at your disclosure about the average exposure per user. So for example, <unk> hundred dollars for an online merchant to $150 for a consumer.

Should we think about these levels in the four categories you disclose is that being about.

Where do you expect them to stay or is there room for.

<unk> average balances to grow overtime and any other categories.

You are talking about just trying to understand what the opportunity for growth. There is on a per user basis and then my second question.

Yes.

On the on the Iron Mall the percentage you mentioned in the shareholder letter averages around 30%.

Historically, so should we view that as perhaps a level.

That you would consider to be the normalized margin and in that case, if your if youre, earning above 30% like you did this last quarter that you might see opportunity to get more aggressive with your loan growth versus slowing it down win when that percentage is lower.

I will say with regard to our exposure for you Sir.

It depends on a couple of things probably the most important one.

We are growing our new cohorts typically when we bring new.

Yeah.

Users are or are we getting to new merchants and consumers who starts with lower credit lines.

As those cohorts mature and we feel confident the comfort level will be to use as we expand those so you would expect for the other cohort number two to continue funding our business a lot of room for growth, we have there, particularly on the consumer side of the business because we really started very conservative.

Yes.

The other half.

Redo cohort going very fast typically those basically the mix will change.

Clients, we have lower lab, so I think that it will be the main driver.

On an interest margin after losses as you see from the new disclosures those have fluctuated.

And Thats, a consequence of new products, new segments launches in new markets and this is still the very early days of our credit business and so we will continue to launch new products. We will continue to expand into new user segments always prioritizing our confidence in the quality of the underwriting of our models.

So I don't think I would signal that this is a steady state the more important thing and the reason we think that it's important to give this disclosure is that just looking at npls without understanding the pricing and the spreads is really an incomplete way of understanding our credit business and what you can see it.

You look at any of the historical quarters is that the models are actually extremely healthy.

If you assume and cost of funding you know, it's close to market and one of the big competitive advantages of Mercado Libre is that our cost to serve and our cost to acquire is extremely low because most of these users are already mercado libre or Mercado Pago users, who we don't have to occur.

Choir, and who we have multiple touch points with so this is a very profitable business for us and even as Npls have increased and part of that is just the math, we've been able to price risk very effectively and the margins have been very healthy and have actually been better in the second quarter.

Order than the two prior quarters, which is why we continue to remain very confident with the credit business because not only is it a significant catalyst for more sales for better sales for more working capital for our merchants, but it's also been a great business the way we've been managing underwriter.

And pricing.

Yes.

Yes.

I would definitely agree based on the results. Thanks, so much Pedro knows model.

Thank you. Our next question comes from the line of Geoffrey Elliott of Autonomous Jeffrey Elliot Your line is open.

Elliot Your line is open.

Well go to the next question comes from the line of.

Cargo Wala of HSBC Your line is open.

Agarwalla Your line is open.

Operator, it might seem like we have an issue with.

The lines.

Okay.

Ladies and gentlemen, please standby.

Okay.

Richard Cathcart. Your line is open. Please go ahead.

Yes, hi, good evening. Thanks for taking my question just a couple of quick ones here. So firstly.

<unk> growth in the other markets. So ex the big three markets was down I think 18% year on year, perhaps you could just give us a few points.

Go ahead on that and then the second question was just on Mexico.

A decent margin better I think probably the highest.

You still have it on a quarterly basis in Mexico, you've already talked about kind of the areas, where you're leveraging I. Just wanted to ask if you are benefiting specific you would call out.

That has contributed to that margin in Mexico, thanks very much.

Great. So.

The other segment, which includes all other markets the largest market. There is Chile, Chile is a market that had phenomenal performance last year. It grew forex certain quarters.

A significant part of that was driven by distributions on pension funds that spurred a very significant consumption boom last year and so the comp is extremely extremely tough and the expectation was that Chile would short term decelerate because of the tough comp when we.

A longer term look and we look at how that business has been growing over the two year CAGR or over a longer period of time, Chile is a significant outperformer and I think shows the increased potential that some of the smaller other markets still have for us. So it's entirely driven by <unk> com.

<unk> in Chile, and slower growth in Columbia that compared to other markets.

Mexico, I think what's interesting about Mexico. Since you asked the question is this is the first profitable quarter out of Mexico in the last five years, if you recall five years ago.

