Magazine Luiza S.A. (MGLU3) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for waiting. Welcome to Magalu's conference call regarding its quarterly results. [Operator Instructions] We inform that this event is being recorded and will be available on the company's IR website at ri.magazineluiza.com.br, where you can also find the earnings release and the presentation in both Portuguese and English. The link to the presentation in English is also available in the chat. During the presentation all participants will be in listen-only mode. Later, we will hold a Q&A session. [Operator Instructions] Questions received in writing will be answered later by the Investor Relations team. Now I would like to turn the floor over to Mr. Fred Trajano, CEO of Magalu. Please, Mr. Trajano, the floor is yours.

Good morning. Thank you for participating in our earnings call referring to second quarter 2023. I am here again with the whole executive management of Magalu and we are all going to be here available to answer your questions at the end of the presentation. I recommend that you all follow the presentation that you can download from our IR website. Without further ado, I believe that in the second quarter, we once again presented consistent growth. Again, we grew our 3 channels, all the channels of the company actually, with significant market share gain. I will speak a little about the industry dynamic, particularly the online market on the next slide. But our online grew 7%, while the market dropped 15%, so 22 percentage points above the online market, even more than we had recorded previously. Offline growth, we grew 3% compared to a drop of 2%. I will say later on that I see a recovery of the offline market but still, we are 5 percentage points above. We use -- for the online, we use the Neotrust and for offline, we use data from GFK. I did an analysis. I asked the team to do an analysis correlating the data so that we could understand the dynamic of the recent years pre, during and post pandemic correlating long-tailing durable categories with Selic interest rate using Neotrust data and correlating with Selic data. It is important that the second quarter of this year represents the last quarter before the start of reduction in interest rates, which opens a much more positive outlook, especially for our operations, given despite all efforts for the diversification of Magazine Luiza, we still have 64 years in the durable good category. We are leaders in these categories and they are representative for our GMV. Looking at the slide, we can conclude that the correlation, even in the online market, correlation of growth and performance of durable good categories in the whole market, I'm not talking about Magalu. I'm talking about Neotrust data here. With the evolution of the Selic interest rate is a very high correlation, much higher than, almost nonexistent correlation with long-tail categories, which are important for us but that do not compose a good part of our revenue. So you see 60% correlation with durable goods and practically 0% with long tail categories. So we see that the high growth we had during the 2 quarters of the pandemic and the reduction of this category, even online -- in the online marketing, in the post-pandemic scenario, when we analyze all of these factors, I believe that we need to see a growth trend considering a 4-year CAGR. So if we look at the last 4 years, next slide, we can see that Magalu was one of the companies in this segment that grew the most, 27% per annum in total. And on the next slide, we can see that we grew 4% per annum of physical stores. Before the pandemic, the brick-and-mortar stores had an 8% share in the Brazilian market. Post pandemic, that share increased to 20%. But Magalu was able to maintain an absolute volume that was higher than pre-pandemic. So increased from 3.4% in the second quarter 2019 to 4% now. And in brick-and-mortar stores, physical stores, this growth is significantly higher as of July. Again, physical stores also have a high correlation because they are 100% durable goods correlated with the Selic rate. From July onwards, we have a positive outlook. Just to talk about the coming quarters, we expect those to grow as the Selic rate declines. This has an impact on the categories we carry in our physical stores. So we have an expectation of improved volumes. So we still gain 1 point in market share. In online, we see an even more pronounced dynamic. In the first 2 years of the pandemic, in the second quarter 2020, we grew 180% -- 182% and in the second quarter of 2020 (sic) [ 2021 ] 46%. In 4 years, [ 47% ] per annum. But even in the last few years, we have been able to grow our revenue even with the reduction that are presented in the Neotrust data in durable good categories. These categories in the last 2 years dropped a lot, which led the Neotrust data overall to drop. So this growth of 2% in the second quarter last year and 7% in the second quarter this year, they represent a significant market share gain for our operations. The big growth driver and this is what I'm going to concentrate our call on, is 3P. 3P has been the biggest growth driver. For a few years now, we have been saying that our focus at the company is on growing 3P channel. Here, we have a much wider range of categories. In the last 4 years, 3P grew 64% per annum. We were the players that grew the most in 3P in the market and we continue with a solid growth even with a decline in the online market as mentioned earlier. So we have been walking the talk in terms of our strategy, improving that. In 3P, we are growing by increasing monetization of 3P, increasing take rate, improving our shipping, et cetera. And we are doing that simultaneously to total GMV growth, which comes to show that this category has been growing. And during the financial part of the presentation, we'll see that this accounts for an important part of our margins. I think that this is a highlight to be mentioned. And it is one which is fundamental because we're growing even in a moment of difficulty, after the difficult part. Starting in Q1 of this year, 3P accounts for almost 30% of our total sales. For the first time in the past quarter, it exceeded and surpassed the physical stores that have existed for 64 years. And it