Mercadolibre Inc Q3 FY2020 Earnings Call

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30, 2020. I am Federico Sandler, Investor Relations Officer for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Osvaldo Giménez, CEO of Mercado Pago, will be available during today's Q&A session. 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. These statements 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 discussed in this call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of our 10-K for the year ended December 31, 2019, Item 1A Risk Factors in Part II of our Form 10-Q for the quarter ended March 31, 2020, among any of MercadoLibre Inc.'s other applicable filings with the Securities and Exchange Commission which are available on our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found on our third quarter 2020 earnings press release available on our Investor Relations website. Now let me turn the call over to Pedro.

Hi, everyone, and welcome to our third quarter 2020 earnings conference call. Before we begin, I'd like to express our continued thoughts and well wishes to those affected by COVID-19, both at our company and everywhere. We particularly extend our immense gratitude, appreciation, and recognition to those who continue to help us combat this unprecedented global health crisis. Getting to our results. MercadoLibre recorded another strong quarter, driven by high demand for e-commerce and fintech services. Brazil, Chile, and Colombia delivered very strong results in both e-commerce and fintech, while our Mexican operation is still experiencing robust growth, despite slight deceleration. Let me dive deeper, starting with the third quarter e-commerce progress report. Increased demand continued during the third quarter, despite the gradual reopening of physical retail throughout the region. We attribute this to improved service levels and the incremental depth of assortment with which we served millions of buyers during the quarter. In this particular regard, during the quarter we surpassed the 300 million milestone in live listings, reaching 304 million. Since the beginning of the pandemic, we've observed that buyers have diversified their purchases across a wider range of verticals on our platform. This in turn activates and engages them in a greater number of services and increases overall purchase frequency. The step-up in online purchasing has been stable across all sites in the region. MercadoLibre's consolidated gross merchandise volume growth accelerated to 117% year-on-year on an FX-neutral basis. At the regional level, Brazil and Argentina accelerated to 74% and 242% year-on-year on an FX-neutral basis, respectively. Mexico's performance is notable given how COVID-19 impacted the region, delivering yet another quarter of GMV growth above 100% year-on-year, also on an FX-neutral basis. The growth of our Mexican business has been remarkable over the past few quarters. In fact, if we were to adjust our GMV growth for the blue-chip exchange rate in Argentina, rather than the official exchange rate, our Mexican business is already at a size comparable to that of Argentina. This is a clear indicator of not only the phenomenal execution we've delivered but the large opportunity that still lies ahead for us in Mexico. Brazil's excellent performance can be explained by our ability to identify and act on opportunities for improvement in overall execution, product development, and commercial initiatives that involve the selection and value proposition on subcategories where we had lower market share. During the quarter, these initiatives resulted in the launch of pricing per category, renewed focus on underrepresented subcategories, growth in official store mix, improved rebate programs for merchants, increases in payment approval rates, and post-sale service enhancements for sellers and buyers. Fundamentally, we also continue to drive penetration on our managed network, which is the key pillar to generate better customer satisfaction and stickiness. Consequently, these initiatives have translated into market share gains across Brazilian e-commerce, as well as gains across key consumer electronics categories. Additionally, we also improved our Net Promoter Score by offering buyers some of the fastest delivery times in Brazil when items are shipped from our fulfillment centers. Countries in the Andean region continued to outperform well above year-opening expectations, particularly Chile, but also the case for Colombia. During the quarter, we launched a few important product initiatives that we believe will help us scale faster while improving the end-to-end shopping experience in those countries. And on the logistics front, we continued expanding our services. Our Flex app is now available in Chile and Colombia, while we continue to scale our fulfillment services in parallel. These are important initiatives within our ecosystem that we believe will help bridge the gap in terms of delivery times and position MercadoLibre extremely well in those markets. Looking ahead, we will continue deploying our ecosystemic solutions in the Andean region, in line with the offerings already available in other main countries as we move into Q4 and 2021. On the commerce demand side, unique buyers reached an all-time high of 35 million during the third quarter of 2020. This growth year-on-year in unique buyers was achieved not only by being able to successfully retain existing users but also by maintaining momentum in the growth of new buyers. During the quarter, we added two million unique buyers in Brazil. Retention of early cohorts also continues to improve. On a category basis, looking at consumer electronics, a key vertical for us, we observed acceleration to approximately 100% year-on-year growth on a consolidated basis during the third quarter. Specifically in Brazil, the performance improvement in this vertical can be explained in part by greater corporate focus and execution, the rollout of dynamic pricing structure, and greater investment in performance marketing to reposition our platform as a go-to destination for this specific vertical. Another key vertical for us, consumer packaged goods, grew at a robust 181% year-on-year on a consolidated basis during the third quarter of 2020. For all our top geos, within the CPG vertical, product launches, product enhancements, and partnerships were a key theme during the quarter. In our Brazilian supermarket vertical within CPG, we implemented navigation improvements, such as a progress bar to reach free shipping thresholds, along with new commercial promotional dates, the re-launch of the Supermercado, and specials in some categories and also continued working to deepen assortment. In Mexico, during the third quarter, we've entered into agreements with JBP, Diageo, and Grupo Modelo ABI in order to further