Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended March 31, 2024. Thank you for joining us. I'm Richard Cathcart, MercadoLibre's Investor Relations Officer. Today, we will share our quarterly highlights on video, after which we will begin our live Q&A session with our management team. Before we go on to discuss our results for the first quarter of 2024, I remind you that management may make or refer to and this present may contain forward-looking statements and non-GAAP measures. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our Investor Relations website. With that, let's begin with a summary of our results.

Hello, everyone. I'm pleased to report another quarter of solid results with excellent operational and financial performance in Brazil and Mexico. Both countries posted GMV growth of approximately 30% year-on-year as we carried over strong momentum from Q4. This above-market growth is being driven by several factors, including the improvement of user experience we minimized as a highlight, our strategic investment in chip infrastructure, which is driving faster growth in specific target regions, and a well-executed marketing campaign leveraging the awareness we generated in Q4 around peak season. Additionally, our advertising business continues to grow nicely and reached regular levels of GMV penetration in all of the markets where we operate. Mercado Pago also performed solidly in Mexico and Brazil, with highlights including the acquiring business growing at an accelerated rate sequentially in both countries. Our credit growth portfolio surpassed $4.4 million and grew strongly from last year, and we had a strong quarter for Mercado Pago credit cards, issuing 1.5 million cards during this quarter. The TPV reached $1.9 billion, growing 133% from last year. In summary, in Q1, we delivered a strong operational performance in commerce and fintech, both in Brazil and Mexico, which offset the negative impact of a weak macro in Argentina and the peso devaluation in the country. Before turning to our financial performance in more detail, I'd like to highlight a couple of reporting updates that have taken effect in this quarter. Investors can find a summary of the impacts on our financials in this quarter's shareholders' letter and a full reconciliation in our earnings presentation. My comments today will refer to the numbers that are comparable to the figures we reported in Q1 last year. Consolidated revenues grew at a fast pace on the back of the strong operational momentum that I mentioned earlier. Brazil and Mexico had an outstanding quarter, and revenue growth was sufficient to offset the impact of headwinds in Argentina. Income from operations grew strongly year-on-year, once again, with margin expansion driven by Mexico and Brazil. This reflects the combination of growth, scale, and cost efficiency that drives operational leverage, and our long-term ambition is to continue delivering both growth and profit, and we are confident in our ability to achieve that. Net income grew at a faster pace than income from operations, as lower FX losses in Argentina were partially offset by lower operational income in that country. Furthermore, the reporting updates I mentioned earlier have a broadly neutral impact on net income. Overall, we are very pleased with the performance of the business in Q1 despite the headwind from Argentina. And this is a great way to kick off MercadoLibre's 25th anniversary. Now I'll pass over to Richard for more on the solid foundations we have built over the past 25 years, looking ahead to the next 25 years of MercadoLibre.

In 2024, MercadoLibre will celebrate its 25th anniversary. And we look back on the progress we've made in merchandise, commerce, and financial services in Latin America. Today, Meli is the leading technology company in the region and a major tech company globally and is being recognized for its innovation, growth, and impact in the region. In addition to business growth and impact, MercadoLibre has a consistent track record of generating shareholder value since our IPO in 2007. We look forward to the next 25 years with great confidence and optimism as we still see plenty of opportunities to continue to grow and fulfill our mission in a region that provides us with a large addressable market. In Latin America, e-commerce is far from mature, and financial services are ripe for disruption. We are the leading e-commerce platform in the region, which has significant potential for growth from new buyers and higher frequency as engagement and penetration of retail rise. By building the fastest and most extensive delivery network in the region and by offering the widest assortment and the best user experience, we have become a natural destination for buyers and sellers. This drives a uniquely powerful and self-reinforcing network effect, as sellers invest to maximize their sales by capitalizing on our traffic, while buyers receive an ever-improving value proposition, which drives more traffic and growth. We're also building one of the largest retail media platforms in the region, which leverages our extensive first-party data to offer advertisers unique audience targeting capabilities and a complete full-funnel strategy. We are challenging the status quo in financial services by offering a wide array of easy-to-use services for individuals and merchants in large markets underserved by incumbents; we have become one of the region's leading fintechs. Our ecosystem is our competitive advantage in fintech services; its data is uniquely rich and enables us to cross-sell. It has also enabled us to have a better view of credit risk and operate a business, which matches the lowest cost to serve in the region. We have built a highly profitable acquiring business based on the technology and know-how developed for our marketplace. We are one of the largest fintechs in this market and are well-placed for market share gains across the region. We are also building Meli Más with the ambition of being the largest and most valued loyalty program in the region by leveraging our ecosystem to offer unique benefits. Technology is at the heart of everything we do. Having one of the largest teams of engineers in the region demonstrates nonstop innovation and product development. We have a diversified mix of revenue with ample opportunities for growth and monetization. Our scale, financial discipline, and tech growth mentality mean we have low-cost structures with solid and sustainable profitability. MercadoLibre's powerful intrinsic impact on the people we serve encourages entrepreneurship and promotes financial inclusion. We are proud of the achievements over the last 25 years, but our mission is far from complete. As a leader in an e-commerce market that is far from mature and one of the leaders in the financial services market that is ripe for disruption, we are confident and optimistic about our future growth. As we look forward to the next 25 years, we are confident that the best is yet to come.

