Q3 2024 MercadoLibre Inc Earnings Call
Good evening and welcome to Mercado Libraise Q32024 Conference Call. All participants will be in listen only mode. Should you need assistance? Please signal conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-toe phone. To withdraw your question, please press star then two. We ask participants to limit themselves to one question and get back in the queue for any follow-ups or additional questions.
Speaker Change: Please note this event is being recorded. I would like to turn the conference over to Richard Cathcart and Vester Relations Officer. Please go ahead.
Hello everyone and welcome to the Maccardi-Di-Bray earnings conference call for the quarter ended September 30, 2020. Thank you for joining us. I'm Richard Cathcart, Maccardi-Di-Bray's Investor Relations Officer. Today we will share our course-ly highlight on video after which we will begin our live Q&A session with our management team. Before we go on to discuss our results of the third quarter of 2024, I remind you that management may make or refer to and this presentation may contain forward-looking statements and non-gap measures. So please refer to the disclaimer on screen which will also be available in our earnings materials on our investor relations website.
Speaker Change: With that, let's begin with a summary of our results. Hello everyone!
and I am pleased to share that Mercado Libre, Hala, Quartetor, Outstanding Growth. We have an excellent quarter across all of our business and geographies.
so the strong performance was really all around. With these results, we reinforced our position as the leading e-commerce and fintech platform in Latin America. Every time we have invested in enhancing our customer experience, in the past, we have been rewarded with strong growth and improvements in our market position. In this quarter, we continue to make strategic investments in our platform, both commerce and fintech, and that resulted in GMB growth of 34% year-on-year in Brazil and 27% in Mexico. This also resulted in market share gains in both countries. In Argentina, item sold grew at 16% and we surpassed the 60 million items sold in our platform, which is the highest ever volume. So we continue to see improvements of the Argentinian market.
We have added a record of almost 7 million new buyers into our platform. This is a number higher than the number that we saw during the peak of the pandemic.
Speaker Change: So let me be clear on that, not even during the explosion of demand that we experienced during the pandemic, we saw a number of new users at this level. As most of you know, the penetration of e-commerce in Latin America continues to be relatively low when we compare it to other more developed regions. Only 15% of commerce is done online, so there's plenty of room to continue growing. As a leader player in the region, we have a crucial role in driving more volume online and increasing this penetration of e-commerce. For that purpose, we continue to invest in our strategic initiatives such as logistics and our loyalty program. In Q3, we opened six new fulfillment centers, five in Brazil and one in Mexico, and that helps us improve or increase the fulfillment penetration by 4.5 percentage points compared to a year ago.
Speaker Change: results in a much better user experience for buyers and sellers.
in faster and more reliable delivery speeds and a much better conversion of volume, in turn resulting in further growth of the ecosystem.
Speaker Change: Investment in technology also plays a critical role in bringing more business online.
Speaker Change: because it removes buyer friction. Our large team of developers continues to be focused on improving the buyer experience and customizing it for each individual vertical. Our advertising business represents a powerful profit engine for MercadoLibre.
Speaker Change: And once again, we had a strong quarter despite FX headwinds that we experienced in Mexico and Brazil. Most of the volume of advertising continues to come from product ads.
Speaker Change: So we see a tremendous opportunity going forward on display and video advertising where we're just getting started. In fintech services, the impressive growth of our user base and the rising engagement that we see people having with our products.
shows that more and more people and consumers are choosing MercadoPago as their main financial service provider.
Speaker Change: We continue to invest behind our credit card as it's a critical product to achieve principality within our users.
In Q3, we issued 1.5 million new credit cards, and the credit card TBV grew by 166% compared to last year. As we see improvements in our risk models, we have accelerated the underwriting of credit, not only credit cards but also consumer and merchant credits.
Speaker Change: and this resulted in growth of our portfolio of 77% compared to last year.
We know that the faster growth of our great portfolio
Speaker Change: combined with a shift towards more credit cards as percentage of total portfolio, puts some short-term pressure on Naiman Express, the rather stable MPLs that we have seen, and the fact that the earlier cohorts of credit cards
Speaker Change: are already becoming profitable gives us confidence in our investments.
Speaker Change: Turning now to our financial results, our strong operational KPIs translated into revenue growth of 35% year-on-year.
Speaker Change: despite FX headwinds that we suffer in Mexico and Brazil. Our successful Q3 performance is not just a result of the great execution of our team, but also a testament of the many growth opportunities that lie ahead of us in our business and our ecosystem.
Speaker Change: Arabid was $557 million with a 10.5% margin.
Speaker Change: Partially upset by a reduction in FX losses.
