Hello, and welcome to the MercadoLibre Earnings Conference Call for the Quarter Ended June 30th, 2022. I’m Lissa Schreurs, Investor Relations Officer for MercadoLibre. Today, we will share our quarterly highlights on video. After which, we will begin our live Q&A session with our Chief Financial Officer, Pedro Arnt; and Chief Executive Officer of Mercado Pago, Osvaldo Gimenez. 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 included in this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of our Form 10-K for the year ended December 31, 2021, and any of MercadoLibre's other applicable filings with the Securities and Exchange Commission, which are available on our Investor Relations website. With that, let's begin with a summary of our results.

Hello, everyone. I'm pleased to present some of the highlights and key messages regarding the performance during the second quarter of 2022. Despite a challenging macroeconomic scenario, we delivered a strong quarter across all of our businesses. Our marketplace achieved consistent results despite the challenging environment for retail businesses with a gross merchandise volume of over $8.5 billion, delivering solid growth year-on-year despite tough comps for the second quarter. We reached over 40 million unique buyers during the second quarter with sustained levels of engagement and items sold per buyer, with a diverse seller base and an efficient logistics network for a wide variety of items. We have a differentiated user experience and product assortment to keep growing and drive further online commerce penetration throughout Latin America. On the FinTech side, Mercado Pago continues to grow and gain relevance in our ecosystem, delivering strong results in Q2. TPV surpassed $30 billion for the first time, growing both in acquiring and digital wallet. Mercado Pago reached 38 million unique active users, growing across all geographies. Mercado Credito continues to grow its credit book, reaching more consumers and sellers and delivering an important ecosystemic effect for engagement and loyalty. With sustained healthy trends in the second quarter, the credit business continues to contribute to our operating margin expansion. As a consequence of the consistent performance in commerce and FinTech, we delivered record results in net revenues and EBIT, with strong improvements in cash generation during the second quarter. Revenues for FinTech have surpassed $1 billion in the quarter for the first time ever as our FinTech products gain more relevance in our ecosystem. In commerce, revenue growth comes mainly from our strength in third-party marketplace categories and the expansion of our advertising business. Our gross profit margin expanded year-over-year and quarter-on-quarter as we scaled our businesses and delivered operating leverage across most costs of goods sold. As a result of this, our operating profit reached a record in the quarter with operating margins that were directionally in line with last year's as we continue to balance investments mainly in product and technology and the credit business with cost leveraging across other operational expenses. The second quarter closed with net profit in our three main segments, including Mexico and with improvements in net income margin year-over-year. We also optimized our cash conversion cycle, leading to improved cash generation for all business units and strong cash from operations results. We will continue to target growth with the correct profitability and cash generation profile. This will mean balancing our focus on the long term with a commitment to constructing sustainable businesses with scalable financial models. A more detailed customary comment on the second quarter operational and financial highlights is now available in a management commentary letter to shareholders, which we release on our Investor Relations website. Before initiating the live Q&A sections of tonight's earnings, we want to share with you some additional news and achievements from the quarter. Our marketplace continues to grow. And technology has an important role to improve the experience of our buyers and sellers, deploying continuous improvements to selection, search, and discovery. In our apparel section, we now have improved filters and brand searching. We expanded the MELI places network enabled for reverse logistics to improve the shopping experience for our customers. We also keep improving our delivery service throughout Latin America. The MELI Air network reduced our delivery times by two to six days in the Northeast and Midwest regions of Brazil. In line with improvements in our buyer experience, our loyalty program has been growing, reaching millions of subscribers and strong year-on-year growth. After reaching Level 6, the highest on the program, users have higher frequency, GMV, and retention, enjoying multiple benefits from free shipping, special discounts, and access to content streaming partners. Our loyalty program also plays an important part in connecting and raising engagement, both in MercadoLibre and Mercado Pago, offering benefits in all of our services for our users. On the fintech side, our credit business also plays an important ecosystemic role, as a tool to provide our merchant base with working capital and our consumer base with personal loans and credit cards. To continue to provide these solutions for our ecosystem, we recently announced new funding partnerships to expand credit lines in Brazil and Mexico. All of these initiatives that potentialize our ecosystem are a result of our tech DNA and execution focus. We believe times like this are ideal to invest and create sustained long-term differentiation, leveraging technology and we will continue to invest in technology and in hiring engineers throughout the next quarters. As we grow, we watch closely our impact in the community and environment around us. That is why we’ve just launched another round of investments in our preservation program, Regenera America in Brazil and Mexico to preserve Latin American biomes and biodiversity. As always, the best is yet to come.