Thank you. We will now begin the question-and-answer session. Joining us for the Q&A are Martin de Los Santos, CFO; Osvaldo Gimenez, FinTech President; and Ariel Szarfsztejn, Commerce President. Our first question comes from Andrew Ruben with Morgan Stanley.

Congratulations on the 25 years. It's helpful on the table you provide in the release that breaks down the peso-denominated and non-peso EBIT. Just thinking about the Argentina business, the units down 5%. It didn't strike us as a major decline, but you had a big hit on EBIT. So I was hoping you could walk us through the situation during the quarter where you had a mismatch between revenue and costs? And perhaps if you could, even how the business evolved on a month-over-month basis within given how fast moving the Argentina macro situation has been?

Andrew, this is Martin. Yes. As you know, in Argentina, two things happened. The devaluation of Argentina, which reduced the size of our business. And as you know, Argentina is a high-margin EBIT margin business operation. We faced a macro situation that obviously puts some pressure in terms of consumption. We've seen reduced volume and demand even though, as you know, we manage a marketplace that is very resilient to this type of situation. So I think we outperformed consumption in general in the country, but we did suffer some loss of volume in Argentina in the commerce side of the business. In terms of cost mismatch, I think we saw some inflation in our shipping cost in Argentina. There was some pressure on that line of our P&L. And to wrap up the situation in the country, on the fintech side, the business performed extremely well. We continue to have a very strong brand in Argentina, with assets under management growing 64% year-on-year. We doubled the number of users of our investment products, and the acquiring business in Argentina grew 300% more than inflation, with active users also growing at 31% year-on-year. So overall, I think that’s what you can see in terms of operating income. When you go below operating income, the exchange rate situation in Argentina has been normalizing, allowing us to see significantly lower FX losses. So that's compensated in the net income line of the P&L. Overall, I would say that Argentina was a headwind in terms of EBIT, partially compensated at the net income level because of the lower FX and lower taxes that we paid this quarter in Argentina. But obviously, we had an extraordinary quarter in Brazil and Mexico that I'm sure we'll delve into more detail later on the call.

Our next question comes from Bob Ford with Bank of America.

Happy anniversary, and congratulations on a great quarter. Can you quantify the impact of the Easter shift on the marketplace, as well as Pago in Brazil and Mexico? In Argentina, what percentage of GMV is generated by sellers with less than 10,000 per month? How would the proposed tax cuts affect those smaller sellers in terms of GMV? What needs to be addressed before you are willing to implement interoperability in Argentina regarding economics, security, or any other concerns?

Bob, it's Martin here. Let me take the first part. I think you were asking about the effect of Easter on our volume. As you know, we always see reduced volume on those days because typically in our countries, it's four consecutive holiday days. This quarter, in particular, was a little bit stronger because last year, Easter fell in Q2 and this year fell in Q1. So if you look at the numbers for March, they were affected by those four days. There was a little bit of loss of volume, which will eventually reverse next quarter because the opposite happens that will play in favor of April, probably. So that's in terms of the...

5% seems reasonable; is that how we should view it?