is -- accounts for almost 40% of the total online sales of the company. The trend is that the share will continue to grow. We continue to grow in our physical stores. This market share gain is not in detriment of physical store sales. No cannibalization but this channel has the potential to grow and it has been the focus of our investments and efforts. Next slide. Another benefit and advantage of our 3P model is that it helps us in 2 important indicators for our business, new customers, 60% of the new customers were originated by 3P in this quarter. I think that this data point shows that 3P has a strategic importance for the company to help us increase our already very relevant customer base and 70% of the total base of active customers have bought products on the 3P channel in the last 12 months. So this is a very important channel for us in terms of activation and increase in shopping frequency. We achieved a historical mark this quarter, 300,000 sellers, growing in all types, large, midsize and even small sellers. Of these 2,000 -- 200,000 sellers were small and/or midsized sellers who have started during the pandemic to use the Parceiro Magalu program. These are physical stores that had never sold online before. So this is the vocation of the Parceiro Magalu program. We continue to grow the space with a great contribution of the brick-and-mortar stores. Physical stores do play a role in our ecosystem and we'll detail that during this presentation. So a good part of the efforts to attract new sellers happens through the hunting teams in the physical stores, helping us achieve this historical mark, 300,000 platforms -- 300,000 sellers. Regarding our -- the online market, we are leaders in products that cost more than BRL 1,000. We come from this category. We've been operating 1P in this category for 23 years. And of course, we grew very quickly initially in 3P in these categories, the more expensive ones. Here, we have a share which is disproportionately high. And we defined this strategy because we have to pick our battles where we have competitive edge to win and where we would be able to replicate this share in categories and families between BRL 200 and BRL 1,000. So again, Magalu for some quarters, you can see our presentation in recent quarters has been focusing on families in this category. We identified more than 200 families with this profile. So it's the whole process, from marketing, all the way to promotions, team hunting and payment logistics to compose a strategy to gain market share. In these categories, we are obviously a company that does a lot of curator share to onboard sellers because when customers buy products that cost more than BRL 200, they want to feel safe. They want to be sure that the product is true, certified, approved, not a counterfeit product. These categories are traditional for Magalu. We brought this from 1P to 3P when we started our 3P model. And now we are applying this as a competitive differential so that we can indeed replicate the share above BRL 1,000 to the category of BRL 200 to BRL 1,000. Why did we choose this? We have the competitive edge. But more than that, when we look at the profit pool of these categories, about 85% of the profit pool of the market are in categories with a higher average ticket. Very low average tickets, contributed with a lower margin because the shipping rate over GMV is lower, because the cost is higher. Because the cost of marketing is higher, GMV is higher. So we have a unit economics, which is a lot worse. So although, yes, there is an important share of total GMV in e-commerce coming from products under BRL 200 but the profit pool of these products is very little. As a result, this is now the focus that indirectly, this strategy of ours kinds of hedges, as ensures, vis-a-vis regulatory changes, which took place in the cross-border market. These are significant changes and they bring some risk to retail but particularly bring a risk to electronic retail of lower tickets, particularly when we don't have to pay federal taxes, up to $5 items. It's a recent measure in Brazil being, well, [ foreigner hedge ] change, I hope it becomes a competitive advantage. I don't think it makes a lot of sense, this reality but looking at radically because, by the way, this topic was very controversial. Many questions from analysts in recent months. We had a thorough analysis. And whenever you have this kind of change, it's important to quantify your risk, precisely giving numbers and figures, in order to make it clear, what is the potential impact. And because Magalu is focused on categories like the ones I described in the previous slide, we had a thorough in-depth analysis by categories up to $50 or the kind of category that are brands or not. And we identify that only 3% of our GMV is subject to the risk of this recent regulatory amendment. Cross-border as a whole, I see it as an opportunity. Naturally we'd be adopting measures in order to also make available to our customers, products from foreign sellers. More specifically, right now, I'm sure we knew the impact of the regulatory change of tickets up to $50 with no federal taxes. I guess this is where we have the greater risk and the most severe problem when it comes to competition. Because our ticket is higher, not only Magalu but also KaBuM!, Netshoes also have high tickets and the same goes for Epoca Cosmeticos, all these tickets above BRL 200 and now we only have 3% risk in our GMV. If we check risk families in the Brazilian market, we can see for pants and clothing, many fashion segments, unbranded, so naturally we have been focusing on families, which are branded and higher tickets than this. Next slide please. Speaking about 3P, we have a positive outlook and a very significant performance in our logistics. Today, 80% of 3P orders go through Magalu Entregas, Magalu deliveries, which evolved a lot, up to 2-day delivery from 40% year-over-year to 50% this year and the take rate, which was already high, 2 days of 83% to 85%. Remember, we have huge capillarity in our distribution centers and this increase have also helped us in conversion and also helping us to keep them growing in 3P in a very fast manner. On the next slide, I'll highlight our fulfillment. It took us a while to launch fulfillment