Speaker Change: As we finish our 25th year anniversary, we continue to see...
Speaker Change: Tremendous growth of Ortega is ahead of us.
Speaker Change: both in commerce and fintech and now also in advertising. We have a clear vision of the future and our focus on the long-term growth, profitability and cash flow generation of our business. Now I want to share some examples of innovation that we have implemented during the quarter, so I'll send it back to Richard that will explain those to you.
Speaker Change: Thanks for watching!
Richard Cathcart: MercadoLibre is a major driving force of the shift of offline to online commerce and financial inclusion in Latin America.
Richard Cathcart: Continuously investing in our value proposition, service levels and user experience is key to making that happen for years to come.
Richard Cathcart: We want to share a snapshot of just some of those investments and innovations today.
Richard Cathcart: In September, we upgraded the MeliMai's benefits package to include cashback for extra installments on Marketplace purchases and new fintech benefits. This means that users are able to get back much more than they pay for the subscription, making MeliMai the smartest choice for our users. Those fintech benefits include cashback on all purchases made with the Mercado Pago credit card.
Richard Cathcart: and a higher yield on funds held in the remunerated account.
Richard Cathcart: These benefits increase the differentiation of our credit card and digital account.
Richard Cathcart: Cashback is paid in the MeliDollar stablecoin and is deposited into users' MercadoPago accounts where it can be held, sold, or used to make purchases on the marketplace. We also introduced an additional tier in MeliMais that offers a cheaper plan and gives consumers a choice of two plans that best suits their needs.
Richard Cathcart: The essential plan includes free shipping, cashback or extra instalments on marketplace purchases and all of the fintech benefits While the total plan has all the benefits of the essential plan plus great content with access to Disney Plus Visa and discounts on other streaming services
Richard Cathcart: Meli Delivery Day continues to be a core and popular piece of our loyalty program. It enables free shipping on lower value items which drives higher purchase frequency and enables us to dilute our last mile costs.
Richard Cathcart: to incentivize the purchase of multiple items for delivery on the user's Meli Delivery Day.
Richard Cathcart: as they engage with the platform. Several other initiatives aimed at improving the online purchasing journey have gone live in Q3. In Q3, this helps us to attract a record number of new buyers, even higher than the previous peak during the COVID pandemic. We continue to develop category-specific UX as a way to drive offline retail online, vertical by vertical.
Richard Cathcart: In Autoparts, we launched a new feature that enables buyers to schedule an appointment with a mechanic to install the items they are purchasing, and we ship those items directly to the mechanic. In the beauty category, we introduced technology that enables users to see different makeup products applied to their face in our app.
Richard Cathcart: This tackles a major barrier to consumers buying makeup online. To increase cross-category shopping, we launched a new tool that suggests a new high-frequency category for users to shop, based on that individual user's profile.
Richard Cathcart: This personalized suggestion includes a shortcut button to a category on the homepage, a special coupon, a personalized landing page, and push notifications. An important driver of shifting offline retail online is the shipping experience.
Richard Cathcart: In September, we announced plans to more than double the number of fulfillment centers in Brazil by the end of 2025. This means 11 new operations, five of which were added in Q3.
Richard Cathcart: These investments will enable us to increase the number of cities where we deliver on the same day in Brazil by 40%. 63% of these operations will be outside of Sao Paulo as we increasingly regionalize our network.
Richard Cathcart: Some of them will be Metro Fulfillment Centres, similar to the model we introduced in Rio de Janeiro last year, which are smaller operations that target individual cities.
Richard Cathcart: This is just a snapshot of the innovations that have gone live recently, and we have a strong pipeline of innovations that will enhance our position as the destination of choice to shop online in Latin America. Because as always at MercadoLibre, the best is yet to come.
Speaker Change: www.marcoparet.com, Non-Verbal Hypnosis
Speaker Change: We will now begin the question and answer session with Martin De Los Santos, CFO, Ariel Svarnsten, Commerce President, and Osvaldo Jimenez, Fintech President. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Richard Cathcart: To withdraw your question, please press star then two. We ask participants to limit themselves to one question and get back in the queue for any follow-ups or additional questions. At this time, we will pause momentarily to assemble our roster.
Richard Cathcart: And our first question comes from Irma Scars from Goldman Sachs. Please go ahead.
Irma Scars: Yes, hi, thank you very much for the opportunity to ask a question. I'd like to ask about the credit card portfolio where we saw...