…probably a combination of those, but maybe if you could just lay out which areas you're most focused on in terms of driving advertising revenues higher. Thank you.

Thank you, Irma. Let me take them in reverse order. So you're correct. I think advertising is beginning to scratch the surface of its potential. There's room to increase the number of advertisers across many product categories, but obviously, as we grow into more and more categories. And equally important, as we grow our first-party business, which has a much higher attach rate of advertising in terms of percentage of GMV, that should also help. There's room for increased engagement for advertising and all of this always driven by technology, so new formats and new positioning throughout our different ecosystems. We've started experimenting with advertising in the Mercado Pago world and the Mercado Pago app. And we have other formats that we can launch going forward. So I think this continues to be an opportunity that we're very enthusiastic about. And as I always say, it is a very high margin one with EBIT margins in the high 70s, low 80s. In terms of what we're focused on going forward, correctly, we don't guide. I think we've shown that we have a good grasp right now of the cost structure in MELI. We continue to invest in a few critical areas like product development, where we're not looking for operational leverage, but we continue to deliver solid improvements in gross profit if you look at H1, and so I think I'm confident in our ability to continue to balance cost management with investing in growth, where there's the greatest uncertainty going forward is just what happens to the health of the consumer in Latin America. But so far, everything we’ve seen, despite I think concerns around the consumer having been around in the second quarter as well, we've continued to deliver solid results and I think the consequence of that is to the best of our assessment, we've accelerated our share gains in Q2.

Thank you.

Thank you. Our next question comes from the line of Andrew Ruben of Morgan Stanley. Andrew Ruben, your line is open.

Hi, thanks very much for the question. I appreciate the additional disclosure you gave around the credit portfolio. I was hoping if you could dig in a bit more on how you've seen performance by the main product line card, consumer, and the merchant loans. Just a bit more color on how you're thinking about trends, both in loan performance and growth of those segments would be helpful. Thank you.

Overall, when we look at our portfolio, there are nine main segments: Argentina, Brazil, and Mexico, which include the market, small merchants, and consumers. All nine segments are profitable and have maintained margins similar to previous quarters, and we are very pleased with that performance. The tenth segment is credit cards, which is a smaller product launched a year ago and is not yet profitable, but this aligns with our expectations. Both areas have been evolving positively. Tomorrow, in our filing, we will provide additional information and offer more details.

Thank you. Our next question comes from the line of Marcelo Santos of JPMorgan. Marcelo Santos, your line is open.

Good evening. Thank you for taking my questions. My first question is about profitability excluding credit. Pedro, you mentioned that gross margins are improving, but how do you assess the business without considering credit? Should we expect profitability in that area to improve as well? What gains have you seen in that regard? My second question is about the significance of credit in generating GMV today. Could you provide an approximate idea of the penetration per country or on a consolidated level regarding how much of your marketplace sales are conducted through credit? Thank you.

Hi Marcelo, let me address the second part of your question. The relevance of credit generation tends to differ from country to country. In some areas, it ranges from mid-single digits to very low double digits.

Thank you. Our next question comes from the line of Kaio Prato of UBS. Kaio Prato, your line is open.

Hello, everyone. Thank you for the opportunity to ask a question. I have two questions on my side, please, and also related to Mercado Credit Solutions. The first one is regarding asset quality. So we saw that your 90 days coverage ratio actually decreased quarter-over-quarter. So just wondering if this concerns you at some point and could trigger a further increase in provisions going forward? And what is the level of coverage that you think would be a comfortable level without your growth level? And then I will follow up with my second question, please.

The question was about the slight decrease in the coverage ratio from quarter to quarter. This is due to our provisioning practices on originations, which have slowed down a bit compared to previous periods. We are still originating credit, and as a result, provisions have also decreased slightly. However, the coverage ratio remains well above 100%. In terms of our credit business, throughout this year, we have actively expanded into riskier segments. We have managed to do this by appropriately adjusting our charges for these retail segments, which are at higher rates. Consequently, our margin has either been maintained or has increased, and the contribution from Credito has risen quarter over quarter. Nevertheless, given the current market deterioration, we are beginning to adopt a more cautious approach, especially in segments where we previously took more risks with Credito.