develop these categories within our platform while also promoting responsible consumption. Additionally, to promote this category, beginning in the fourth quarter, we've waived flat fees for our sellers and brands for products that are delivered from our fulfillment centers. Staying on e-commerce but turning now to marketing. During the third quarter, we reignited marketing spend after an atypical second quarter, doubling the size of our marketing investments in our marketplace on an absolute basis compared to the prior quarter. With that said, we are still investing at a lower rate than our original pre-COVID plan, due to the pandemic's continued impact in driving consumers online and because we are still generating robust organic traffic growth. In the Andean region, we've accelerated the pace of marketing investments versus prior quarters, both in absolute values and as a percentage of GMV. This increase was particularly notable in Chile and Colombia, where we reinforced branding campaigns and invested in special dates and performance marketing campaigns, with solid results. Most notably, our Chilean operations now lead the top-of-mind measurements that we carry out in that country for the first time. Let me now turn over to logistics, a key enabler of growth for our commerce business. Our logistics operations have been instrumental in helping us navigate through these trying times. Its powerful synergies with our e-commerce business have unlocked meaningful value, not only helping us drive higher Net Promoter Scores and customer satisfaction, but it is increasingly becoming a competitive advantage in multiple countries. Our Mercado Envios managed network continued gaining penetration during the third quarter, reaching 64% on a consolidated basis, exiting the quarter at 74% overall adoption. Brazil, Mexico, and Argentina reached 68%, 56%, and 84% respectively. Fulfillment in Brazil reached 22% of total shipments, while in Mexico, it has already surpassed 55% share of shipments. As a result, we've been able to deliver faster and more efficiently. In Brazil, we managed to improve delivery times and lower costs despite the Correios strike, which lasted for approximately six weeks this year. However, since we successfully migrated significant shipping volumes onto our managed network, we've been able to not only almost double the amount of items we've delivered versus last year but also significantly enhanced service levels, recording a 20 percentage point improvement in shipments being delivered in less than 48 hours. The growth of our MELI logistics proprietary technology within the managed network combined with the addition of Flex in the Greater São Paulo area helped scale our managed network, resulting in lower shipping costs and delivery time improvements versus last quarter. Another development in Brazil was the reduction of our free shipping threshold to BRL99 during the quarter. This had two key benefits. First, it broadened what was an already comprehensive free shipping program in Brazil. Second, it enabled us to cover a greater share of our marketplace GMV within the free shipping program. In Mexico, the incorporation of cross-stocking to our Mexican managed network is part of our expansion plan in order to reduce our dependence on commercial carriers, enabling us to find more capacity to accompany our increasing volumes and growth in that country. And finally on logistics, we are happy to report that Colombia and Chile continue to gain penetration of our managed network, ramping at a very fast clip, reaching 14% and 15% respectively, an almost 10 percentage point improvement versus last quarter. Execution and logistics has been stellar across multiple geos. During the quarter, as I've just called out, we simultaneously shifted volume into our own managed network while continuing to invest and expand the buildout of our logistics infrastructure, despite trying circumstances. We are confident that the increased pace of execution in this expansion will enable us to be amongst the best-in-class in terms of service levels and continue to gain efficiencies in shipping costs going forward. With that, let's now move on to the FinTech side of the business, another central building block of our ecosystem strategy and value proposition. Mercado Pago reached almost 60 million unique payers during the quarter, adding 7.5 million payers mainly attributable to Brazil. FX-neutral consolidated total TPV grew by 161% year-over-year during the quarter. Our off-platform payments business accelerated sequentially to 197% year-on-year on an FX-neutral basis not only with a robust performance of online payments, but also an improvement in our in-store payment solution, particularly mobile point-of-sale devices. We have observed that some segments that had not been heavily impacted during the quarantine regimes have now begun to recover. The transportation segment we serve is one example of hard-hit segments that are now beginning to recover. Off-platform unique payers reached 36 million, with Brazil reaching almost 20 million. Specifically in Brazil, we reached an all-time high of unique payers added, adding almost 4.2 million over the prior quarter. On the collectors' front, we reached almost 11 million active collectors, with Brazil leading on the merchant acquisition front. Starting with online payments, consolidated TPV accelerated to 204% year-on-year on an FX-neutral basis during the quarter, with growth having been led by performances in Argentina and Brazil. For Brazil, we saw solid online payments growth, especially in the long tail and social seller segments, setting new records for seller acquisition, more than tripling the number of active sellers. The growth in Brazil's online merchant base is the result of a series of actions we took focused on the acquisition of sellers, especially those that started selling online for the first time. In line with that, we also relaunched marketing campaigns with healthy seller acquisition costs and shorter payback periods. We also expanded our cross-sell actions with other Mercado Pago verticals, especially with Point and QR. Additionally, we launched incentive programs in conjunction with the main e-commerce platforms to facilitate the onboarding of new sellers to the online world. And in Argentina, the other strong performer, online payments accelerated sequentially mainly attributable to promotional dates, social sellers, and an improved checkout. Social sellers' monthly acquisition reached an average of 113,000 in September versus the historical average of 33,000, where our main focus was to generate better cross-sell capabilities and optimization of marketing initiatives. Our MPOS business has delivered solid execution as governments begin to ease quarantine measures. In Brazil, TPV accelerated 14 percentage points versus last