Irma Scars: Just surprised to see that jump from one quarter to the next and I was curious to
Richard Cathcart: larger longer-duration loans to lower risk users in really all your geographies. And I was curious if you could just expand a little bit more on that. What does it mean for growth ahead and if you're generally feeling more confident about your underwriting mechanisms
Speaker Change: Why wouldn't that make you maybe go into perhaps like slightly higher risk classes where you may be initially seeding smaller loans but then sort of have more of a ramp up over time as you as you feel more confident with those with those new customers?
Richard Cathcart: Thank you.
Speaker Change: Hi Ema, let me start with the second part of the question about MIMAL and then I move back to credit cards.
Irma Scars: With regards to Nimal, yes, Nimal is a quarter of 15% driven by basically three drivers. The largest one is the ramp-up I'll refer to in a minute of the credit card business.
Irma Scars: whose share in the portfolio rose from 25% a year ago to 39% now, and since this is a lower spread product, this increase in product mix or in product mix
Irma Scars: affected Nemo.
Irma Scars: credits that are very profitable, but that have lower spreads than the one we had, which were smaller to lower income customers
Irma Scars: The third part of it is simply by the fact that we have been accelerating the size of the portfolio. Whenever we grow the portfolio, initially we have to hire a proportion of provisions and then the revenues from the interest comes afterwards. So whenever we're growing very rapidly, there's a hit to NIMA.
Irma Scars: And having said that, I'd say that the quality indicators are solid. We have had broadly stable growth rates, both for the 15-90 days and beyond, which has been stable at 7.8%.
Irma Scars: Thank you very much.
Speaker Change: Now, moving on to the first part of the question with regards to credit cards and
Speaker Change: Yes, we are excited with how this business is evolving, both in Brazil and in Mexico.
Speaker Change: variable contributions and even some cohorts in early 2023 also have positive variable contributions that are already net positive So
Irma Scars: The fact that we are growing so fast, and that the recent cohorts represent a significant part of our total portfolio, makes it possible for us to grow so fast.
Irma Scars: has an impact in our returns or in our P&L in the current quarter. And we are very excited with how the product is evolving, not only because all the cohorts are already profitable, but also because we see all of the drivers that the increased penetration of credit card bring us.
Irma Scars: from higher net promoter scores, higher increased transactionality in users who have credit cards, both on the marketplace but also off the marketplace, increased use of other marketable power products, and in general, an increase in principality.
Irma Scars: So, we are excited to see how that is evolving.
Speaker Change: You mentioned too, regarding the number of cars we origin, I think that beyond the number of cars, which is growing, I think that we are doing two other things. One is increasing the size of the lines and therefore increasing the TPV, which we believe is the more relevant metric.
Irma Scars: in the TPV of the portfolio of credit cards. All of that has resulted in the increase in the penetration of cards in the portfolio, as I mentioned before.
Speaker Change: Thank you very much for your time.
Speaker Change: The next question comes from Andrew Rubin from Morgan Stanley. Please go ahead.
Andrew Rubin: Thanks very much for the question. Hoping to dig in a bit to the shipping investments, given the five distribution centers in Brazil in a quarter being quite sizable. So hoping you can help give us some color on how long a distribution center typically takes to ramp up and reach productivity. And you mentioned the reach outside of Sao Paulo, but perhaps if there's any incremental category or capabilities otherwise these facilities give you. And then related, we recall last year you had some network capacity constraints during the 4Q holiday season. So I'm curious with the network expansion so far this year, what are your views on how the capacity now compares to your demand expectations during the holiday season? Thank you.
Speaker Change: Hey Andrew, Ariel here. So yeah, as you said, we made a significant progress in terms of facilities for our hotel operations.
Andrew Rubin: buyer and seller MPS and from there higher retention rates and I think we we were clear in the past that we need to grow our fulfillment capacity because of three things.
Irma Scars: A, because of the expectation of future demand, we need to grow capacity with what we think the business will continue to grow in the future, and luckily we see huge opportunities for growth in our marketplaces both in Brazil and in Mexico.
Irma Scars: Second, we need to build capacity because of the increases in fulfillment penetration that we are consistently having in Brazil. And last but not least, there is a normalizing effect of capacity available in Mexico.
Irma Scars: So overall, we are confident that with this capacity that we are bringing into the network, we will not only
Irma Scars: have the required square metres to deal with big demands from our sellers and buyers, but more importantly, to continue growing and expanding our business in the different regions.
Speaker Change: In terms of the first part of your question, ramp-ups and productivity, we are consistently making progress in shortening.
Speaker Change: the productivity ramp-up window from our representatives. But it's natural, right? So every time we open a fulfillment center, we start operating with lower utilization, which then tends to grow. So yes, to your point, in the short term, you can see some cost pressures. But this capacity is crucial for our growth, for our scale, and for our long-term strategy of serving our users.