and this is because we wanted to have absolutely integrated to our 1P and physical store operation. When we launched 1P in the past, we launched logistics integrated to physical stores and that brought us a lot of competitive edge in 1P becoming a leader in 1P in Brazil. We used the network of physical stores to deliver 1P with better conditions and we wanted to replicate this successful model to 3P and that's how we developed this. So the whole fulfillment of sellers that store Magalu products, they store at the same distribution centers for our own products and they use the same networks. So today, we have 7 DCs, 1,900 sellers in our fulfillment and today, we hit the mark in less than 1 year of 10% of total 2P orders. They already go through our fulfillment centers, whose products, the turnover of the inventory is great, 30 days and we sell more. So this inventory turnover is even better today than 1P. We are doing great and we are opening some costs, a reduction of 25% of delivery costs for those who are in fulfillment and an increase of 25% in conversion. So fulfillment is now an important milestone. We expect to grow a lot, like I said, we have 7 DCs enabled and our schedule is very aggressive and fast to replicate this competitiveness. Once the seller is here, our fulfillment is multichannel, greatly increasing for instance the Click & Collect or the in-store pickup rate. If we look at the quarter, for instance, we had almost 30% in-store, store pickup. 40%, we have more than 1,100 stores enabled for 3P. So once again, it's part of logistics in 3P, helping in hunting for sellers and also for consumers, so they can buy the sellers' product and have in-store pickup for a lower cost. We don't even charge a delivery fee for 3P, for products that are over BRL 70. So that's a very good competitive edge considering the present capillarity. Another point, when it comes to the equation for logistics, is the fact that they also run with Magalu agencies or branches. So for hunting efforts, they are also important when it comes to sellers shipping the goods. 77,000 sellers using our stores rather than post office branches for goods drop off. And Magalu's network also supplying and providing reverse logistics and routing of these products. I'd also like to highlight other monetizing efforts in our marketplace. We have our fintech. We had a milestone in our fintech this quarter, which was the integration of Magalu payments by fintech, Hub Fintech acquisition about 1.5 or 2 years ago. The main goal was to buy regulated fintech, so we could plug all our volumes for advance payments from sellers, everything in the regulated market because our size was enough for that. In the quarter, we had more than BRL 10 billion TPV. In Magalu Pagamentos this year we included in the fintech. And this will generate 2 benefits in our operations at the company. We used to have 2 platforms, Hub and Magalu Pagamentos, 2 development teams. And at the end of the day, the growth in our operations were very challenging. Most of our products and development and innovation and digital account was not connected to Magalu Pagamentos platform. So we couldn't scale up because the flow of funds was not going through that. Now with the integration of Magalu Pagamentos by Hub Fintech, we scaled a lot of products, for instance, the digital account, we have 56,000 digital accounts, we have BRL [indiscernible] of TPV of the sellers account. We intend to grow and Hub Fintech already processes fixed transactions for Magalu. And also for some companies of our ecosystem, 7.5 million fixed transactions. We don't use a bank. It's made by Hub Fintech, more than twice than last year. And we are also putting all our process -- payment processing into our group companies, especially throughout KaBuM!, we already included Netshoes last year. So with this reverse integration right now, all the benefits from all systems developed by Hub Fintech in previous years will be shared by all companies in the ecosystem and by all our sellers. So a potential amortization is very interesting. Now about ads, MagaluAds, evolving very well. In the last call, we announced, the sponsor surge by a great development, brings significant growth because it's highly important for our advertisers. More than 5,000 active advertisers and then [indiscernible] created over the quarter is growing by 45% over the first quarter and more than 4-fold growth over the same quarter. So all these efforts generated not only a higher GMV growth in revenues but also improved profitability. Revenues with commissions, general revenues, monetization and GMV more than doubled, totaling 32% and [indiscernible] greatly in our contribution margin because we reduced financial expenses and shipping expenses owing to all the initiatives made by the marketplace team in order to improve the contribution margin. The business contribution margin was negative and now it's positive. In other words, the channel, which is our main strategic bet has been growing above the market and generating contribution and positive results to our company, showing that our strategy is on the right track. And once again, the most traditional channel benefits from lower growth rates owing to the cycle. And once we have historical levels of growth in profitability, in normal market conditions, we see both things overlapping, adding to one another. In other words, all our initiatives, all our investments in innovation, we'd like to positively -- our core business, which is cyclic and now going back to new cycle of lower interest rates of -- well, we've been a listed company for 12 years. And we can see that when we have high interest rates, they're cyclic, after [indiscernible] but once interest rates go down, the evolution is very positive, more than average in the market. And that's what we see down the road. We'll keep on focusing our efforts in our current channels with future opportunity for growth and diverse revenues. But once again, we want to benefit from these tailwinds and try to evolve and grow also in these traditional channels, which we are leaders. We are very strong and we tend to benefit from this new cycle of lower interest rates. Now I turn it over for Beto to talk more about profitability and then we go back to the Q&A session.