quarter, almost reaching pre-COVID levels of growth. The pace at which we are selling devices was also a positive surprise, with more than 1.3 million devices sold across LatAm during the quarter. And staying on Brazil MPOS, third quarter TPV cohorts are incorporating more TPV compared to January cohorts, which shows a robust acceleration in the cadence of MPOS growth. This is in line with the sales levels of devices, which also grew at a faster pace if we compare September to January. In Brazil, we launched Point Smart, our top-of-the-line device focused on businesses that require a simple, fast, and modern terminal. This device should enable better cross-sell for marketplace merchants who have physical stores and now are able to cater to their in-store payment needs given the new device we are offering. And in the case of Argentina, during the quarter, we grew 129% year-on-year on an FX-neutral basis. One important highlight from our MPOS business there is that as we evolved to multi-product with the launch of our Point Plus device, such rollout has been very well received. Moving on to our mobile wallet, another key factor in our ecosystem. Our wallet TPV growth continued to accelerate on a consolidated and FX-neutral basis to 381% year-over-year. The share of payments once again skewed towards P2P transactions, utilities payments, and cell phone top-ups as a consequence of COVID-19. For our last call, the second quarter represented an important milestone in terms of product migration and adoption of payment flows from the physical world to the digital world. And during the third quarter, we've been able to maintain the payment volume reached in the prior quarter and continue growing. We focused on minimizing churn in order to retain digitized users gained and acquired during the pandemic. P2P payments continue to gain share of payments within the wallet. This trend was evident across the region. The large pickup in peer-to-peer during the quarter was not only driven by quarantines and shift to digital, but also by the launch of a new product experience and new free pricing for all transfers made with account money and debit card when P2P transactions. Finally, on wallet, during the third quarter, we were able to grow the active payers to almost 14 million on a consolidated basis. In Brazil, we added a record-high number of unique payers for a single quarter. We also have made inroads on the opposite end of the wallet as our collector network continues to grow at a healthy pace, reaching 5.5 million active wallet collectors on a consolidated basis, an all-time high on this front, more than doubling versus the prior quarter. Let me now move on to our credit business. Mercado Crédito had a record third quarter with an all-time high in terms of originations, growing 157% Q-on-Q. While our loan portfolio also reached an all-time high of $284 million as we've been able to originate more loans with lower NPLs. During the quarter, we had increased the APRs as we calibrated for higher delinquency rates. However, as the quarter progressed, we observed that defaults were in fact improving, resulting in better profitability profiles. In Brazil, we extended terms for online merchants up to 18 months and increased caps while also improving lifetime values. On consumer credit and express money users, we made our policies more flexible by lowering caps. Additionally, we've been able to enhance the adoption of our credit products by leveraging artificial intelligence methods that enable us to do a credit offer at a point in the user journey where there is a greater tendency for adoption. Originations on consumer credits accelerated 140% versus last quarter. Within our credit products, MPOS in-store merchant originations almost doubled, while our express money credit product more than tripled its volume versus last quarter. Originations to merchants on our marketplace grew a solid 172% versus last quarter. Additionally, we launched our micro credits offering, now representing about 15% of consumer credits in terms of originations. With that, let's now move on to our financial progress report for the quarter. Let's start with the review of our P&L with comments on consolidated net revenues. For the third quarter, they reached $1.116 billion, surpassing the $1 billion mark for the first time in the quarter and representing a year-on-year increase of 85% in U.S. dollars and 149% on an FX-neutral basis, mainly attributable to commerce net revenues that continued accelerating and reached their highest historical growth rate. Gross profit for the third quarter was $480 million with a margin of 43% compared to 47% during the third quarter of 2019. The decrease in gross profit margin resulted primarily from an increase in shipping operation costs as a percentage of net revenues. In the slides accompanying this presentation, we've included as we always do, a detailed breakdown of these as well as the OpEx margin evolutions that I'll cover quickly now. Operating expenses were $397 million, an increase of 8.4% year-on-year in dollars. As a percentage of revenues, operating expenses were 35.6%, compared to 60.7% during the third quarter of 2019. The increase is primarily a consequence of marketing expenditure efficiencies, representing over 1500 basis points improvement that we achieved as a result of the growth in organic demand brought about by the effects of the COVID-19 pandemic on consumer behavior. Moving down the P&L, the company incurred $24.5 million in financing expenses this quarter, mainly attributable to financial loans entered into during the third quarter of 2020, primarily in Brazil and Argentina, and interest expenses from our trusts related to the factoring of our credit card receivables in Argentina. During the quarter, we also had a foreign exchange loss of $30.4 million, mainly related to the difference of the Argentine official exchange rate and the blue-chip swap rate at which we effectively carry out stock repurchases in Argentine pesos. We also believe this operation presents an added benefit of generating greater transparency around FX rate distortions that arise as a consequence of Argentina's multiple exchange rates. Interest income was $24.6 million, a 13.7% decrease year-over-year as a result of lower interest rates in our investments as a consequence of the pandemic, mainly offset by higher interest income in Argentina as our float grows. As a result of this, net income for the third quarter was $15 million. Wrapping up today's call, we want to reinforce our commitment to the democratization of commerce and money. The opportunity ahead of us remains sizable, and we feel increasingly confident that we can capitalize on it. Thanks, everyone, as always, for joining the conference call, and we look forward to keeping you updated on our progress report next quarter.