Speaker Change: Our next question comes from Marcela Santos from JP Morgan. Please go ahead.
Marcela Santos: Thank you for coming.
Speaker Change: Marcello Alce d'Arcoli
Speaker Change: for Simuleos.
Speaker Change: and then we learned and iterated on how to adjust those models and every roughly six months we have been able to roll out a new generation of models.
Speaker Change: We did learn quite a lot along those lines.
Speaker Change: and therefore when we launched the product in Mexico last year.
Speaker Change: and we have more experience and probably we're more reliable.
Speaker Change: and Marcos Galpern.
Speaker Change: Clearly, the penetration of credit cards in Brazil is significantly higher than what it is in Mexico, and therefore we believe the opportunity in Mexico is huge.
Speaker Change: Having said that, there is less public information about how and credit scoring for the users in Mexico, so you have to rely a little more on internal information and less third-party information. Also, there are differences in terms of
Speaker Change: when and how the working capital works in each country because you have to sell the transactions in Mexico the next day and in Brazil it's after 30 days so the working capital requirements are higher in Mexico than they are in Brazil. I think those are the main differences.
Speaker Change: The next question comes from Jeffrey Elliott from Autonomous. Please go ahead.
Jeffrey Elliott: Paolo, thanks very much for taking the question. If I could go back to the point about the investment you're making in fulfillment. You've opened
Speaker Change: Quite a few fulfillment senses in q3. You've got
Speaker Change: another, I believe, 5 or 6 planned by the end of 2025.
Speaker Change: Can you give us a sense of how long this is going to weigh on margins, weigh on profitability? Because it's clearly had a pretty significant impact relative to where you were a quarter or two ago.
Speaker Change: Hi Jeffrey, it's Mardin here. How are you?
Speaker Change: It's just like you said, we continue, and I think Ari was mentioning this before, we continue to invest in fulfillment centers.
Speaker Change: In the case of Brazil, to increase the population penetration and to take it to the same levels, similar levels that we have in Mexico and in Mexico just to keep up.
Speaker Change: the growth of the business.
Speaker Change: which is this quarter's growth at 27% year-on-year.
Speaker Change: And I think that if you look at the margin pressure of this particular quarter, there wasn't a lot of margin compression because of fulfillment, most of the compression came from credit cards as Oswaldo mentioned recently.
Speaker Change: So, to answer your questions, we will continue to invest.
Speaker Change: business as usual as we have been doing it for the past five years and if you look back over the past five years
Speaker Change: Potential penetration increased significantly, it has always put some short-term pressure on margins, but because of the incremental volume that it brings, because of the better user experience and so on
Speaker Change: then we are able to dilute those costs in addition to all the focus that we put on productivity.
Speaker Change: This quarter will improve significantly their productivity.
Speaker Change: The actual cost per shipment is down year on year, even though we have higher penetration of fulfillment.
Speaker Change: so I think
Speaker Change: This particular quarter there wasn't a significant pressure for margins because of that.
Speaker Change: that we will continue to invest in fulfillment and business as usual as we have done it in the past.
Speaker Change: Just to complement Martin, Jeffrey, another point to highlight here is that not necessarily every new warehouse that we open is a 100 square meter.
Speaker Change: facility, right? So, a few quarters back, we announced that we're testing our first Metro Fulfillment Centre in Rio de Janeiro. This quarter, two of the warehouses that we opened are Metro Fulfillment Centres, and potentially in the coming years we'll open more of those, which have a different profile, a different type of investment.
Speaker Change: The next question comes from Jamie Freedman from Susquehanna. Please go ahead.
Jamie Freedman: Hi, thank you for taking my question. I wanted to ask about slide 19. It's the margin bridge and specifically about the bad debt call out here. I'm wondering, is that
Jamie Freedman: Is that like the fail first of new originations or is there something underlying the credit quality that's maybe different than you had modeled?
Speaker Change: Hi Jamie, how are you? Let me start with the last part of your question. In fact, we are very confident about the credit quality and the prediction of our models, and this is the reason, as Osvaldo explained, that we are accelerating our credit origination. So that part is not explained in this 3.4 percentage point compression that you are pointing out to.
Jamie Freedman: Here what's happening is that we increased roughly $1 billion of our portfolio quarter on quarter. If we were to look at it year on year, we increased it by 72%. As Osvaldo mentioned, when you increase the portfolio very rapidly, as we did this quarter, you provision the losses up front.
Jamie Freedman: And that happens not only on credit card, but also on consumer credit and merchant credit.