Good morning, everyone. Thank you for joining us in this earnings conference call. Let's move to the next slide to speak a little bit about the financial highlights. Let's talk about sales increase, across all channels. We spoke a lot about sales. Total sales of almost BRL 15 billion. Okay. Just waiting for the slide to change. Okay. I think that the highlight on the slide was the gross margin, [indiscernible] gross margin. This is the highest growth margin or gross margin in the last 3 years, growing 0.2% over last year and growing [indiscernible] quarter-on-quarter, 1.5 points. So the performance of the gross margin for us was significant, in still a very challenging environment, with the market shrinking and still very high interest rates in Q2. Now with this expansion and all of our initiatives, we improved EBITDA margin from Q1 to Q2, 4.9% to 5.1%. So we were able to improve our operating results. And we were able to reduce the negative net result this quarter over the previous quarter, particularly given a strong reduction in financial expenses and we'll be discussing more about that momentarily. And just 1 observation. This result is adjusted for nonrecurring expenses of about BRL 155 million. These expenses or most of them are related to the integration process of Magalu Pagamentos related to Hub Fintech, as mentioned by Fred. And also another relevant point is that we have started the consolidation process of all the logistics companies that we acquired. You will remember, GFL, SincLog and others and have Magalog, which is our delivery platform and various others and all of them will be under 1 single corporate taxpayer number, serving all of the companies in the ecosystem, just like we have just one, just a single 1 piece serving our whole ecosystem. Oops, there is some problem here with the slide. We're back. Okay. Before moving to the slide, in addition to these expenses related to consolidation and integration, we also had expenses related to adjustments of capacity. We closed 2 distribution centers and some cross-docking units in our logistics business. Now moving to the next slide, we'll speak a little about the evolution of EBITDA margin compared to last year. The main explanation, the main variation here still lies in the margin on goods that reduced 1.7 percentage point year-over-year. Here in the middle of the slide, we kind of have an additional breakdown to explain the evolution of the gross margin on merchandise or on goods. They dropped from 23.1% to 21.4% this quarter. But as you can see, this margin in this quarter is already evolving, 1.2% over Q1 '23 margin. In Q1, the margin had dropped 2.4%. Now it dropped just 1.7%. And when we look at this 21.4%, it is 1 percentage point only below our 2022 [indiscernible] which was about [ 22.4% ], which means that of the total impact of a deal follow of about [indiscernible] percentage points. Since the beginning of the year, given the increase in the tax burden, now with 21.4%, the gross margin will be practically less than [ 2 ] points of the total impact of 3 points. So we just made 1 percentage point for us to [indiscernible] the gross margin on merchandise. And we believe that by year-end, everything will be behind us. So the default impact, in fact we always say, it's temporary. It's short term. And we are passing it along. The best news on this slide is the impact of the service margins. This quarter, it offset the impact of default, was even greater. And here, the trend is that we're going to have accelerated growth in the long run. This is why we are very positive regarding the dynamic of gross margin that we should observe for the coming quarters and years. Now to speak about selling expenses and administrative expenses, probably very, very little, both nominally and compared to net revenue. If we look at total sales, including the marketplace, we even had a dilution of expenses. The marketplace has for [indiscernible] selling expenses related to marketing and logistics, it has some impact. But as a reminder, it is our most profitable channel. And this is more than offset in the margin on services. And the trend here, as far as possible will continue to be very much under control and we'll look for operating leverage as these traditional channels grew more and allow us to have a greater dilution of operating expenses as well. Lastly, speaking a little about Luizacred and allowance for doubtful debts, we'll show you the recent cohorts have had a very positive performance. Very soon, both Luizacred should start contributing positively to our results, vis-a-vis our provisions related to CDC should be diluted. So we also have very positive expectations regarding the performance of these 2 line items looking forward. On the next slide, which is, well, this one on working capital, I would like to highlight that again, we evolved a lot with our adjusted working capital this quarter, one more time we reduced our inventories. We improved inventory turnover by almost 5 days compared to last year. We improved the average term of purchases in another 5 days compared to last year, we generated a lot of cash from our working capital. We reduced the volume of conforming operations, which are part of the financing of our suppliers in BRL 3.8 billion, down to BRL 2.8 billion this year. So it's a very positive trend in working capital. It is not reflecting in a reduction in financial expenses. This quarter, we spent BRL 100 million less over Q1 '23. In Q1, we managed this but this was seasonal that there were a lot of prepayment to suppliers. Last year, financial expenses increased over the year, the increase in CDI for this year, we should have the opposite dynamic, a reduction in financial expenses and [indiscernible] these expenses together with a reduction in CDI [indiscernible] this has been a highlight. Growing 15 percentage points in our e-commerce, we have reduced the cost of prepayment of receivables and we have a cash position, which is more sound and more robust. This quarter, we increased our cash position by BRL 1 billion, a very strong performance, given the cash flow of operations of about BRL 800 million. This more than paid for our CapEx and interest and leasing expenses. And we also had received the renewal of operating agreement with Cardif. We still have LuizaSeg receipt pending approval by [indiscernible]. Hopefully, this will happen soon. And with that, we got to BRL 8.1 billion in cash, including receivables. On the next slide, we see that with this cash position, we resume a net cash position of around BRL 1 billion -- BRL 900 million of net cash position. So from the infrastructure and leverage standpoint, we have a very net, very liquid position with a very competitive capital cost. Our average capital cost is about CDI plus 1.25% per annum. And our gross debt relatively distributed all along the next 3 years and a total cash over net debt of practically 3x. Moving forward, Luizacred. Here, we continue with a base of approximately 7 million cards, TPV growth getting to BRL 14 billion and BRL 20 billion in the loan portfolio. In recent months, we have seen a pickup in the issuance of new cards, at the same time that we have seen a significant reduction on the previous indicators of delinquency, NPL. Here on the slide, we bring you managerial indicators for CDC and Luizacred. And we see good trend of improvement, a reduction trend in delinquency, which is quite pronounced. We can see NPL under -- of 15 days, improving. So we are very confident in terms of resuming profitability and credit granting levels in the coming quarters. Honestly, in addition to everything that we are doing to increase our gross margin, EBITDA margin and all of our operating results and also in the attempt to reduce financial expenses regardless of the macroeconomic scenario, we bring you here sensitivity analysis, just to give you an idea of the potential impact of a Selic rate reduction on our financial expenses. Our expenses are practically all linked to CDI. All pegged to CDI. In the last 5 years until the pandemic, between 2017 and 2020, interest rates were dropping consistently. And in this period, our financial expenses also weighted on average 2% to 2.5% of net revenue. Last year was 5.5%. And we believe that with the CDI going back to a normal level, our financial expenses tend to go back to historical levels. The sensitivity here is that every 1 point reduction in interest rates is equivalent to approximately BRL 150 million savings in financial expenses, not to mention sales increase and the positive impact on the cost of funding of Luizacred, reduction in NPL delinquency and the capacity to get a lot more credit to our customers. Very well then. With this, we are going to end the presentation. And now I would like to invite you for the Q&A session. Thank you very much.