Thank you. Our first question comes from Stephen Ju of Credit Suisse. Your line is now open.

Thank you. So Pedro in your prepared remarks, you talked about consumer electronics growing at I think 100% year-on-year. I know it's probably hard to tell given the circumstances, but do you think that is a supply-led acceleration due to the change in the commission rate? Or is there like a price elasticity factor there as well as merchants adjust to the new rates? And also in regards to the CPG effort, you talked about a deeper assortment there also. Is that mostly through third-party sellers that you're getting the deeper assortment right now? Or have you started to form, I guess, larger and deeper relationships with the brands directly? Thank you.

Great, Stephen. So on consumer electronics, what we highlighted was that we've really focused on some of these categories that we had identified as categories where we were lagging in fair share compared to our overall expectations for market share. And we've really begun to execute better on those categories. So it's a combination of product improvements, new pricing, very strong execution on the commercial front to source better deals with OEMs that are coming across and then a more aggressive pricing and rebate policy also on price points, at which we sell. So to get that kind of a turnaround it really takes I think concerted execution across the board. On consumer packaged goods, we continue to have a growing 1P presence, but that business is still primarily 3P. And again, we're just sourcing well from existing marketplace vendors. And really that's one of the areas where if you look at the user experience over the last few months, we've been perhaps more innovative than in many other places in terms of supermarket navigation and really improving the purchase of consumer packaged goods. And then, obviously, assisted by the overall pandemic and a very strong shift of demand online in those categories probably growing more than any other throughout the pandemic.

Thank you. And our next question comes from Andrew Ruben of Morgan Stanley. Your line is now open.

Great. Thanks for the question. So we've seen a big pickup in your managed network penetration again this quarter. So I'm just curious for the quarter itself, how the Correios strike impacted the figures and your short-term strategy? And then thinking longer-term any update on where the managed network penetration could reach over time? Thank you.