Jamie Freedman: which are very profitable books, but as we accelerate, we need to provision upfront and that generates an incremental bad debt.
Jamie Freedman: which is generating a compression march in this quarter.
Jamie Freedman: So it's not related to the performance of a portfolio. When you look at NPLs, which we also publish here, you can see that they are pretty much under control.
Jamie Freedman: And the fact that we're accelerating, I think it speaks out our confidence on the way we're originating. Which by the way, we're accelerating in all of the markets and all of the products. So we feel very comfortable with the quality of our books.
Speaker Change: The next question comes from Craig Marr from FT Partners. Please go ahead.
Craig Marr: Yeah, hi, thanks for taking the questions. I wanted to ask if you could perhaps separate out the margin compression related to one-time costs of setting up new facilities versus the ongoing cost of operating those facilities.
Craig Marr: And second, the ad penetration rate was flat or unchanged quarter over quarter. I was curious what your expectation is for penetration going into the fourth quarter and perhaps next year if you can comment on that. Thanks.
Speaker Change: Hi Greg, how are you? It's Martin here.
Speaker Change: We don't disclose specifics you know of the margin compressions which part we are treated to ramp up versus
Craig Marr: Overall incremental cost of fulfillment but if you see on the disclosures on the investor letter You can see that the the impact of our investments in fulfillment was relatively low less than one percentage point of compression so
Craig Marr: So that's as much as I want to say about that. I think, as I mentioned earlier, over time, we make up for those short-term pressures through incremental volume, and we feel very comfortable about the investment that we're making in fulfillment.
Craig Marr: www.microsoft.com.ca
Craig Marr: So, hey Craig, this is Ariel. To your question about that, we are pleased with the performance we had this quarter. We grew 86% in FX Neutral.
Craig Marr: 37% in US dollars, and as you said, we've reached 2% of revenues over GMB this quarter. That's an increase of 0.3 percentage points year over year, with Brazil and Mexico reaching record high penetration.
Craig Marr: once again.
Craig Marr: So, we are happy with the fact that ads revenues are growing well above our GMB. We continue to see great potential for our ads business in the future as we develop more technology and better product stack across the full funnel of advertising. Steel growth will never be linear, so we are not focused on analyzing what's happening quarter over quarter. There are seasonality, mix effects, effects, whatever, many, many levers.
Craig Marr: They are the ones who explain changes, but conceptually, we are excited with the progress we are making and see great results from all of our efforts. Thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: Our next question comes from Deepak Mathavanan from Cantor Fitzgerald. Please go ahead.
Deepak Mathavanan: Hey guys, thanks for taking the question. So on the rampant credit cards, can you give us some color based on historical cohorts, how it's likely to drive
Speaker Change: by Marcos Galpern.
Deepak Mathavanan: And then secondly, just to get some specifics on the NIMR difference between the various products. How does it differ between credit cards and consumer credit? How much is NIMR generally lower on credit cards so that we can think about modeling the headwinds for the future a little more precisely? Thank you so much.
Speaker Change: Hello Deepak, so with regards to the impact the credit card has on our users and our ecosystem
Deepak Mathavanan: who have access to a credit card, start using it and on top of that start using also a credit line.
Deepak Mathavanan: and the users who are happiest with MercadoLibre and MercadoPago they have.
Deepak Mathavanan: the highest engagement, they use our products more often, they buy more.
Deepak Mathavanan: on the marketplace, so clearly it increases the engagement those users have with us. And then those users who have all of these products, then second next are those who use our credit card, and then those who use our credit, and so on. But basically, getting a credit card significantly increases engagement.
Deepak Mathavanan: Also, another factor that is very relevant is when you look at
Deepak Mathavanan: We were already building a proportion of mix that was coming from our consumer loans and Mexico probably is a great case.
Deepak Mathavanan: because it was the case where we had the highest penetration of consumer loans within the marketplace. And on top of that, we are adding the layer for the credit card. So we continue gaining share.
Deepak Mathavanan: with great products of all of the volume in the marketplace and therefore it becomes more profitable.
Deepak Mathavanan: and I would say those are the most relevant impacts. In terms of ramping, we'll continue increasing the cars we issue, we'll continue increasing the lines and so on. We are comfortable with how this is working.
Speaker Change: Hi, it's Martin here. Regarding animal spreads, we don't disclose specific spreads by country or product, but I can give you directionally.
Speaker Change: Consumer Credits and Personal Loans have the highest animal margins throughout, followed by Merchant Credits, which has also a relatively high margin. In both of those products, as we move up market, we expect to reach users with lower risks.