We analyzed the month-by-month numbers. In March, we likely experienced a decline of about 5 or 6 percentage points for that month. We will see what happens in April when we announce Q2.

Bob, let me answer the question about interoperability in Argentina. We established a successful QR code network in Argentina, and a few years ago, we started interoperation for account-to-account transactions, which has been functioning effectively. Now there's a requirement for us to also interoperate for credit card transactions, which represent a minor portion of our transactions in Argentina. The bulk of our transactions are account-to-account, while credit card transactions make up a small part of that volume. Since there wasn't a standard for credit card transactions when we set up the network, we currently handle those transactions as online payment transactions. To achieve interoperability, we must meet two conditions: first, the transactions need to be tokenized to ensure network security, and second, we have to reach an agreement on commercial terms with the counterparties, likely involving banks and other wallets. We are engaged in that process. On our end, we can handle tokenized transactions, but we have not yet received them. In the meantime, we are in discussions with the banks regarding potential interchange fees or charges for the wallets involved in these interoperable transactions.

Bob, I think to answer your last question regarding Argentina, obviously, we are observing and analyzing the reform that's going on right now to see what the impact would be on our merchants. The number of merchants you’re referring to is a number that we don't disclose specifically.

Our next question comes from Marcelo Santos with JPMorgan.

I wanted to ask you about the profitability of Argentina. There was a very steep decline in the EBIT contribution of Argentina compared to what you reported last year. I just wanted to understand, is this a new ongoing level for Argentina, given this new currency reality? Or was there something more like a one-off in this quarter that could be reversed in the next couple of quarters? Because today, Argentina is showing almost the same profitability as the rest, while it used to be much more profitable. So I wanted to understand that.

Martin here, Marcelo. Thank you for your question. I think we mentioned before, Argentina faced some tough macro situations. The devaluation also didn't help because when you look at the revenue from Argentina, it was diminished due to the devaluation, which was stronger relative to other countries. There were tough macro and demand issues that affected, particularly the commerce side of the business. Brazil and Mexico grew extraordinarily high. Just to put it into perspective, the EBIT of Argentina decreased year-on-year, as you mentioned, but the EBIT outside of Argentina grew by 185 percentage points. So almost double the EBIT coming from other countries. As a result, the share of EBIT coming from Argentina now is at 19% compared to a year ago, where it was about 60%. The devaluation is behind us, and we see macro effects in Q1; we will have to see how the rest of the year plays out. But again, we think that in terms of EBIT contribution, it is a new normal. With the exchange rate being higher than it used to be due to devaluation, it is more normalized because of lower FX losses, but on a net income level, the variance is not so high. I will focus more on net income as the main metric to evaluate the results of MercadoLibre. As we have been saying in the past, we mentioned there was a bit of a distortion in EBIT because of FX in Argentina, which is now behind us. I think in terms of FX distortion, this is more normalized.

And your next question comes from Irma Sgarz with Goldman Sachs.

I'd like to ask about Meli Más and logistics. Thank you for the useful commentary in the shareholder letter. Now as you get further into the rollout of the Meli Más program, where are you in terms of logistics network efficiency gains from the uplift to overall volume and units per shipment? Are the costs from greater free shipping subsidies that you provide there now more than offsetted or will that take more time as you adjust the flow of the network and as overall engagement rises? I'd also be curious if there's any notable differences in take-up and engagement with that program between Brazil and Mexico.

Irma, Martin here. Yes, we have seen very good adoption of Meli Más, both in terms of adopting the MELI Delivery Day for users enrolled in the Meli Más program. We have also seen incremental engagement and volume on our platform. We are excited about these results. That said, the implementation increases a bit the cost of our shipping operations. We estimate that year-on-year, it does put some pressure on margin, adding 20 basis points as a percentage of GMV, but it’s more than compensated by the incremental value we generate through Meli Más. In terms of your first part regarding optimization, we think we are still at a very early stage of optimizing Meli Más. Remember, Meli Más comes with MELI Delivery Day, which is a day in the week that users choose to receive their products. As we continue to scale Meli Más, we will be able to lower the cost of shipping by optimizing how we group certain products and the way we manage the delivery costs of getting products to our users. So it’s early stages, but we are very optimistic and encouraged by the engagement and adoption results so far.