Yes. So counterintuitively, I think the strikes that we face end up being an incredible positive for us long run because: a, they reinforce our commitment to moving volume onto our own managed marketplace at an accelerated pace, but it also gives our merchants a very strong incentive to migrate volume onto the managed marketplace. So not only is Brazil driving that increase in managed marketplace volume shift. That's happening in other key markets as well with very positive results in terms of delivery times and delivery costs. But yes, the strike in Brazil accelerates that move. And we see this as a one-way door. So once merchants have moved onto our fulfillment cross-docking and place operations they tend to stay. And we make all the efforts for them to stay on the managed network. And so our aspirations are to continue moving volume onto the managed marketplace because we see the significant positive impact it has on delivery time cost and Net Promoter Scores. I don't think we give specific near-term or long-term objectives. Suffice to say that the more we move to the managed network the better it is for our consumers and for our merchants.

Thank you. And our next question comes from Irma Sgarz of Goldman Sachs. Your line is now open.

Yes. Hi. Thanks for taking my question. In your opening remarks in the press release, you made a comment about that you're starting to strive for the highest segments of the merchant pyramid. Can you just expand a little bit on any disciplinary measures that you're taking that you'd call out for Fintech and e-commerce on that front? Thank you.

So I'll quickly start with commerce since I've already mentioned some of it. We clearly are seeing incremental traction in our efforts to complement the historic core base of SMEs that sell on our marketplace with a growing number of flagship stores and official stores across multiple categories. And so this is somewhat driven by rapid consumer demand online that is forcing many of these brands and OEMs to engage more constructively with online channels like our marketplace, but also as we improve our product and we improve our ability to sell into enterprises we are able to onboard a growing number of companies that sell direct through us. We mentioned some of them in the CPG category in the prepared remarks. And there are others across consumer electronics. Samsung is rapidly becoming one of the largest marketplace sellers in many countries and a slew of others.

Irma, with regards to Fintech, on the POS front as you know in the past, we considered mostly on individuals. A few quarters ago we launched our Point Pro, which is a device with a printer on it. And what you saw was that the average volume of sales per device was over twice what we had on the MPOS segment. And now more recently we launched Smart POS. And again, we are seeing a step-up with TPV which is roughly 12% higher than the one we already had with Point Pro. So we continued to see increased volumes per device and we are starting to be able to penetrate SMBs which were out of our scope.

Thank you. Our next question comes from Bob Ford of Bank of America. Your line is now open.

Thank you. Good evening everybody and congratulations on the quarter. Pedro, can you talk a little bit about your use of air cargo? There seems to be a lot going on besides the dedicated aircraft in Brazil. And I'm curious in terms of what the implications of excess passenger capacity means for freighter availability and your costs now whether or not this has implications for network design and your build-out priorities. And how should we think about other markets when it comes to air cargo?

So the overriding objective is how can we increase the number of parcels delivered in less than two days and then eventually continue to shorten that time. And for that, especially in the larger geos like Brazil and Mexico, air is a critical piece of this. We started with air as you mentioned using excess capacity on commercial carriers. And as we understood that part of the business better and the volume began to ramp up, we've continued to sort of integrate in that value chain and we now start having freight-only 3PLs that provide exclusive routes and exclusive planes for us, hence the news yesterday of the yellow-liveried MercadoLibre Air airplanes. And that will be a growing part of our network design as we strive to go faster. Importantly, there's no CapEx involved in that. These are third-party logistics air providers and when we look at unit costs, we're trying to be selective in terms of routes where we have enough scale where the overall negative impact on unit cost is manageable yet the acceleration in delivery times is impactful. And no, it's not just a Brazil thing, it already happens in Mexico. And I assume that as the networks grow in other markets, we will also look into it.

Makes perfect sense. And just one other question if I may. Can you talk a little bit about app usage year-on-year in terms of engagement conversion rates, improved navigation, impacts for client acquisition costs? And then is there a reason to maintain separate Mercado and Pago apps? Or is there an opportunity that we should be considering longer-term?

So, we continue to see traffic and volume migrate increasingly obviously to mobile. I think we're already above 80% of volume is mobile and two-thirds is already app volume. And obviously that's a consequence of a combination of consumer demand shift, but also our continued focus on improving those app experiences. In terms of the number of downloads, not always an ideal metric because our cadence of investment in downloads may vary Q-on-Q, but we continue to grow that base. And we believe that our installed base of both MELI apps and MFA apps continue to be one of our strongest competitive advantages across the region.

Thank you. And our next question comes from Gustavo Oliveira of UBS. Your line is now open.

Hi Pedro, good afternoon. I have two questions. The first one is I would like to understand better the impact on gross margins and overall operating profit margin due to the increased penetration of 1P in the business. I noticed there is a 210 basis points impact from the cost of sales of goods. Is this related to the rise in 1P penetration? If you could elaborate on that, I would appreciate it. The second question is about the growth of off-platform unique payers in Brazil. You mentioned there were 4.2 million new unique payers this quarter. What are the factors driving this growth? Is it linked to your efforts with peaks that might be helping grow your unique payer base, or are there other contributing factors?