Okay. Perfect. Thank you very much. And the second question is related to the credit card business in Brazil. Just if you could provide any details, I don't know, the level of NPLs for this product and how this or at least how this compared to the overall industry in Brazil, especially the digital banks. And you also mentioned that this project is not positive yet in terms of margins. So, if you could mention when do you expect this product to become profitable? And last but not the least, how comfortable you are nowadays in terms of increasing the pace of origination in this product? Thank you.

Okay. So you'll get some additional product disclosures on loan performance in the Q tomorrow. I think with a credit card product that is basically less than a year old, comparisons are not going to be very useful. I think the way you build out a solid and profitable credit card business is over multiple years, which has been the case of many of the neo banks. So this is very early for us. We continue to see, I think, a product that will be very critical for our long-term strategy and that we're continuing to invest behind. Obviously, once we've distributed cards to the strongest and users we had, the deepest relationships with in the earlier quarters, we're now slowing down the rate of new cards, but it's still growing. And we're seeing improving profitability as those earlier cohorts begin to clean up and perform better and better. So, it's early. I think we're going at the right pace, making sure that we have the right underwriting capacity. And long term, this is still a critical product for us within our fintech ecosystem.

Okay. Good. Thank you very much.

Thank you. Our next question comes from the line of Bob Ford of Bank of America. Bob Ford, please go ahead.

Thank you very much and hi Lissa, Pedro, Osvaldo congratulations on the quarter and thanks for taking my question. I'll ask them really quickly. What was behind the strong unique buyer growth rates in the quarter in Brazil, Argentina, and Mexico, given the regional deceleration in e-commerce? We found them very noteworthy. And then can you also discuss the move into used car loans with credit card in Mexico? And maybe more broadly, the transition from a transaction or I should say, an insertion-based model into a transaction-based model across classifieds? And then lastly, how does your deal with Western Union changed your strategy in remittances and maybe the functionality roadmap you're building out for Pago in Mexico? Thank you.

So Bob, I think, again, when we look at the consumer backdrop, when we look at the general, I think, e-commerce market data, and we look at our Q2 numbers, what we're seeing is the return on the investments that we've been carrying out over years in user experience, logistics, and payments, and credit. I think a unique buyer metric is a consequence of that. I think consumers, when they begin to get tighter in their wallets, will probably focus more and more of their spend on places where they can find selection, value, and convenience, and we seem to be gaining a growing number of that user preference and choice throughout Latin America when you look at market share. So I don't think I have any specific call out. Marketing and customer acquisition has continued to scale actually as a percentage of revenue. So this is not an uptick in investment; this is simply a consequence of everything we've done over the past multiple years in driving the best user experience possible. The Credito’s experience in Mexico, I think, is a small pilot with a company that we think does a great job in that space. And I think in similar deals that we have with financial institutions in Brazil. It continues to inform our understanding of that space and is potentially a space that eventually Mercado Credito could look to expand with a combination not just of these partnerships but also building a product for securitized lending, which is an interesting space throughout Latin America. In terms of the transition to a more transaction-based model within Classifieds. I think we're still working on that. We see the potential of that space. We see that it's a high-traffic category within MELI. So one that we should be able to cross-sell very efficiently. But I don't think we have defined or have really figured out how we move into the transactional model. Some of our previous intents around reservations and whatnot, I don't think have been the right solution. So, in typical MELI fashion, we will continue to iterate and think through the business model until eventually we find something that sticks and we can see a reacceleration in Classifieds. Remittances is a market that we've always identified as a large market. We think allowing remitters in the U.S. to be able to send remittances direct into a Mercado Pago wallet which generates all sorts of use cases for the receiver. They can purchase. They can then use their debit card. They can pay utility bills, they can use in-store QR, is an interesting solution rather than driving that consumer to have to go to a Western Union Kiosk and extract cash. It drives further financial inclusion. So it’s a win for Mercado Pago and it’s a potential added service for our partners. We're pleased to have partnered with Western Union, but you will see other partnerships in this space as we look to grow our pie of the very, very large remittance business.

Excellent. Very helpful. Thanks.

Thank you. Our next question comes from the line of Joao Soares of Citi. Joao Soares, your lines is open.

