Good day, and thank you for standing by. Welcome to the MercadoLibre Earnings Conference Call. At this time, all participants are in a listen-only mode. Due to some technical issues, we will begin this call with the Q&A segment. After the Q&A, we will have the video available to play on this call. Thank you for your understanding. We will now begin the question-and-answer session. Our first question comes from Andrew Ruben from Morgan Stanley. Your line is now open.

Hey, great. Thanks very much for the question. I'm interested in the commerce take rate. It was a strong quarter; we see the increase of about 50 basis points for the seller final value fees and about 60 basis points on the shipping fees. I'm curious if you could dig in a bit further on both of those items. Was there any change in your pricing policy? Was it mix, anything maybe on the contra revenue line? Just trying to understand what drove the take rate expansion would be helpful. Thank you.

Can you hear me now? Sorry. So we were just encouraging everyone to please take a look at the video after we're done with Q&A. And apologize for the technical difficulty. Andrew, it’s a little bit of the three things you mentioned. We have begun or continued to selectively change shipping prices on select routes and zones in different markets. So the net revenue from shipping has improved as a consequence of those pricing actions. Mix has been a driver of improving final value fees, as there’s been some mix shift towards higher take rate categories. Typically, at the beginning of the year in the first quarter, we also carry out selective pricing on seller fees across different geographies in the marketplace.

Great, and as a quick follow-up, you mentioned the pricing on select routes and zones in different markets. Is that more the core logistics fees or any change in how you've implemented some of the tests for fulfillment and warehousing specifically? Thanks again.

Yeah, no. So this is driven more by passing on cost increases to transportation costs within our network and less related to us beginning to ramp up the monetization on fulfillment. If anything, as I always said, the first sequential priority on fulfillment is to continue to drive incremental usage of the fulfillment service. We've seen some really solid pickup of fulfillment adoption throughout the first quarter, primarily in Brazil, exiting on a high note in terms of a historical high for Brazilian fulfillment penetration. We continue to accomplish that first sequential goal. The ramp-up in monetization, we always said is probably the second one sequentially, once we've reached more Mexico-like levels of fulfillment in the other markets. So the monetization improvements on logistics are not driven by incremental monetization on fulfillment services, but much more by price increases on transportation costs.

Great, it's very clear. Thank you.

Thank you. One moment while we prepare the next question. Our next question comes from Irma Sgarz from Goldman Sachs. Your line is now open.

Hi, thanks for taking my question. The continued rise in your product and technology development expenses leaves relatively little doubt about your commitment to invest beyond innovation. My question is, other than adtech, are there any other specific new areas to which you're incrementally deploying more tech spend in 2023? And then the second part to this question is related. I imagine you already use AI and machine learning across a number of products and functionalities. But with the advances on these technologies over the last six months or so, are there any new areas of application and opportunities that you're particularly excited about? Will they require either through the OpEx or the CapEx line, greater investment cycle into the future? Thank you.

Hi, Irma. So on product development, a couple of important clarifications: yes, it continues to be the most significant line in terms of deleveraging. I think on super solid top line, when we look at margin expansion, we've been able to generate incremental margin across most of our cost lines. The two that haven't on a year-on-year basis are certain sales taxes, primarily in Brazil, and then 220 basis points from product development. Bear in mind that the rate of incremental hiring has come down from about 4,000 engineers to 2,000. A significant portion of those 220 basis points are a consequence of the annualization of all the engineers that we hired last year and not a continued acceleration in the rate of engineer hirings. So for next year, we should begin to see a slowdown in the level of deleveraging from product development, unless we significantly ramp up hirings again, which is currently not in our plans. In terms of areas of investment, it really is across the board. We see our product and our technology as a competitive advantage. Those engineers are really split across the multiple different products and services that we are either building out or improving constantly. So they're fairly evenly distributed among the existing businesses you're well aware of. Regarding AI, I think as most companies, we do see some very relevant short- to midterm positive impact in terms of engineering productivity. We are also increasing the amount of work being done on what elements of the consumer-facing experiences we can deploy AI on. The focus right now is on some of the more obvious use cases, improving and streamlining customer service and interactions with representatives, improving workflows for representatives through AI-assisted workflow tools, and then deploying AI to help find better products on our website and better understanding specifications of products where existing LLMs are quite efficient.