Speaker Change: with whom we charge lower interest rates and there will result in lower and smaller spreads but it will be incremental volume as Osvaldo was mentioning before.
Speaker Change: The credit card itself as it is ramping up, remember the credit card, it takes several months, a few months to reach profitability, so as we are scaling, the normal spread of the credit card is neutral or marginally negative.
Speaker Change: But, we have seen the older cohorts becoming positive already, so we are confident that as we continue to increase our portfolio and clean the older cohorts, we will reach profitability at a portfolio level.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Neha Agarwala from HSBC. Please go ahead.
Speaker Change: Hi Neha, is your line muted? Hi, can you hear me?
Speaker Change: www.marcoparet.com, now the world's leading authority in non-verbal hypnosis
Speaker Change: Moving in again on the credit cards, could you just give us a breakdown as to the usage of credit cards on platform and off platform roughly, both in Brazil and Mexico? And also, any sense of what percentage of your credit card portfolio is in Brazil versus Mexico?
Speaker Change: My other question is on the software business. You mentioned that in Brazil, in the acquiring space,
Speaker Change: How the software business is in-house, are you building software in-house or are you working with software providers and attaching it with your POS.
Speaker Change: to make the usage seamless for the merchants. And what is the ambition there? If you could elaborate a bit more on that. Would it be organic, M&A, partnership?
Speaker Change: Thank you so much.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: that's right.
Speaker Change: www.mustwatch.eu
Speaker Change: So
Speaker Change: between the marketplace and off-platform. I would say that, in general, the majority of the volume we do, both in Brazil and in Mexico, is off-platform. I would say over 60% of the volume we do in both countries is off-platform. Even though we do give extra incentives for people to use the card on-platform, we believe it's great because we show that
Speaker Change: They are not just using the card for those incentives, but that we are gaining principality and in many cases this is the card that gets top of wallet and gets used more frequently.
Speaker Change: with regard to software.
Speaker Change: I think, as you mentioned, it's an important part of the strategy of our acquiring business. We are making good advances in the electronics, we mentioned some of those in the letter, but for the most part it will be in some of the developers.
Speaker Change: other companies so most likely will be development. Let me compliment that Martín. Thank you.
Speaker Change: two things. On the one hand, there are many things we want to develop. We have started with catalogue, the ability to invoice and also to keep stocks. And then there are things that we will develop related to basically becoming really the neural system of a small and medium stores. There are many things that we need to do to be able to achieve that, but we are starting to see good results in terms of engagement and driving higher use of the stock. Thank you.
Speaker Change: and particularly with SMBs where they usually have several MPOSs in front of them.
Speaker Change: Also, with regards to acquiring, we have seen some...
Speaker Change: I think that this is typically very complex because you really need to integrate it with all of the payment systems and we have seen other companies struggle with this in the past so it's a likely, it's always something we look into and we usually prefer to develop it ourselves.
Speaker Change: The next question comes from Robert Ford from Bank of America. Please go ahead.
Robert Ford: Hey Martin, Ariel, Osvaldo, thanks for taking my question. Can you talk a little bit about the rate of adoption of melee mice in Brazil and Mexico, you know, and more specifically how behavior patterns change following subscription on the marketplace and also across other verticals?
Speaker Change: and are there any early indications of incremental principality and then how is melamine is impacting blue funding as well. Thank you so much.
Speaker Change: Hi Bob, how are you? Martin, as you know, we did, we implemented the...
Speaker Change: which includes all the benefits of free shipping that we traditionally had, including also now the fintech benefits of cashbacks.
Speaker Change: both on the marketplace as well as when you use the credit card outside of MercadoLibre.
Speaker Change: And then we have the other, the traditional one, which is called Minimize Total, which includes all the benefits plus the content from this page.
Speaker Change: We don't disclose specific numbers on the loyalty program, but we have seen very positive adoptions. Look at the new program, the one that is the lower priced one. We have seen a lot of users engaging with that.
Speaker Change: of the Loyalty Program.
Speaker Change: And then the effects of people enrolling into a program are similar to what we have seen in the past. We've seen more users, better conversion, better engagement with our platform, so it's all very beneficial to us.
Speaker Change: So we're very excited about the relaunch of the program.
Speaker Change: but it's still too early to share actual numbers on that. And then you refer to the blue money, as you know, we're giving cashbacks on purchases on Mercado Libre, as well as purchases done with the Mercado Pago credit card. Those cashbacks are done on mainly...
Speaker Change: Thank you very much.
Speaker Change: The next question comes from Joao Suarez from Citibank. Please go ahead.