[Operator Instructions] First question, Vinicius Strano with UBS.

I would like to dive deeper into the growth potential in the market for categories higher than BRL 200. Some of them have a slightly higher than average online penetration. Second question about default. What stage of the pass-through do you consider to be today? And maybe what about the impact on gross margin down the road? Lastly, you mentioned changes to Fintech Magalu. What about the new products that you intend to launch? Any funding alternatives about the fintech?

Three of our managers will answer, Edu, Fabrício, [indiscernible].

Vinicius, overall speaking, these families of products between BRL 200 and BRL 1,000 account for 45% to 50% of the current online market, potential growth in penetration. When we look at these families, we, based on our share, a slightly lower share, lower than 7%. So when we compare it with a share that we have in our traditional families, over 25% or 30%, some of them even 40%, that's how we calculate our potential growth. This is the rationale behind these growth families.

Just giving more color, Fred speaking, today, they are around 80% of the estimated market GMV above BRL 200. So all of them are very significant. So they tend to have a very -- they have -- they are very important. They will be very important in the future.

As for default, Fabrício speaking. Like Beto said in the presentation, we managed to have a pass-through of 60% to 70% of default to date. Like we said in the previous call, we had exceeded 1/3 in the first quarter. And now we pass through another 1/3, so 2/3 total default. And we keep on passing through. We expect that by year-end, we'll manage to pass through 90% of default -- 95%. We're very confident owing to the competitive market. About fintech, Vinicius, Fintech's agenda is much concentrated on profitability and growth. So we work for a lot of time building up the very competitive, good profile and portfolio, both our sellers and end users. So now we are building scale and making these products more profitable now that we have these great 2 stakeholders in our value chain. So at the end of the day, everything related, particularly to digital accounts, we have a lot of things to become mature, products to our sellers also need to evolve very significantly. Payments with token in Magalu and we need also to speed up the conversion in our digital sales. So our agenda is very intense, if we think about all the work that we've been doing over the last 3 years, so we can effectively build scale and monetization on top of these assets. As for the outlook for funding, we are working with the Central Bank trying to improve the increase or capital increase, owing to the reversal operations and deals that we had in these 2 instances in Magalu. And right after the approval, we are going to work on something that is 100% ready on our side. So we can have this financial party not only provide us a balance for credit risk assets but also bringing us instruments for funding via CDBs, letters and all papers and securities related to the financial company. I hope I've answered your question.

Just adding to [indiscernible] answer, an important thing to mention about scale, has to do with this integration that we recently had a reversal integration. Like I said during my slides, we used to have all functionalities developed in the Hub platform and all the volume in Magalu Pagamentos. In order to gain scale it's highly important to put together volume and functionality. And that's what we managed to do. So the whole volume of the 3P will go through the hub where all functionalities are developed. All the efforts of recent years and, obviously, in this direction, putting together volume and functionality will allow us to have gains of scale, particularly products related to sellers but not exclusively sold.

The next question comes from Irma Sgarz with Goldman Sachs.

I'd like to go deeper into the competitive dynamics and the demand scenario, particularly for 1P, online and physical stores. Based on the comments on the release, I understand that July was better at the store level. But I wonder if you give us more color about what you expect to be the reason to generate this improvement in this growth trend? Was it demand-wise? Was it the demand that is definitely better or any in-house measure that generated these better results? And the second quick question, it's very cool to see the service revenue going up above GNP. Naturally, it brings an increase in take rate. Could you break down and let us know how much of this increase was owing to an increase in commissions? What it did over the first half of the year? And how much was owing to other supplementary revenues like ads and other services?

Irma, I will begin answering and then I'll turn it over to Fabrício. First, about 1P. I began my presentation by showing a correlation between these categories with a Selic rate, a high correlation. That's how it materialized in the past. I believe that now that we are starting the interest rate reduction cycle, one of the main impacts we'll see on our operation is an increase in the revenue in these precise categories. Naturally, that's a step-by-step process. But we have a very positive trend. If we follow all the other interest rate reduction cycles, we can see that right afterwards that category begins to respond. And I can see this scenario happening both in physical stores and online. In these categories, we are leaders in 1P. I cannot say this happened in July because the reduction cycle started in August but we can see a better competitive dynamics as of July. Sales -- in-store sales improved vis-a-vis June and, Irma, we were pretty much concentrated in default pass-through, particularly online 1P when we passed through a lot of price. It's very hard to do that and grow the sales at the same time. So we have to choose. Our choice in the first half of the year was default pass-through. We are up to 2/3. We still have something to do. But once we conclude the pass-through, I believe we will go back to 1P, online, focusing on a slightly focused -- have our focus on growth. So I can see a very positive dynamics in the midterm. But in the short term, owing to the market dynamics, we begin to see better growth compared to what we had in the first half of the year. Anything to add, Fabrício?