Great, thanks very much.

Thank you. Please stand by while we prepare the next question. Our next question comes from Marcelo Santos from JPMorgan. Your line is now open.

Hi, good evening. Thanks for taking my question. I wanted to ask about the improved logistic economics you mentioned in the release. Is this mostly because of pricing that you pass on, or are you experiencing also benefits of scale or more efficiency like cost-based improved economics? Thank you.

Yeah, so it's not just driven by price increases. We continue to see improvements in terms of productivity across different portions of our network. So it's a combination of pricing and scale benefits.

Perfect. Thank you.

Thank you. One moment, please while we prepare our next question. Our next question comes from Thiago Macruz from Itau BBA. Your line is now open.

Thanks guys. Thank you for taking my question. And congrats on a great quarter. You've mentioned that the warranty operation has reached a turning point in this Q1. Can you shed some light on the main differences that you're seeing in the economics of the business today? Also, you're generating plenty of cash. Would it make sense to invest that more and accelerate the consolidation of the market, chiefly in Brazil, where we now see a somewhat softer competitive environment? Thanks, guys.

Great. As we signaled over the past few quarters, we have slowed down the first-party business, in large part because we had grown it initially very fast. There was a significant amount of internal operations that we wanted to fix, which would allow us to reaccelerate that business with a healthy margin structure and much better internal operations. What you're beginning to see now are the initial phases of that turnaround. We feel a lot more confident in how that business is being run; we are beginning to see margin improvements across different product lines in 1P, hence you're seeing some of the acceleration. If we continue to see these positive trends going forward, you should continue to see the 1P business accelerating growth, which should provide some interesting benefits across the categories where 1P can be an important competitive factor. Regarding your point about investing aggressively to consolidate market share, if you look at our 1P results and certain items like marketing spend and couponing efforts, we've invested behind the logistics network. We leaned into the market, especially in Brazil, where there is more market share to capture in the short term. The return on those investments was a very strong acceleration in top-line, which has actually contributed positively at a dollar perspective. We believe we are investing more aggressively to strengthen our leadership position, and we see that reflected in market share numbers. Investment at an even higher level probably gets us into areas where the return on those incremental investments don't make as much sense in the long term. We continue to manage the P&L aggressively, striving mainly for market share gains and above-market growth, while also wanting that incremental market share to come in a profitable manner.

Makes sense. Thank you very much.

Thank you. One moment, please while we compile the next question. Our next question comes from Pedro Pinto from BBI. Your line is now open.

Thank you, everybody, for taking the question. I would like to hear from you about the addition of e-commerce across regions. As long as market share gains in Mexico and Brazil seem to be in good shape. Do you think it's time to increase focus in other regions such as Chile? So basically, I would like to know what is your view on timing and deliverables.

Great question. We continue to see a very attractive mid-term opportunity in the Andean markets, particularly Chile, Colombia, and Peru. Chile has some very tough comps based on macro issues. In previous years, significant funds were put into consumer pockets that led to increased consumption. Thus, the rate of acceleration in Chile has significantly declined and turned negative over the last few quarters. However, we are beginning to see improvements now. GMV growth was already slightly positive this quarter, and revenue growth rebounded much more positively than in previous quarters. We are confident that Chile should continue on this upward trend. Not too long ago, Chile was one of our fastest-growing markets throughout the pandemic. Once the comp issues are behind us, we see a lot of potential in that market. Peru is still relatively small for us, but we are increasing our customer acquisition and marketing spend there this year. We hope to see enough returns on that investment to warrant continuing to ramp up our efforts in Peru. Colombia, however, remains the most challenging market for us. That is generally true for all of e-commerce, but we still see it as an attractive market. We still need to improve our execution and product rollouts to achieve better results there.

Okay. Thank you.

Just one moment while we compile the next question. Our next question comes from Geoffrey Elliott from Autonomous. Your line is now open.