Gustavo, I'll address the second question regarding the growth of platform payers in Brazil. The peaks have not yet impacted that. However, a significant driver for this growth was the Auxílio Emergencial emergency payments made in Brazil. We observed a substantial increase in the number of people linking their cash accounts with Mercado Pago accounts to access those funds and make payments afterward. Consequently, we experienced a surge in downloads, account funding, and payments in Brazil, all driven by Auxílio Emergencial.

Yes. And then on the 1P business, Gustavo, this is a business that we are investing behind. We think that it has a key role to play going forward in terms of being able to step in with 1P offerings where there are inventory breakage or inventory gaps from our marketplace. It allows us to be very competitive versus other 1P competitors in terms of promotional calendar and pricing. And so this is an important part of our strategy going forward. In the early years, it's a business that has less scale than what it will have in the future. And so when you look at current pure product margins and the overall P&L it does compress gross margins. I think the important thing here is to understand that we're investing into it because we trust that as it scales and grows there will be leverage on PPM on down. And that business, longer-term, isn't necessarily going to be as much of a drag on gross margins as it is in the very early phases.

Currently, Pedro, what's the penetration of 1P in your total GMV? Hello? Hello, Pedro. I think we can't hear you.

Yeah. I'm not sure if we got cut off. I think the last part of the answer was that we don't.

Yeah, Pedro. I think –

Yeah. Sorry. So we were saying that, we don't disclose what the percentage of 1P is, but it's growing nicely and it's still relatively small in the single digits.

Thank you. And our next question comes from Ravi Jain of HSBC. Your line is now open.

Hi. Thank you for taking my questions. So the first one is given that your electronics GMV is growing nicely, is there a change in the way you think about like the big holiday sales like Black Friday, etc., in terms of promotions and things like that? And the second one was more on the Andean region. That has obviously been growing nicely. And when you look at the revenue split, it's still under-indexed quite a bit. So maybe some color around, what exactly do you want to focus on in Chile, Colombia in terms of whether it's going to be CPG electronics? Is it going to be logistics that's going to drive a lot of – or is it going to be the payments and the loyalty together? So some color on what exactly are your main focus for the Andean region? That will be helpful.

So let me start with the Andean region answer. I think this goes to show the enormous opportunity that exists in those markets, once we begin to have enough resources to continue to aggressively invest in Brazil and Mexico, but also start investing more aggressively in those markets. And by investing aggressively, I don't necessarily mean spend. Those markets were actually profitable during the quarter. But I do mean having greater and greater human capital, primarily engineering resources, to be able to take the user experience and the technology in those markets to the level that Brazil and Mexico are at. And so there is no different strategy for those markets. It's all of the things you mentioned that have allowed us to be successful in the other markets. Yes, logistics is already a big piece of the acceleration. We have as you know, a warehouse in Chile operational, one in Colombia on the way, and the growing managed network in those markets. We have a strong CPG business. So in a way they – as we have more and more resources we can focus on those markets. And they have the benefit of being able to leapfrog some things, because they can benefit from a lot of the innovation that's occurring in Brazil and Mexico that maybe wasn't present in those markets when they had the size that Colombia, Mexico – sorry, Colombia, Chile now have. So, similar strategy, greater ability to invest behind them, the demand and the market opportunity we believe was always there, and we're now beginning to capture that. And going forward, we continue to expect solid growth from those markets. I think in previous years, we have been quite willing to stay on the sidelines in some of these year-end promotions that typically were dominated by 1P retailers. As we improve both our 1P capabilities but in our general sourcing and execution across some of these key categories, I think we believe we can invest somewhat more aggressively, because the user experience and the price competitiveness is there on our marketplace. And so you will see us, I think be less on the sidelines during the Q4 critical promotional period.

Thank you. And our next question comes from Edward Yruma of KeyBanc Capital Markets. Your line is now open.

Hey, guys. Good evening. Thanks for taking my questions. I guess, first on Mexico, I know you kind of highlighted the share opportunity there. I guess, as you think in the medium term, what kind of investments are necessary to kind of continue to propel growth in Mexico? And then second on Brazil credit, nice to see you leaning into that. I know it was maybe about a year, a year-and-a-half ago that you ran into some issues in Brazil. What are you doing this time around to ensure that delinquencies and charge-offs don't tick up, knowing that I think you mentioned using AI more as a tool? Thank you.