Yes, that's very exciting. May I also ask about the reacceleration in TPV growth in Brazil? You highlighted new devices and we know that you've been shifting up a market, but I was hoping to get more detail on the drivers of this acceleration and the direction of the incremental margin that comes attached to the revenues?

There were two components to the acceleration of TPV in Brazil. The most relevant one is online payment. We have been able to accelerate the growth of online payments in Brazil over the last several quarters now, mostly by adding larger merchants and increasing the share of wallet we do with them. There are several drivers for this, but we have definitely seen better performance and approval rates. We are encouraged by how we see these operations continuing. On the point-of-sale business, as we mentioned in prior calls, we have been changing our go-to-market strategy, and that is having a good effect, with that business growing at an accelerated rate on a quarter-on-quarter basis. So both mostly online payments, but also to some degree point-of-sale businesses are accelerating in Brazil.

Just to complement that, in terms of monetization, as we disclosed in the investor presentation, we continue to increase the cross-selling of credit to our acquiring users. So that continues to improve the profitability of that business.

Our next question comes from Geoffrey Elliott with Autonomous.

The change in Mercado Envios from agent to principal, the accounting impacts of that are all very clear. So thank you for that. But from a business point of view, what was the objective there? What does this mean in practice for the business side? And why did you make this change in terms of conditions?

Geoffrey, this is Ariel here. We see the process on the opposite. Over the last four or five years, we've been switching from operating purely with national post offices and carriers across Latin America into building our own logistics network. This process has already occurred. What we've done now is adjusted our terms and conditions, taking on the responsibility for execution, which is something we've been doing. There’s nothing new in terms of the way we operate. I think that process has happened already; we are just now adjusting contractually and formally to reflect the way we have been operating for quite some time.

Okay. So it sort of reflects you taking the risk rather than a national postal service taking the risk?

We already had the risk. So what we've been doing since we launched our own last mile operation in 2019, was taking over warehouse operations, our line costs, etc. So nothing new, no risk profile changes. Right now, it’s only formalizing something that has been happening already.

I would say that there's no change operationally. There's no incremental risk. This is just an accounting adjustment that we make. It reflects better the way the business is running.

Our next question comes from Neha Agarwala with HSBC.

Just quickly on the credit business. We saw a continued decline in the 90-day NPL, but there was an increase in early delinquency, which you mentioned is partly because of the shift in the mix of business cohorts. Could you please elaborate on that as to why the early delinquencies have increased? And what do you mean by a shift to riskier cohorts? Thank you so much.

There were two components to the increase in early delinquencies. On the one hand, as you mentioned, we have been taking more risk going to riskier segments. The reason we are doing that is because our models are better at forecasting and evaluating the risk of each user. Therefore, we are also pricing this accordingly. Even though there are higher NPLs, these credits have been priced with an adequate spread. So it's not a source of concern. The other factor is that the last week of March ended with four days that were either weekends or holidays. Therefore, collections were typically lower than usual, as during those last four days, there were invoices due that were passed over to the following month, resulting in a small effect for the fact that Good Friday and Good Thursday were the last two non-working days of the month.

If I can ask another question, when I look at your average interest rate, excluding the increase in provisions, there has been a drop of about 800 basis points quarter-on-quarter on the average interest rate for your loan book. I understand part of that is probably driven by the expansion in the credit card portfolio. But given that you're moving into riskier cohorts, which are priced accordingly, why such a sharp decline quarter-on-quarter?

It's Martin here. First, when we compare year-on-year, the NIMAL margins, I think is what you're referring to is improving despite having a larger share of credit cards, which, as you know, is a lower NIMAL product. On a sequential basis, typically Q1 tends to be a strong quarter for credits due to strong collections from the previous year. Q4 is typically a good month for credit collection. Thus, Q4 is strong for collections, while Q3 is a lower month. This is expected, along with a couple of other things. The speed in growth of our credit card portfolio contributes to this, and we accelerated originations of other products which generates more provisions upfront. Remember, we provision 100% of the losses upfront when we originate. So with a quarter like Q1, where we accelerated sequentially originations, that tends to pressure margins. However, we continue to have a strong EBIT margin; it's something we manage effectively.