Hello, thanks for taking the question. I wanted to ask one on the credit side. It looks like the IMAL is down quite a bit sequentially. I know in the slides, you mentioned an element of seasonality around bad debt. But if we look at the bad debt provisions, they're a bit higher than Q4 but quite a bit lower than Q2 and Q3 when the IMAL was higher. Can you help us understand a bit better what's going on there? Is it a mix shift, a pricing change? Is it about funding costs? What's driven that down? And how should we think about it going forward? Thank you.

Hi, Geoffrey. Yes, IMAL is down from what I think was an exceptionally high quarter, still at 39% for the quarter. I think it came down for a combination of things: on the one hand, we had slightly lower revenue in the fourth quarter, which typically features a higher participation of merchant credits and usually comes down in the first quarter. Also, in the first quarter, we increased the issuing of credit cards, which results in initially booking the losses, but most of the volume doesn't generate revenue because it gets paid in full. That brings down a little bit of IMAL also, as you book the losses initially, that increases the bad debt. Finally, as the portfolio rose in the quarter, it's the third factor that impacts the change in the portfolio affecting IMAL. That's why it came down. We're still comfortable with the 39% volume.

And you mentioned accelerating in credit cards. What have you seen that gives you confidence to do that? How much more potential is there to continue to ramp up growth in costs?

We felt confident; we're always looking at cohorts and flow rates. We felt comfortable that towards the second half of the first quarter, we were willing to issue more cards. So we issued significantly more cards in the first quarter than we did in the fourth quarter of last year. We'll see how conditions remain, but so far, we are comfortable with the rollout that we're seeing and with the latest segment of cards we have issued.

Great, thanks very much.

Thank you. Jamie Friedman from Susquehanna International Group. Your line is now open.

Great, thanks for taking questions. Great. Pedro, first question, as penetration gains were a little bit lower than we expected. I understand there is some lumpiness to it. But can you talk about the product roadmap in 2023 and kind of the efforts to accelerate that penetration? And then second question, can you talk about the drivers of the credit book growth, particularly on the consumer side? What signals are you seeing in the market that enable growing the book? Is there a level for IMAL merchants that we can expect you to hold as you sort of lean in and grow the book again? Thanks so much.

Great. So on advertising, the business continues to grow very nicely. It grew at 62% year-on-year, which is very much in line with the growth rate over the past three quarters. This is dollar growth, so momentum is still quite strong. GMV did accelerate this quarter versus the prior quarter, making it a tougher comp for the ad business considering that we're dividing revenue by GMV on the penetration metric. If GMV growth had been similar to prior quarters, we would have had a 10 basis point increase Q-on-Q in advertising penetration or something along those lines. Also bear in mind, Q1 is typically less of a season for advertisers to invest as aggressively as in Q4, so the rollover on a sequential basis from Q4 to Q1 is not necessarily one where we should see significant penetration gains. Finally, much of the technology being launched over the last few quarters may take some time before it gets fully adopted by advertisers. We expect to see increases in penetration in the coming quarters since we'd like to see advertising revenues outpacing GMV growth. Lastly, if you look at year-on-year penetration gains to strip out seasonality, those continue to be quite encouraging.

Deepak, regarding credit, we feel comfortable increasing origination primarily in Argentina and Mexico, mostly in that order and to a lower degree in Brazil. We continue to control groups and see if those are profitable, and we thought there was profitability to be willing to take more risk and expand the number of consumers we're reaching out to in Mexico and Argentina. In the case of Brazil, the increase in origination was mostly in the credit card business towards the second half of the quarter. Regarding merchant credits, it has remained stable from the quarter.

Look, Deepak, I think there is a growing number of credit products out there that could affect credit. So we're not giving any directionality on where we think the interest margin after losses might trend. We'll report those back to you on a quarter-to-quarter basis. We’re beginning to see an improvement in credit conditions that might encourage us to start opening the spigot again in originations. We could see additional lower margin segments that, when risk-adjusted, are actually very attractive to move into and will generate incremental dollars from credit, although they may not be incremental in terms of IMAL. We'll keep you updated as this develops. The books are still very young, and we might see volatility in margin structures due to segment and product mix shifts going forward.

Thanks so much, Pedro.