I believe it's important to reflect on our journey in Mexico over the past four years, where we have made significant investments, and it has proven to be the right approach. The growth we have seen in Mexico, along with our maintained competitive position and the improvements in user experience, highlights our commitment to a long-term strategy. We plan to continue this approach in Mexico, focusing on long-term investments rather than short-term gains in a competitive market. It's worth noting that our business also benefits from scale, and while we have been very aggressive with our investments, both our loss levels and margin structure have consistently improved over time. Overall, Mexico's performance has been very positive, and we will keep prioritizing long-term growth while recognizing that the benefits of scale will positively impact our profits as we expand this business, which continues to double year after year.

Regarding operations and pricing in Brazil, during the second quarter, we adopted a cautious approach due to the early stages of the pandemic. We were uncertain about how our merchants and consumers would respond. However, the industry is progressing, enhancing our model, gathering more data, and refining our collection efforts. By the third quarter, we felt confident and were able to triple the number of loans offered to both consumers and merchants, leading to an increase in our portfolio size and a reduction in non-performing loans.

Thank you. And our next question comes from Thiago Macruz of Itaú. Your line is now open.

Thank you. Thank you for taking my question. Pedro, we've seen several players endeavoring into fresh goods and foodservice categories, especially here in Brazil, in an attempt to generate traffic and decrease customer acquisition costs. Do you think you guys will play a part in those two categories as well? I would like to understand what are the pros and cons of doing that. And regarding peaks, there is clearly an impact here in the money in and out of digital wallets in the country. I'm curious to hear what other opportunities you believe can come from the launching of this payment to in Brazil this month. Thank you, guys.

Yes. Look, I think we aim to be able to supply whatever our consumers want from us and where demand pockets are. We don't comment on future category developments or where we might be going, but we look to be the stop and the online solution that our consumers go to for all the things that it makes sense for us to sell. So clearly, category expansion is a part of our growth story, as we continue to aim to gain share of wallet of consumers, but we'd rather comment on specific category expansion once we launch something rather than in advance.

Thiago, regarding the peaks, it's still very early, but we are excited about the initial results. The last time the central bank published data, we ranked second in the number of significant technical performance difficulties. We also initiated the top launch yesterday, and at least this payment has had some technical performance difficulties. So far, our debts are progressing as planned. The ramp-up will occur over the next couple of weeks, with all loans expected to be issued by November 15. We believe this will have an impact. It started with the potential that these technical performance difficulties will provide. On one hand, we think it will affect loan transfers and debt transfers for peer-to-peer transactions, as well as from peer to merchant. However, we believe that the fact that these systems do not support installments may reduce the impact compared to what we initially anticipated. We are actively developing features to accommodate big segments in our operational flows.

Thank you. And our next question comes from Deepak Mathivanan of Barclays. Your line is now open.

Hi. It’s Trevor on for Deepak. On the commerce side, can you talk about how cohort level trends over the last three months have evolved? Are you seeing active buyers that came to the platform in April and May still continue to exhibit similar frequency and spend? And how about on the new customer trends? Are cohort sizes still similar? And lastly, any commentary on active buyer growth coming from like truly new customers versus existing customers that were dormant kind of reactivating? Thank you.

Yes. So cohort performance has continued to be very strong and improved sequentially across most key metrics. If we look at the quarterly evolution of new buyers acquired during the growth of online demand because of COVID. So users who we acquired over the last few months at a very rapid pace have continued to remain engaged, and the overall cohort performance has actually improved sequentially quarter-after-quarter. In terms of the new cohorts, I would say, the last quarter was in line with the previous pandemic cohort, perhaps slightly below in terms of their initial performance but still historically strong compared to any other prior quarter we could have.

Thank you. And our next question comes from Marcelo Santos of JPMorgan.

Hi, good afternoon. Thanks for taking my question. The first question is regarding the post – regarding the post office strike. So was there a negative impact in the end in terms of growth? And could you help to like for us to have a feeling or the migration to manage logistics in the end help to offset completely that? And the second question is about EBITDA margin, EBIT margin. So profitability also came quite strong again this quarter. Are you reaching a point, where you should kind of keep a more positive profitability at the more mature businesses like generated results, as you mentioned last year like the more mature ones should build more results? Or should we still ramp up more investments and end up doing more the trade-off in terms of – in growth? These are the two questions.