Your outlook on the credit business changed or modified slightly in the last month given that we are now looking at probably a higher for longer kind of rate scenario in both Brazil and Mexico?

No, it hasn't. We continue to have the same strategy as in the past, which is to cautiously increase our credit book as we feel more confident in terms of our underwriting capabilities. As Osvaldo mentioned, we focus heavily on growing our credit card, which is critical to our fintech strategy. Users of credit cards tend to use more of our other fintech products. It's a crucial component of our strategy.

Regarding interest rates being a little higher, it is a relatively small factor compared to the spreads we have.

Just to reinforce that, the fact that our loans are typically of short maturity allows us to adjust very rapidly to changing interest conditions.

Our next question comes from Maria Clara Infantozzi with Itaú BBA.

I wanted to explore the potential of monetization of logistics services ahead given that you showed consistent improvement in the average speed of delivery and also accelerated penetration for another quarter. Does the company intend to start being more vocal on charging for the procurement services? How far are we from such a scenario?

Maria Clara, Ariel here. Thanks for your question. I think there's no change in strategy for us. As we've been saying over the last few quarters, we know that there’s an opportunity in the long run to increase our monetization on our shipping infrastructure. For now, we remain focused on: a) capturing the most out of the efficiencies potential; b) getting sellers to operate with our network, particularly focusing on improving fulfillment penetration, which has been consistently rising; and c) being disciplined in passing through inflation increases. We know we have another lever for the longer term regarding monetization; we simply don’t think the time is right.

Our next question comes from Marvin Fong with BTIG.

Congratulations on 25 years. So a couple of questions. I'd like to get a little more detail on origination side. I believe it was about the same growth rate as last quarter in dollar terms. But I'm curious how much Argentina factored into that. Perhaps you can provide some detail by country. How originations performed, did they accelerate versus last quarter? And on MELI Delivery Days, you provided some disclosure about how many shipments are generated by that channel. Is that a significant benefit for you guys, or is it really just designed to reduce stress on the network without achieving cost savings? Additionally, an idea of where that percentage can go over time would be helpful.

In terms of origination, most of the acceleration is coming from Brazil, where we are very comfortable with our models and see increased demand for loans. In Argentina, we continue to be cautious. We have seen growth compared to last quarter, but it's at a significantly lower rate in dollar terms than before the elections. In Mexico, we are experiencing year-on-year growth, but the origination is similar to the previous quarter.

I would add that we had a devaluation in the middle, which affects growth rates in Argentina when comparing year-on-year. However, we will continue to maintain a healthy book in Argentina, probably with the lowest NPLs; but we are being cautious.

Regarding MELI Delivery Day, I think for the first time in our investor presentation, we have provided you with some details on slow shipment share. You can see that more than 5% of our shipments were delivered using a slow method, most of which come from MELI Delivery Day. This reflects good adoption of Meli Más, allowing users to obtain free shipping on low ASP items. To answer your question on economics, we are seeing savings from that delivery model as we can consolidate items in the same box and the same delivery route. However, there's still room for the program to continue scaling and driving costs down through route density, more items per box, or even incremental transactions delivered together. So there’s good progress so far, and we’re excited about the results.

Our next question comes from Craig Mauer with FT Partners.

Happy anniversary. I wanted to ask about the ad penetration rate that moved up from 1.6% to 1.9%. Was this related to the GMV coming down in Argentina? Or was this an actual improvement in adoption?

Ariel here again. We had a very strong quarter in advertising. As you noted, penetration increased by 30 basis points quarter-on-quarter, and revenues grew 64% in dollars year-over-year, almost 100% in constant currency. The increase in penetration is definitely not coming solely from Argentina. We observed consistent increases in penetration across every country, with Mexico presenting the highest growth, both in terms of dollars and revenue percentage of GMV. Overall, we’re excited about what happened this quarter and remain convinced that the opportunities ahead of us continue to be significant, with many levers we can capture.

Can you remind us if there's any seasonality in that number that we should be watching out for?

No, we don’t think there’s a specific reason for seasonality. We made several product improvements pertaining to the algorithms we use for bidding processes and changes in our placements in sales results. Many moving parts contributed to this acceleration.