Thanks for taking my questions, Just a quick one on my side. I just wanted to Pedro, if you could talk a little bit more about the 1P if I'm not mistaken, we saw a slightly lower contribution sequentially when we look into the first quarter and now into this quarter, it seems, I don’t know, it seems like if you could talk, maybe if there is any change here in the 1P strategy and talk about any changes or how you're seeing your relationship with consumer electronics, home appliances suppliers? I think would be interesting. Thanks so much.

When you mention contribution, I believe you're referring to the proportion of total GMV from our first-party business, which has indeed slowed somewhat. Overall, our first-party business is still operating at a loss at the EBIT level. In the current market environment, as we aim to tighten our operations and enhance our efficiency regarding margin and cash generation, this business remains crucial for our long-term strategy. However, we will be growing it at a slower pace given the current circumstances, with a stronger emphasis on improving product margins and EBIT contributions across the various first-party categories. Once we achieve breakeven or positive margins, we can reinvigorate growth in this area. We're optimistic about the direction of our first-party business; we see it as strategically important in the long run. However, due to the current market conditions, we believe it’s prudent to take a more measured approach to growth while we improve our operational efficiencies and work towards reaching EBIT breakeven or even profitability before we pursue aggressive growth again.

Understood. Thanks Pedro.

Thank you. Our next question comes from Marvin Fong of BTIG. Marvin Fong, your line is open.

Yes, good evening. Thank you for taking my questions. And I wanted to reiterate that I appreciate all the additional disclosure that you have made. Two questions, if I could, on the FinTech side. So the first question, just looking at your disclosure about the average exposure per user, so for example, $1,400 for online merchant, $150 for consumer, should we think about these levels in the four categories you disclosed? Is that being about where you expect them to stay, or is there room for these average balances to grow over time in any other categories you're talking about? Just trying to understand what the opportunity for growth there is on a per user basis? And then my second question on the IMO, the percentage, you mentioned in the shareholder letter averages around 30% historically. So should we view that as perhaps a level that you would consider to be the normalized margin? And in that case, if you're earning above 30%, like you did this last quarter, that you might see opportunity to get more aggressive with your loan growth versus slowing it down when that percentage is lower? Thank you.

With respect to our user exposure, it largely hinges on several factors, the most significant being the pace at which we grow our new profits. Generally, when we onboard new users or borrowers, they start with lower credit limits, and as these customer groups develop and we gain confidence in them, we increase those limits. We anticipate that older cohorts will continue to be funded, particularly focusing on consumer growth since we tend to start with conservative lending limits. Conversely, while we establish new cohorts and grow rapidly, the composition of these new clients will reflect lower initial limits. FinTech will be the primary driver of interest margin after losses, which, as you may have noticed from our recent disclosures, have shown volatility due to new products, segments, and market entries. We are still in the initial phase of our credit business and will persist in launching new products and expanding into diverse user segments, prioritizing our confidence in the quality of our underwriting models. I wouldn't characterize this situation as a steady state. The key reason we find it vital to provide this information is that merely examining non-performing loans without considering pricing and spreads offers an incomplete view of our credit operations. Historical data from previous quarters demonstrates that our margins are healthy. Assuming a funding cost close to the market rate, one of MercadoLibre's significant advantages is our low cost to serve and acquire users since many are already familiar with MercadoLibre or Mercado Pago, with whom we have established relationships. This credit business remains highly profitable for us; despite a rise in non-performing loans—which is partly a mathematical reality—we have effectively priced risk, leading to healthy margins that have shown improvement in the second quarter compared to the two previous quarters. This gives us strong confidence in our credit business, which not only acts as a critical catalyst for increased sales and better working capital for our merchants but has also been successfully managed in terms of underwriting and pricing.

Yes. I definitely agree based on the results. Thanks so much, Pedro and Osvaldo.

Thank you. Our next question comes from the line of Geoffrey Elliott of Autonomous. Geoffrey Elliott, your line is open.

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We'll go to the next question, it comes from the line of Neha Agarwala of HSBC. Your line is open.

Hi, I hope you can hear me now?

We can hear you now.

Perfect. Thank you for taking my question. I have three questions. First, a quick clarification on the Creditas comment in Mexico. Did you say that you were looking to do securitized credit on your own balance sheet in the future, or would you stick to the partnership model?