Thank you. One moment while we prepare the next question. Our next question comes from Stephen Ju from Credit Suisse. Your line is now open.

Thank you, Pedro. The Argentina unit growth has reverted back positive, but it’s still a little bit unusual to see that number in the single digits. We can’t grow high double digits forever, but can we talk about what you may be seeing from a cyclical or secular perspective that might be moving that growth around? Secondly, you've probably seen one of the mobile operating system owners release a savings account product, which I think was able to gather a pretty large sum of deposits immediately upon release. You're already well on your way with the credit products, but does this event create greater urgency for you in the asset management product development? Thanks.

Stephen, thanks. Regarding Argentina, I attribute the weakness in that business primarily to very volatile macro conditions. You're correct; I think this is a business that we've traditionally seen perform well even in weaker macros, which is typically the case for MELI. Over the past few quarters, currency restrictions have made it difficult to import goods. There’s nothing structural behind it; Argentina still has a level of e-commerce penetration of retail that is lower than Brazil, for example. It’s a market where we have probably the strongest market share and it’s far from saturation, thus should be an attractive market for us mid- to long-term. We just have to navigate through the short-term volatility. Also, because structurally, it's a less competitive market, we’re focusing more on profitability than growth. If you look at the bottom-line results from Argentina, those are still extremely strong.

Regarding the virtual account that offers a return, it's very similar to what we've offered for the last four or five years in our top three markets. What's happened recently with interest rates going up is there’s clearly an incentive for money to flow out of savings accounts from banks, which usually pay close to zero, into money market accounts. Our accounts have instant availability and varying returns based on local interest rates, for instance, in Brazil, that’s about 13%, in Argentina around 69% because of the incredibly high rates, and in Mexico, it’s around 6%. We've observed a substantial increase in assets under management, which is growing over 100% year-over-year, and we believe this flow is likely to continue. This is a product with huge opportunity as banks keep paying close to zero on accounts in most of Latin America.

Thank you.

Thank you. One moment while we prepare the next question. Our next question comes from Neha Agarwala from HSBC. Your line is now open.

Hi, thank you for taking my question. I gathered that you are more open to accelerating gradually the pace of 1P. What impact should we see coming from that in terms of margin costs take rate? Anything that you can express about that would be very helpful. The impact of the 1P acceleration. My second question is on the credit business. There’s been a bit of acceleration in terms of credit origination. I understand it's mostly from Mexico and Argentina. But should we see continued acceleration in the coming quarters as things stabilize in Brazil? Or would you still remain resilient and kind of maintain originations and grow selectively for the rest of the year? Thank you so much.

On 1P, the 1P business has been improving its margin structure across most categories but continues to have a lower margin than the rest of our businesses. To be precise, it remains negative in terms of EBIT margin. Growth in the 1P business should strengthen categories where we under-index and improve selection for our consumers, which is a long-term positive. It will help us gain scale within 1P purchasing and logistics, which should continue improving margins in 1P until eventually turning positive, but short-term, it is detrimental to margins. Regarding take rates, it’s the opposite; we book the full revenue base, and so it accelerates revenue and improves take rates. Overall, it’s a critical move for long-term success in specific categories.

In terms of credit originations, our credit models sort users based on risk, and we are quite calibrated about that. Whenever we see good results in a given cohort, we are willing to proceed to the next one. We maintain control groups whenever wanting to start giving loans to segments where we previously did not grant loans. When we see profitability in that group, we expand that segment. This has occurred with Argentina and Mexico, but not yet with Brazil. Once we observe improved profitability in those control groups, we will be more willing to accelerate originations in Brazil.

Understood. Thank you very much.

Thank you. One moment while we prepare for our last question. Our last question comes from Robert Ford from Bank of America. Your line is now open.

Thank you. Congratulations on the quarter. Pedro, can you discuss trends in terms of items per box coming from the distribution centers across your various markets? And as you enable the drop-off returns in your places or agencies, how is that driving new category trial and GMV growth versus areas without those return services? Thank you.