We engaged in a very aggressive investment cycle.

Confident that long term, if we invested in Mexico, given the size of the market the potential of the market eventually scale would kick in and Mexico would become a profitable business at a much larger size and additionally, it has allowed us to defend our leadership position, where despite an incredibly <unk>.

<unk> market, we still are market leaders. So I think this for US is a confirmation of the potential for Mexico to be a very large market and a profitable market as we emerge from the heavy investment cycle and start to reap some of the benefits of scale and of the investments made in the past.

I think this is a bit ahead of schedule. So this is not necessarily.

A trend.

In terms of short term performance, but it definitely confirms the conviction we've had all along that Mexico will be profitable.

And also very large when we look at longer term.

Okay.

Excellent very helpful. Thanks, Patrick.

Thank you. Our next question comes from the line of Stephen Ju of Credit Suisse Stephens. Sir Your line is open.

So I think on the disclosure you once again called out fulfillment penetration having reached about 40% across your network. So are you basically at a point, where you can start combining multiple items per delivery as of yet or do you think are really.

To see a higher level of order density or fulfillment penetration in order to.

Start doing that.

One more on the Fintech side, if I may.

In the past.

You've mentioned really access to asset management products for your wallet users is another sort of pillar for growth of your Fintech revenue. So our recollection is that this has been out in Argentina for some time, so maybe it's a little bit more mature there versus the other regions. So is there.

Anything you can share in terms of your users propensity or willingness to keep a balance.

And their wallets.

Okay.

Thank you. Our next question comes from the line no no sorry, sorry, sorry, no operator, sorry.

We haven't gotten there yet.

So you are necessary with us.

Starting with the second part of the question with regards to user propensity due to store balance of in market power I think that we have seen inquiries financing in all of the countries, particularly so I would say in Argentina, because on the one hand, we have added the wall and what we're seeing.

Israeli or.

Lots of Bally transaction that it's very convenient to have that store balance in order to pay those down such as Italy.

We have seen over the last year is an increase in the mix of payments that is dog with restore balance on top of that.

We have what we offer in Argentina in money market funds and that money market funds.

Yields north of 30%, which is below inflation bodies north of 30% larger than it was.

You're getting a savings account so it's really an inaugural <unk> user to have the money in Morocco, a bottle on being able to use at any time with regards to Brazil.

The one thing we offer now has suggested.

Interest on the appliances, you account, but I.

I would say in the last few quarters some of our competitors who used to have 40 70 have stopped doing so.

That has made the Macau telecom more attractive.

We still what we offer is pretty basic.

We are in the process of building it.

Better yielding problems for <unk>, we expect these to increase we believe that starting balance.

<unk> is a big part of our ambition to become two game Principality.

We got it as a full solution for four basic banking.

Great.

On orders per shipment. So so obviously, we already do that.

All orders were more than one product come out of one fulfillment center, obviously are our multi items per order.

I think there are many drivers that we still can act on to drive up orders per shipment.

It's true that fulfillment penetration is one of them, but incremental fulfillment penetration also comes with a growing number of warehouses. So it's more complex than that I think a lot of it is tied to the user interface and how we can drive larger shopping cards, but then increase the number of item.

<unk> per order and decrease obviously the unit economics on each shipment. So I think I mentioned this last quarter I would say this is still a lever that we're working on and where we can drive incremental operational efficiencies going forward I think the number has been relatively stable for a few quarters. So there is opportunity there.

Sure.

Okay.

Thank you. Our next question comes from Knee-high Agarwalla of HSBC.

Caller your line is open.

Hi, I Hope you can hear me now.

We can hear you now okay perfect.

For taking my question I have two questions Trust.

Good clarification on the credit does Goldman did Mexico did you say that you were looking to do is take your guys' credit on your own balance sheet in the future or would you stick to the partnership Margaret.

Okay.

I think we are open to.

Having a combination of both things, but we'll have to wait and see.

Okay.

My second question is on the funding cost.

Could you talk a little bit about how you fund your credit and the prepayment business and.

How has.

The combination of keeping it on your own balance sheet versus using third party funding how has that evolved and where should we see this going forward.

And my last question is.

Regarding asset quality in the recent months.

<unk> seen what what changes have you implemented integrated business and here I'm talking in terms of maybe ticket size or the preload et cetera.