Joao Suarez: Thank you. Two questions on my side. First one, I just wanted to hear your thoughts, I mean, we're looking to Brazil, the current environment, right?
Speaker Change: It seems like October...
Speaker Change: It had a slight uptick in households with outstanding debt, right? So it seems like there's some, of course, with the interest rates increasing, right? The coupon just increased interest rates here in Brazil to 11.25. So it seems like you're very confident in growing and keep the origination at this pace, right? But how are you thinking about the macro? Could it impact somehow, right?
Speaker Change: And just going back to the question about Brazil and Mexico, I just started – I didn't understand how much is Mexico growing versus Brazil. If you could please clarify, thank you.
Speaker Change: Hi, yes, it's...
Joyce Mardin: and Joyce Mardin here.
Speaker Change: It's correct. We've seen, you know, this increase in interest rates in Brazil. We have seen it in different countries where we operate. But the reality is when we look at our credit business, much more important than, you know, one or two points of increasing interest rates or the cost of funding is our ability to predict defaults. That's the biggest part of the cost structure of our products.
Speaker Change: And again, once again, we are accelerating because we feel very confident about the improvements that we have made on models And we're reaching new segments of the population that are lower risk So I think macro overall it does not affect this product as much as our ability to predict bad tests
Speaker Change: Thank you for watching.
Speaker Change: And on the second part of the question, we don't disclose precise numbers by country. What I was referring to is that if you compare the first year or the first quarters of Mexico to the first ones in Brazil, we are issuing cards in Mexico at a significantly faster rate than we did in Brazil, basically because we have had more prior experience.
Speaker Change: Willing Codicar Modos.
Speaker Change: Thank you. Thank you.
Speaker Change: Again, if you have a question, please press star, then 1. And our next question comes from Josh Beck from Raymond James. Please go ahead.
Josh Beck: Yes, thanks for taking the question. I wanted to ask about the Fulfillment Center ambitions. You obviously added, I think, five.
Speaker Change: in Brazil and one in Mexico. Is this a multi-year investment cycle? And then I'm also curious.
Speaker Change: as you have a higher density of fulfillment centers that's maybe a little bit more hub-and-spoke, you know, what type of benefits are you seeing in terms of cost to serve and ability to do shorter delivery windows?
Speaker Change: Hey Josh, Ariel here. So, to the first part of your question, there is no new multi-year cycle or change in ambitions.
Speaker Change: always saying that we pretend to continue building the capacity.
Speaker Change: that we need.
Speaker Change: in order to make sure we can deal with the growth in demand that we are forecasting for MercadoLibre, the growth in penetration that we'll have in Brazil and other countries, and normalizing the capacity required to operate in Mexico after a few years in which we were running super tight. So, no new direction, no changes.
Speaker Change: in terms of investment cycles, just reality on what we think we need to continue gaining market share as we have been doing over the last few years.
Speaker Change: To the second part of your question, there is definitely an angle in terms of geographic expansion. We are not only building warehouses in the main capitals of the countries as we have announced, we are also regionalizing.
Speaker Change: our capacity more and that means that we'll be better equipped to serve our customers with faster delivery promises and hence better hopefully retention rates coming from them.
Speaker Change: different profiles of warehouses have different unit economics. I think we have never gone that deep into disclosure and will probably not do so in the future.
Speaker Change: But as I was saying before, the story and the type of unit economics and investment modes that we're thinking are not changing from what we were thinking in the past. This is the type of investments that we need to continue growing and serving our users.
Speaker Change: Let me just complement from a cash flow perspective. These are investments that are business as usual. If you look at the CapEx in this quarter, which will open six fulfillment centers.
Speaker Change: for Logistics was $120 million, which is more than last quarter, of course, but that percentage of revenue is relatively stable compared to the past several quarters, so it's something that...
Speaker Change: It's not an investment cycle, it's not, obviously, this quarter we opened more for FEMA centers than the past couple of quarters, but this is business as usual, as Ari mentioned.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question is a follow-up from Jeffrey Elliott from Autonomous. Please go ahead.
Jeffrey Elliott: Hello, thanks very much for taking the follow-up. I just wanted to get some explanation on one point. There's a note that G&A expenses rose 1.1 percentage points year-on-year, of which 0.8 percentage points due to a non-recurring expense that relates to certain customer refunds.
Speaker Change: for prior periods? What happened there? Why refund customers for prior periods?
Speaker Change: Hi, it's Mardin here. Yeah, as you mentioned, there was a 1.1 compression margin because of GNA. Most of that is related to a non-recurring...
Speaker Change: expand this quarter.