Irma, Fabrício speaking. Like Fred said, the competitive environment is more rational, which is to our favor. When you do the pass-through, price goes up and it takes us some time to be stable and have the price perception by consumers. This is pretty much stable, particularly online. You can see the online market goes down. We've grown a little -- a lot of share. Physical stores growth is already at a high digit. We had a good Father's Day this year. And an important thing that brings us more confidence in the macro scenario is that we have a good schedule until the end of the year. Our inventory quality is very good. We don't need any adjustments, which is very beneficial to us and we're doing fine with our suppliers. Magalu is one of the few alternatives for suppliers today. So we've been managing to do good business and we're very confident for the end of the year.

As for the take rate, Edu -- good morning, Edu speaking. When it comes to take rate, the bulk of this increase in revenue that also include the base in our commissions, be it in shipment and take rate in general and also an increase in additional revenues but the bulk in the first half of the year comes from this increase in commissions. Overall speaking, considering our position in the market, we understand we have competitive rates for sellers. Our growth in our seller base, at the same time, we post growth in our revenues.

Next one, Maria Clara, Itaú BBA.

I'd like -- can you elaborate on the dynamic for profitability looking forward? If you could comment on the expectation for margin growth along the [indiscernible] for you, what do you believe then of these [indiscernible] of restructuring in the quarter, I think the company has the ideal structure to have more internal gains to operate in each of the remaining quarters?

Maria, I will try to answer all. You know we don't provide for guidance. So we have to align expectations [indiscernible]. On that slide that I showed on the EBITDA margin. I think Beto spoke a little about the initiatives taken by the company to resume our operating margins, to bring them back to the historical levels. You will remember that we had EBITDA margins before the pandemic between 8% and 9%. Today, we are at 5% to 6%. EBITDA margin of the marketplace is way higher than the average. It is in the high 2-digit range. We have [indiscernible]. It is our most profitable channel. A channel that grows the most and that has been increasing profitability. And all of that also has the potential to continue to grow in an extraordinarily fashion without working capital investment, with low fixed costs and not requiring fixed investments. So institutional [indiscernible] has the potential to be a game changer in the gross margin, for example, reinvesting a lot. I think that the whole presentation is very much focused on growing the marketplace. In addition to the marketplace, we have been improving the margin on goods, on merchandise. We also spoke about this. We expect a second half that will be stronger in terms of sales, with better product margins and the combination of these 2 things tends to favor and to drive the gross margin, the EBITDA margin, especially the gross margin. And in terms of the gross margin, we intend to continue to work efficiently on our operating expenses, optimizing marketing and logistics expenses. And more and more with an expectation to have then a lower delinquency level at Luizacred, CDC and so on and so forth. All of these then contribute to a positive and growing EBITDA margin, with no need for intervals but with a very positive trend. Second half sales seasonality is historically better, historically, the margin falls in the second half of the year and with all of these initiatives and investments that we have in making. Now within the commentary, I already [indiscernible] we've excluded with the -- regarding the evolution of these indicators both for the second half of the year and remaining months. We are very confident regarding a consistent movement -- evolution in the coming years.

Next question from Pedro Pinto with Bradesco.

I have 2 questions. Fabrício spoke a little about the balance and good quality inventory. So I'd like to ask a question regarding Black Friday expectations this year. How you are preparing for this event from the standpoint of inventory? I want to understand how you intend to bet on physical channels and 1P channel for this year. That's #1. Second question has to do with working capital. At the beginning of the year, we had a stressful situation regarding funding. We saw the [indiscernible] reducing in Q1, actually resuming in Q2 [indiscernible] or should we see the suppliers going back to what -- that we had last year?

This is Fabrício speaking. Regarding Black Friday, like we said, we have good quality inventory. Preparations for Black Friday is starting now. We are negotiating with suppliers, 6 months in advance. We are confident on having a great Black Friday. Last year, it was our very best Black Friday. We expect it to be the matter, both in the online channel and in the brick-and-mortar store. So we'll be ready. Our inventory should increase a little in Q3. We're already preparing for end of year activities. The results [ heat ] coming. If we have the [ heat ] that we're experiencing of that changes, our sales in terms of white line goods, so we are prepared with our suppliers to face that moment.