And our next question comes from Kaio Prato with UBS.

Good evening. Hello, everyone. Thanks for the opportunity for questions. I have two questions. First, regarding fintech, can you explain the rationale behind the accounting reclassification this quarter and why you decided to do this now? Secondly, could you help us understand the strategy regarding the fintech business in Mexico? Are you planning to compete with fintechs growing in Mexico, or is this more financial for the marketplace business? Looking at the financial landscape there, not having a banking license seems to complicate things compared to Brazil, where you need some partnerships for investment lending. I would like to understand your perspective regarding this and if you plan any upgrades in your license there as well?

Martin here. Regarding the reporting update, as we explained in the investor letter, in the past, we reported interest income and costs for the entire operation below EBIT. As the Mercado Pago business evolved from being a wallet to a digital banking business, a lot of the business was the float we had in that operation, which we’ve now brought above EBIT. We now recognize interest generated as revenue and the costs as the cost of goods sold. This is a better representation and reporting of the nature of our business. In fact, this aligns with how we've managed our business for quite some time. I think this is an improvement in disclosures, and that's why we made this change at this point.

Building on Martin's comment, the time value of money has been an integral part of how we price our fintech services. Everything from acquiring sellers to providing extensive fintech services is influenced by this view. We believe this reflects better how we perceive and run our business as a financial enterprise.

In terms of our strategy in Mexico, we aim to be the largest fintech in Mexico, offering a complete suite of products from acquisitions to fintech services. We’ve been able to offer our wallet for a long time now, and we launched our credit card last year, which has been rapidly growing. We've partnered with third parties to offer a remunerated account, enabling access to money 24/7 in the Mercado Pago account. We have a comprehensive offering, and the opportunity in Mexico is significant as it goes through a transformation similar to the one Brazil underwent in recent years, leading to greater financial inclusion.

This is clear. Any plans for a potential upgrade in your license in Mexico?

Yes. Today, we work within the current Mexican license that allows us to execute our operations. We regularly reevaluate if we might need an upgrade in the future. If we do, we will inform you.

Our next question comes from Jamie Friedman with Susquehanna International Group.

I wanted to ask a question about Argentina. It looked like FX-neutral growth in Argentina came in slower than inflation. In your prepared remarks, you attributed this to reduced consumer demand. I’m trying to gauge that. Is this trend something you are contemplating for the future? Because previously, Argentina revenue consistently outgrew inflation. Is this a new reality to consider?

Martin here. This quarter, we saw a recession in Argentina, a slowdown in consumption. Growth was high in nominal terms but fell below inflation. In fact, in dollar terms, it also decreased from last year. We are monitoring the situation and will navigate the macro conditions as they develop throughout the year. As I mentioned earlier, we operate a resilient marketplace, which has proven effective in challenging situations in the past.

On the fintech side, we've seen some deceleration in the point-of-sale business. However, the QR code and our wallet continue to perform strongly above inflation, and we remain cautious regarding the credit side.

If I could follow up, switching gears on Slide 18, I apologize if you answered this question already, but I might have missed it. The gross margin compression of 3.9% related to the change in shipping conditions—what was that about?

Yes. I think the reduction in margin is due to higher rates. We are attempting to explain and normalize the change to understand this quarter's results better. Approximately $300 million more in revenues that we would have earned without this change increased the denominator, thereby reducing the margin. That’s reflected in our results.

This concludes the question-and-answer session. I would now like to turn it back to Martin de Los Santos, CFO.

Thanks, everybody, for joining. As we mentioned, we are very excited about the first quarter of our 25th year, particularly with the results we saw in Mexico and Brazil, which exhibited tremendous growth in both fintech and commerce, along with improving profitability. As we indicated, the EBIT margin for Brazil and Mexico combined doubled year-on-year. This was driven by the commerce business performing exceptionally well in terms of ads and shipping efficiencies, which continues to enhance profitability. The fintech business in Brazil and Mexico is also prospering, with a growing credit portfolio and improving profitability. As we continue to grow, we gain operational leverage that flows through our P&L. As mentioned, there are significant net income growth trends year-on-year. Again, we are thrilled about these results and look forward to connecting next quarter.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.