Yes. So Correios like I tried to transmit, we believe long-term is something – or the Correios strike, sorry is something that ends up being very beneficial to us. We migrated thousands of incremental large merchants away from the drop ship model onto our managed network as a consequence of the strike. Short term, it's still a headwind. So I think we calculated anywhere between mid- to high single-digits of growth that we lost because during the strike, delivery promises were longer, conversion rates dropped, and parcels took longer to arrive at doorsteps. So again, it's short-term, it's negative. Mid to long-term it's positive because it gives us incremental arguments with merchants to move them onto the managed network. And we saw that significant increase in sellers now fulfilling through us or using our network for pickup and then injection into our logistics network. In terms of profitability profile, as you know we don't guide. But I think conceptually the way you've laid out the question is accurate. Our more mature businesses and the larger, more mature geos have strong natural scale in them. And so they should continue to be able to drive some operational leverage. Now don't forget that this is a highly competitive market. And again, we will continue to take the long road. So if we need to err on the side of remaining aggressive on our investments and driving growth and market share that continues to be our number one priority. If we're able to accomplish that and also take advantage of economies of scale, fantastic. And then there are newer business units and newer initiatives that we've launched, CPG, 1P, insurtech that could be very, very large opportunities and that we will invest behind.

Thank you. And our next question comes from Jamie Friedman of Susquehanna. Your line is now open.

Pedro, do you have any view about the impact of the corona vouchers, the stimulus program? Any way to detect how much that may have helped your TPV?

I would say they basically had an impact in numbers of payers during the quarter on those accounts. In terms of TPV, I don't think there's a number we can specifically point to because there were many you can use, especially paid to the corona vouchers that we had impact us in a number of ways.

Okay. Thanks for that as well. And then, do you happen to have any update on the PayPal operating agreement? What are you guys doing together? What do you have operationalized in the market at this point? And what are your future plans?

So, Jamie, what we have already launched for the ability for PayPal payers to pay cross-border in MercadoLibre in Brazil and Mexico, and also for PayPal payers to pay in the merchant side at the customers at São Paulo in these two countries, and now we're working on the other parts. One of them is for MercadoLibre payers to be able to pay on global PayPal merchant. And the third one is to focus on remittances from the U.S. into Mexico driven by someone on the PayPal side and by our distribution network in Mexico. But those two we are working on them and have not yet been launched.

Thank you. And our next question comes from John Colantuoni of Jefferies. Your line is now open.

Hey, thanks for the question. Can you talk about how efforts across the Brazil retail landscape to spread out sales events this holiday season could impact overall promotional spending this year? And related to that dynamic, I'm curious whether you're seeing any signs that competitors with large physical store footprints are putting even more effort into driving sales to their e-commerce offerings given the impact the pandemic may have on consumers' desire to shop in-store? Thanks.

Yeah. I think I feel more comfortable recapping how Q4 plays out once we've actually gone through the quarter and anticipate how competitors might play and what might happen. Like I said, I think we're focused on our own Q4 execution. You should see us see less on the sidelines than in previous years. We feel that we are better equipped to participate aggressively in those promotional activities and let's see how it plays out. And then in terms of where consumer affinity for online versus for physical store purchases, I think as we've seen gradual reopening of retail, we are seeing more traffic rising that we see primarily in the gradual rebound of our MPOS business and our in-store to our businesses in FinTech. So I do think that slowly consumers are beginning to return to physical stores.

Thank you. And our next question comes from Kunal Madhukar of Deutsche Bank. Your line is now open.

Hi, thank you for taking my questions. I have a couple. Firstly, regarding the recent Amazon Prime Day and how it may have raised awareness for e-commerce overall. Typically, we see that many other retailers in the U.S., competitors of Amazon, report higher growth and increased trading volumes during those days. What was your experience? Secondly, regarding what Amazon is doing in the U.S. with Amazon Flex, where they are financing trucks and trailers for last-mile delivery, is that a possibility for you in Brazil to help alleviate the challenges with couriers?

Let me try to address that. First of all, during Prime Day, we implemented some initiatives that we believe reduced the effectiveness of our value proposition. We enhanced our free shipping offer during that period and experienced positive results on our end. Regarding our network design and current activities, my main observation is that we have always focused on understanding what is occurring in the global e-commerce space. Whenever there are applicable strategies or practices worth emulating, we have been skilled at adopting and adapting them to suit local circumstances. Our network exemplifies this approach. We are confident that we are constructing the most efficient network in the region, covering multiple areas, not just Brazil or Mexico. This obviously demands hiring the right talent, making substantial investments, and learning from global practices to replicate where appropriate.

Thank you, guys.

Thank you, Kunal.

Thank you. And ladies and gentlemen, this does conclude our question-answer session. Thank you for participating in today's conference call and you may now disconnect.