Pedro, I'm going to comment on suppliers. We reported a reduction in Q1. It's very seasonal. And indeed in Q1, the market was still kind of turbulent in terms of costs of this line item. It became a little more expensive in Q1, given everything that happened in the market. But we mentioned back then that this was turbulence. That things were going to normalize and that the market would settle again and this has been happening since then. Interest rates for these [indiscernible] are short term. The short-term fulfillment is relatively cheap. In Q1, they increased but then they started accommodating, settling. And there is -- they are in a trend of reduction of normalization almost at the same level as last year. And with that, with more competitive rates normalizing, the demand on the part of suppliers will normalize as well. We don't have any guidance regarding the level of this because it will really depend on the need of each of our suppliers. If they want to have prepayment or not, it's their decision. We offer them this facility. It's in a win-win relationship that will work for everybody. As interest rates decline, there might be a slight recovery. There was some recovery from March to June but there should not be any significant change in the short term, in terms of demand. And Pedro, we had an improvement in inventory turnover in the average term of purchases, as a whole that had an impact.

Next question, Felipe Reboredo with Citibank.

We are in Citi and we want to better understand evolution in 3P. We showed 1P was a little bit more suited and had a bit of focus on higher ticket products. How does it communicate with the core 1P at Magalu? Does it compete with the core products, particularly items greater than BRL 1,000. Another point is about monetization of 3P. So to speak of a higher ticket 3P, is it easier to monetize this kind of seller, particularly in take rate negotiations or fulfillment? So that's about it.

I'll begin by answering -- well, we did some strategic planning for the next 3 years. And we've pinpointed 200 families of products, which are absolutely complementary to the ones we currently work with, traditional families. We provided [ codes ] to the size of these families, their relevance for Brazilian e-commerce. Eduardo already gave us some color about their size. And on top of that, we are working. The growth of these families, these are families with low share and we want to replicate a share of traditional families. We're speaking of tickets above BRL 200, not only above BRL 1,000. So BRL 200 to BRL 1,000, that's the great opportunity to expand and replicate share above BRL 1,000. That's what I mentioned in my slides. So these actions add to one another. About 1P categories we're very rational. 1P is very positive, is contributing to our earnings. So the decision tomorrow to move 1P to 3P is very dynamic. And it depends on the profile of the category results. If it's better to continue with 1P, we'll do it. We are very pragmatic today. 1P today is a positive profitable channel for the company. Sometimes when you don't have a lot of turnover, we can work with that. And some families are migrating into 3P but nothing so significant. The bulk of the families are families where we didn't have 1P and want to specifically address via 3P. When it comes to dynamics and economics, it's not only that the take rate is different, it's even slightly higher proportionately. Think about take rate in fashion compared to higher tickets. So this is more specific about unit economics, shipping costs on GMV is lower. Marketing costs over GMV is lower. So it's more related to contribution margin dynamics, which necessarily of charging more. Think about companies like Flipkart in India, tickets are very similar to Magalu, also with a big base of higher tickets and they have monetization, greater than 2% ads. So these categories, they have a potential for monetization. Another thing about monetization, which is a service we launched, which is very important. To show the importance of our fulfillment and how it's different from other markets, so for high-ticket products of higher [indiscernible] like furniture and fashion, we only have fulfillment for sellers. And we keep on starting to charge this modality, which will be important because we have a lot of idle space in our DCs and it will help us to monetize this idle area. As fulfillment grows and as we grow the number of sellers paying for this room as fixed rent, we'll manage to monetize as well. So these categories have profile and different monetization dynamics but an important potential. Once again, we have this location, it's part of our mission. Our logistics is an equal and we are developing credit for higher product categories. So we have an area -- a significant area in this regard and we also have hits. These categories at Magalu, they generate a lot of hits and have credibility. Consumers will not trust a website that sells a lot of smuggled counterfeited products. They are not going to buy BRL 500 to BRL 600 product. So it doesn't happen to us because we have this credibility and we have high chances of having a very similar share to what we have for BRL 1,000. And it's a driver for growth with profitability for 3P, which is materializing in practice this quarter and the figures are evidence of that. And we'll keep on working for future quarters.

Next question, Eric Huang with Santander.

Maybe it's a follow-up of the previous question. Maybe just to summarize what we mean by the main pillars, so you can manage to keep on growing in terms of monetization. And maybe you can make some comments on ads. What is missing or what do you still have to develop in order to speed up your share of ads? And maybe your last question on our end. This is more related to cross-border. Fred, you quickly mentioned that you want to tap into this area. I wonder if you could give us more color on what you mean by that and how you see this opportunity, it would be very cool to learn more about it.

Fatala is joining us today. So there is a lot of complexity when we develop an ads platform. Maybe Fatala can give us more color about what we're doing and what the teams of [indiscernible] are also doing on the ads platform. And then when it comes to monetization and cross-border, Edu is going to answer the question.

Eric, speaking of the ads platform, we started development last year. This was when we began to integrate in Magalu channel at first. The idea behind ads basically was to work on traffic that we have in the whole ecosystem. And for that, we need to explore the most relevant positions where we have more users, so we can have space for ads. The breakdown when it comes to the ads platform are twofold. In one of them, we work with sponsored products. And the other one is for display. We started with sponsored products. We have a integration at first with a search for Magalu. And afterwards, we started, part of the learning curve at Magalu, expanding for connection and other sales channels. Another example was Netshoes. Today, the e-commerce platform where we run Netshoes and other stores are already integrated with ads. We are in a pilot study and working a lot. As for challenges, like Fred said, the most important thing is to come to a balance between the bidding system and the inventory delivery. So from this point onwards, we manage to analyze results that are taking place, ROA for -- ROI for advertisers and bidding processes in order to have good pricing for the sponsored products in these areas. And at the end of the day, have revenue generation, good for the platform and at the same time, something that is very relevant result-wise for advertisers, in our case, our sellers. As we speak, we're doing an integration in other areas too. We're also beginning to work with product recommendation at Magalu. And also, we are ready with a pilot phase for Netshoes. And from then onwards, we will also expand with the integration for displays. So this is about the road map of what we're doing. Like Fred said, it's not so simple to do it in practice. When we think about other players, they work on development about 10 years. And we've been managing to speed up the process a lot owing to the learning -- lessons learned from other players and also the relationship with a very nice player like Flipkart's story, which is very similar to us and how they work on their ads development system.