<unk> got a potential worsening in the asset quality cycle.

Thank you.

Great. So let me start with funding.

The funding is is done through multiple funding windows.

And we believe that for the long term health of the business, having available <unk> availability to multiple funding sources.

Is the correct star.

Structure and then we can vary between funding structures based on cost and depth of each different funding.

Pool at different times. So today some of that is done through equity with a very attractive Roe.

Some of that is done through S.

Spv's are <unk>, specifically in Brazil, with some of our financial partners Goldman Sachs and Citibank two of the largest and then increasingly in Brazil, we have what would resemble retail funding. Although we are not a bank, which is the issuance of certificates of deposit which.

He is also one of our sources of funding in terms of the evolution over time, what you've seen is increasingly over time, a mix shift towards third party funding as the business grows and as the amount of equity that we're willing to commit to that I think has decreased.

We're confident that going forward. The combination of these third party funding sources plus incremental equity that we are willing to invest in the business given the Roe.

Ken.

Yes.

The growth in the credit business for the foreseeable future.

With regards to asset quality I would say that during the last year, we have been growing aggressively our credit portfolio, focusing mostly on profitability, putting both itself letting profitability.

We have been able to do so by by reaching out to riskier consumers would scale merchant and pricing Accordingly, and that's why we have seen despite.

Thank you more risk, we have been able to maintain margins and grow profitability now us.

I would say.

Rate environment is looking more cautious we are also becoming a little bit more cautious.

While we are doing is.

Probably focusing more on those of those consumers will be more great loyalty.

Being more cautious.

Lowering offers or removing offers to those segments that are riskier and we have started to reduce actually this quarter. The third quarter as everybody else. These third quarter in the consumer business and we have already started doing so in the credit card business in the prior quarter and that's a key quarter.

Our next question comes from the line of Geoffrey Elliott of Autonomous Jeffrey Elliot Your line is open.

Geoffrey Elliott. Please go ahead.

Well go to our final question in queue.

Your line is open.

Yes. Thanks for the question. So just a couple quick ones on the commerce business.

It looked like the third party take rate declined a little bit year over year.

I'm just sort of wondering what drove that particularly given that the ads business is growing is that going to be category mix or higher shipping incentives, maybe higher priced products that might see or fixed fees. It looks like that sat in the cellar final value fees in the flat fee component.

I've got one quick follow up.

Okay, great. So.

I think it's down very slightly it's about.

What is it like 30 bps.

Primarily on increases and increases in interest rate that compressed some of the the take rate on on zero installment financing listing types and then also different growth rates, especially Brazil with lower great growth.

Then some of the other markets, Brazil was the highest take rate market. Those two factors account for that 30 chip compression I think year over year, it's actually up by 10 bps in general I would say, it's just a solid level of monetization around 16, 5% to 17% net.

We've been able to sustain.

Okay.

Got it Thats helpful.

Yeah I was looking just specifically at that first party business, but.

Pivoting a little bit to first party, what's the long term appetite for that obviously, a little bit slower here in the near term, but is that still.

Double digit percentage of G&A in Columbia.

Paul.

Yes, <unk> clearly has a role to play in I guess, one way to simplify the strategic thought is there are certain subcategories and are very wide selection, where market structure of the third party market might not be the most efficient either because there are very few <unk>.

Pliers, because third party merchants don't have access to competitive pricing and Thats typically where we will step in with one P. I think it's fair to say that our long term ambition of percentage of overall mix is is in excess of single digits exactly what it will be will depend a lot on our capacity.

To execute and how also our third party business evolves, where it's incredibly efficient and there's less need for us to step in and I think we will remain <unk>, an asset light, where we can better serve our consumers by stepping in with a one P. Offering we will see that so we need to monitor that over time.

But it should continue to grow.

Great. Thanks, so much.

Thank you at this time I would like to turn the call back over to Patrick for closing remarks, Sir.

Great. Thank you so <unk>.

Really pleased with the quarterly results I think we are delivering on a combination of growth above market with market share gains improving profitability and one thing that hasn't been mentioned is also improvements in our cash conversion cycle in our cash from operations and the <unk>.

Kris in liquid assets that we have on our balance sheet. So great quarter I think the team has done phenomenal work and we look forward to updating you. After Q3. Thank you very much.

Okay.

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Bill.

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