Bob, items per order has had a very gradual upward trend as fulfillment penetration continues to grow and as we improve inventory co-location, but the numbers have not been significant or material. It's been a slight gradient increase. As we continue to grow fulfillment penetration—we exited Q1 on a record high for Brazil—we hope to drive that number up further. We will innovate significantly on network design, offering options for consumers at checkout that will allow them to bundle purchases into single deliveries or greater numbers of delivery slots. This should help drive up items per order, lower costs, and enable us to offer some of those cost savings back to consumers who select that slower shipping option. Regarding greater category trial as a consequence of improved return options, I don’t have the data at the moment to confidently answer that. However, we do see an enhanced return experience and increased return rates, positively impacting our Net Promoter Score (NPS).

No worries. Thanks again and congratulations on the quarter.

Thank you. One moment while we prepare our next question. Our next question comes from Trevor Young from Barclays. Your line is now open.

Okay. Great. Just first one, dovetailing on that last one, innovating on the network design and so forth. It looks like CapEx is down Q-on-Q and it's below trend in recent quarters. Was there anything related to timing there? Should we expect that to rebound later in the year as you may make some of those investments in innovating on the network design? And second question on market share gains in Brazil; did those come from specific categories where competitors are conceding share, or was it more broad-based than that?

Yes, the CapEx improvements do include an element of phasing—certain logistics investments that we initially planned for the first quarter have been pushed back into the second, third, and fourth quarters. Our CapEx trajectory will also be somewhat volatile as new warehouses and nodes are established in different markets at different times based on the logistics network rollout across our various geographies. But specifically, Q1 included elements of phasing, and shipping-related CapEx came in quite low, below $50 million for the quarter. Regarding market share gains, they have been consistently across multiple categories. Our share gains are partly beneficial from the specific change in market structure and the relative balance sheet struggles of certain market participants. Much of the shift is coming from competitors; however, it is fairly well distributed across all categories. When reviewing market share on a category-by-category basis, we’ve seen ourselves as market share gainers across most categories.

That's very helpful. Thanks.

Thank you. One moment for our last question. Our last question comes from Jamie Friedman from Susquehanna International Group. Your line is now open.

Hi. Thank you for stepping back in. Pedro, Oswaldo, I wanted to ask in terms of the IMAL progression. I know you called out the typical Q4 to Q1 seasonality. Can you remind us how to think about IMAL? I know you don’t provide guidance, but what is your outlook for IMAL’s typical seasonality in Q2?

Jamie, I’d say that, probably there’s more seasonality in the fourth quarter since we typically grant more loans to merchants during that time. There’s not much specific seasonality quarter-to-quarter. It’s likely more related to portfolio changes in the segments of each market, along with how delinquencies evolve.

Okay. And then if I could just ask a high-level question about the regulatory environment, especially in Brazil, particularly regarding credit and Mercado Pago. How would you describe it? Is it benign? Is the coast clear? Historically, the government has been supportive of incubating Fintechs. Has that changed? Or how would you characterize the regulatory environment in Brazil relative to Fintech overall?

In general, Brazil has been the country where the Central Bank and the government have been the most pro-competition. They encourage both banks and fintechs to compete on an equal footing. Most regulations we’ve seen have revolved around that. PIX has probably been the most successful example, though there are recent measures like the caps on interchange fees for prepaid cards. I’d say the environment has remained pro-consumer and pro-competition. They have been very pragmatic and practical whenever we’ve pointed out that certain proposals were not practical.

Okay, perfect. Thank you for the insights.

Thank you. As I mentioned, that was our last question as we prepare to play a video, which you can access on the company IR website. I would now like to turn it back to Pedro Arnt, MercadoLibre's Chief Financial Officer, for closing remarks.

Thank you, everyone. We had an incredibly strong start to the year, top line ahead of our expectations, and very strong margin evolution. We're very pleased with how the business has gotten off to an excellent start this year. We will continue to invest throughout the remaining quarters to gain customer preference and expand market share if we execute well. We hope to see the kind of response from our users and consumers from all the hard work happening here at MELI as we did in the first quarter. I apologize for the technical difficulty with the video; however, we encourage you to take a look at it. It contains some interesting product detail on the advertising product that has been at the center of many of the questions regarding how we're improving the stack. It should be up and available for you to review, and we look forward to speaking with you again when we report the next quarter.