Speaker Change: which is a refund to fintech users for the past several years back.
Speaker Change: What happened is this quarter we made a change to our consumers and merchant credit products in Brazil, where from now on, when a user pays an installment a few days before the actual due date, we are going to be refunding them the other day.
Speaker Change: the days which advance, the advance, the advancements, sorry, those are the days that they prepay.
Speaker Change: So even if it's a few cents, we will refund them for that installment.
Speaker Change: So since we're going to be doing that going forward, we decided to go back in time and refund our users for the past several years. And those refunds are very, very small, on average $4 per user.
Speaker Change: 40 cents per actual
Speaker Change: and they were paid in advance, because those are a few days, but we felt that it was the right thing to do to make it up for them since we're not making the change going forward. So this is the one-off that will register this quarter. That's it.
Speaker Change: Our next question comes from Rodrigo Gaston from IBBA. Please go ahead.
Rodrigo Gaston: Yeah, thank you guys. Just two questions here on the loyalty program. First...
Speaker Change: if you're, you know, seeing any kind of margin pressure coming from the loyalty program given that you...
Speaker Change: This was the program this quarter, so I need a large impression on this from how much we're investing on that. That's the first point. And the second one is, what are the main unit economics differences between the essential plan and the total plan that just launched? So just curious here to understand how you see that, what are the main KPIs and the difference in terms of unit economics. That's it.
Speaker Change: Hi, it's Martin here. I think your question is related to potential margin pressures because of the loyalty program.
Speaker Change: First of all, all the benefits that I was mentioning before, the fintech-related benefits and the cashbacks, we started it this quarter, so it's still ramping up. The way we're investing that is we're relocating marketing dollars to the loyalty program, so we don't expect that to generate significant margin pressure. Also, keep in mind that the expectation of the loyalty program is to bring in current volume that should compensate.
Speaker Change: that whatever investment we make on the program, so.
Speaker Change: www.mustwatch.eu
Speaker Change: the whole details on our program. Bear in mind that in the total...
Speaker Change: subscription we need to
Speaker Change: pay Disney for a big chunk of what we collect as part of our agreement with the subscription for content, while in our essential subscription, we are basically giving our users the same type of benefits within our ecosystem, but we don't have to pay content. So basically the revenues we get from the subscription do help us sustain or pay for the benefits that we are providing our users.
Speaker Change: Marcos Galpern, Richard Cathcart, Marcos Galpern.
Speaker Change: And the next question is a follow-up from Jamie Friedman from Susquehanna. Please go ahead.
Speaker Change: For more information visit www.FEMA.gov
Jamie Friedman: in the presentation you describe it as Argentina improving significantly to being driven by growth initiatives consumption trends but could you elaborate further what the market environment looking like in Argentina thank you
Speaker Change: Thank you.
Taylor Win: or Taylor Win.
Taylor Win: to expand our business, but also there's something around our own performance, right? So we continue to roll out experience.
Jamie Friedman: improvement, assortment improvement, removing friction from our users. We've also taken measures to help our buyers and sellers while taking care and preserving our P&L.
Jamie Friedman: to boost frequency and drive conversion rates like installments, shipping prices, etc. But in general, we remain very, very optimistic what we are seeing in the country. Demand is performing well and we are satisfied with the turnaround that we saw over the last few months.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you for taking the time.
Jamie Friedman: Yes, just to complement that, on the fintech side of the business, we're also seeing very good traction in Argentina, with interest rates coming down, NPLs under control and very good spread for our product, our credit product, we also accelerated credit this quarter in Argentina. So, very positive signs as well from the fintech side.
Speaker Change: Thank you.
Speaker Change: There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Martin De Los Santos for any closing remarks.
Speaker Change: Thanks everybody for joining the call tonight. We had another quarter of strong results and great growth throughout our business.
Jamie Friedman: As we mentioned, we invested in this quarter.
Jamie Friedman: which is strategic for Mercado Pago, as well as logistics, which is critical to continue bringing volume online. MEN is very well positioned to capture all the investments and the growth opportunities that we have ahead of us, and we are investing behind those with discipline, focusing on long-term and sustainable profitable growth.
Jamie Friedman: Let me take a minute now to remember Mario Vazquez, who passed away a couple of months ago. He was a board member for MercadoLibre for 17 years.
Jamie Friedman: He left a very strong mark on all of us, you know, all of us who had a chance to work with him for those years. So I'm going to miss him, and now I close the call, and thank you again for joining.
Speaker Change: Thank you very much.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: This is a production of the U.S. Embassy in the Philippines U.S. Embassy in the Philippines