I think we are open to having a combination of both things, but we'll have to wait and see.

Okay, my second question is about funding costs. Can you explain how you finance your credit and prepayment business? How has the mix of keeping it on your balance sheet versus using third-party funding changed, and what do you anticipate for the future? Lastly, regarding asset quality, what adjustments have you made in the credit business recently? Specifically, I'm interested in any changes to ticket sizes or approval rates to prepare for a possible decline in the asset quality cycle. Thank you.

Great. So let me start with funding. The funding is done through multiple funding windows, and we believe that for the long-term health of the business, having availability to multiple funding sources is the correct structure, and then we can vary between funding structures based on cost and depth of each different funding pool at different times. So today, some of that is done through equity with a very attractive ROE. Some of that is done through SPVs or FIDCs specifically in Brazil, with some of our financial partners, Goldman Sachs and Citi being two of the largest. And then increasingly in Brazil, we have what would resemble retail funding, although we are not a bank, which is the issuance of certificates of deposit, which is also one of our sources of funding. In terms of the evolution over time, what you've seen is, increasingly over time, a mix shift towards third-party funding as the business grows. And as the amount of equity that we're willing to commit to that, I think, has decreased. We're confident that going forward, the combination of these third-party funding sources, plus incremental equity that we are willing to invest in the business, given the ROE, can fund the growth in the credit business for the foreseeable future. Regarding asset quality, over the past year, we have aggressively expanded our credit portfolio with a focus on profitability rather than just growth. We have targeted riskier consumers and merchants and adjusted our pricing accordingly. As a result, even while taking on more risk, we have maintained our margins and achieved profitable growth. However, as the credit environment has become more cautious, we too are adopting a more careful approach. We are now concentrating on consumers we consider more creditworthy and being more selective about offers to riskier segments. We initiated this strategy early in the third quarter for the consumer business and have already begun implementing it in the credit card business in the second quarter.

Our next question comes from the line of Geoffrey Elliott of Autonomous. Geoffrey Elliott, your line is open.

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We'll go to our final question in queue, which comes from the line of Sean Dunlop of Morningstar. Sean Dunlop, your line is open.

Yes. Thanks for the question. Just a couple of quick ones on the commerce business. It looked like the third-party take rate declined a little bit year-over-year. I'm just sort of wondering what drove that, particularly given that the ads business is growing. Is that going to be category mix or higher shipping incentives, maybe higher-priced product that might see order fixed fees? It looks like that said the seller final value fees in the flat fee component. So, I’ve got one quick follow-up.

It's down very slightly, about 30 basis points, mainly due to increases in interest rates that compress some of the take rate on zero installment financing listing types and also due to differing growth rates, particularly in Brazil, which has lower growth compared to other markets and holds the highest take rate. These two factors contribute to the 30 basis point compression. However, year-over-year, it's actually up by 10 basis points. Overall, I would say we have maintained a solid level of monetization around 16.5% to 17%.

Got it. That's helpful. Yes, I was looking specifically at that third-party business. But diving a little bit to first party, what's the long-term appetite for that? Obviously, a little bit slower here in the near-term, but is that still double-digit percentage of GMV in the long run?

Yes, first-party offerings clearly have a role to play. To simplify the strategic thought, there are certain subcategories in our extensive selection where the market structure of third-party sellers may not be the most efficient. This could be due to a limited number of suppliers or a lack of competitive pricing for third-party merchants, which is when we step in with first-party offerings. It's reasonable to say that our long-term goal for the percentage of overall mix exceeds single digits. The exact figure will depend largely on our execution capability and the evolution of our third-party business. In areas where the market is highly efficient and there's less need for our intervention, we will continue to focus on third-party. However, in cases where we can enhance consumer service by introducing a first-party option, we will do so. We will need to keep an eye on this over time, but it should continue to grow.

Great. Thanks so much.

Thank you. At this time, I'd like to turn the call back over to Pedro Arnt for closing remarks. Sir?

Great. Thank you. So, really pleased with the quarterly results. I think we are delivering on a combination of growth above market with market share gains improving profitability. One thing that hasn't been mentioned is also improvements in our cash conversion cycle, in our cash from operations and the increase in liquid assets that we have on our balance sheet. So, great quarter. I think the team has done phenomenal work, and we look forward to updating you after Q3. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.