Next with the answer. Let me talk about monetization. In January, we had an impact in the second half of the year. So now we have announced some new adjustments in our orders and some reductions for Parceiro Magalu platform to make sure we have good monetization for the second half of the year. Like Fred said, it was hedged. And now we have collection announced to the market and we're trying to model collections from -- when the [indiscernible] comes, we'll also work with ads. Fatala worked a lot -- talked a lot about the ads platform. We work now that we expand inventories throughout the platforms and will be a strong driving force for profitability, no doubt about it. As for cross-border, if we think about the upside, we see it as an opportunity trying to explore it and support our strategy. Our strategy is higher ticket products, fast delivery times. So it's an additional opportunity based on what we already have.

Next question from Gustavo Senday with XP.

I have 2 quick questions. One, regarding nonrecurring expenses. We saw the quarter-on-quarter evolution of that amount. So I'd like to understand from you, what do you expect looking forward? Should this amount normalize with the integration of Hub Fintech? And a follow-up question on take rates. It caused a tension in the pass-along of take rates this quarter. I'd like to understand from you, any specific category, if these is room for increase? And in what categories have you made adjustments in the last quarters?

Gustavo, I'll speak about nonrecurring expenses. And let me just elaborate a little. Most of these, BRL 155 million, most of that were concentrated on the 2 integration processes. One that has been completed and eventfully, the integration of a payment institution, you know how complex that can be. It took months and it involved a lot of people from many departments in this integration of Magalu Pagamentos with Hub Fintech. And the other one that was, to speak, a little more costly so far, it is related to the integration process of the logistics companies that I mentioned. You can observe, we have a subsidiary called Magalog. Then posted a relevant negative result this quarter. And this is already the result of this integration process, which is going to transform all of them into 1 single platform, that is a lot more streamlined, efficient, scalable and providing services to all of the companies in our ecosystem with a number of benefits. So these are almost the investments that were made. Of course, we post them as nonrecurring expenses. But actually -- but they are not going to happen again. The integration processes, like I said, one is already complete, and the other one will be completed soon. And the smaller part of all nonrecurring expenses is related to what we call capacity adjustment expenses. We revisited our DCs. We closed one between March and April in the South. We closed another one between June and July in the Northeast. We closed down some cross-docking units where there was some overlapping inventory with no impact whatsoever on our efficiency ratio. So we're delivering actually faster and faster. And we also made a capacity adjustment in our corporate team. So if we put all these adjustments together, we get to this amount. Last year, we also had nonrecurring adjustments in the first half. And then in the second half, we didn't have anything. So we have no guidance in that regard. In the past, we also had some nonrecurring revenues. So -- and we excluded those. So we exclude nonrecurring expenses. If there is any type of nonrecurring expense, we'll always adjust for that to exclude that so that we can present the results in the right way, in the most transparent way for our investors. So these expenses are not recurring. They are nonrecurring. They belong to the past. And for the coming quarters, we expect to continue to evolve and to improve operating results, to execute on our strategy and so on and so forth, as mentioned earlier. And regarding take rate, I'll turn the floor to Eduardo.

We don't have a table per category. We have a table of commissions, which is partly variable and partly fixed. And lower ticket categories have a higher commission. We had made some adjustments in January and in July, we made some other adjustments to increase this fixed amount from [ BRL 3 to BRL 4 ]. This is going to be repeated in the second half. In the Parceiro Magalu program, we also made some adjustments in the take rates in the commissions. And as mentioned before, we have the evolution of ads. And we'll see how monetization will evolve in the future.

Our last question comes from Joseph Giordano with JPMorgan.

I have one last question. Going back to working capital. We could see a significant improvement which accounted for the [ gross ] part of the cash generation of the company. So I'd like to hear from you, what would be the next drivers to improve working capital? Or is this kind of normalized? And my second question has to do with restructuring. Last year, there were some store restructuring and this year some internal restructuring. Do you see any opportunities to revisit your pool of stores considering a great focus on digital, ads because that's an easier avenue to get monetized?

Joseph, I'll start speaking about working capital. Well, we continue to reduce our inventories marginally. A good part of the reduction took place last year and beginning of this year. If we compare with the peak of inventory in the end of 2021, inventories were reduced by BRL 1.5 billion or more in the total value of inventories. As Fabrício mentioned, our stock out level is at a very healthy level. We have a sound inventory level versus a surplus inventory. Naturally, we'll always try to improve inventory turnover. This continues to be one of our obsessions of the company. We see more room in increasing sales than in reducing inventories. Of course, we can have some efficiency gain. We had a number of internal initiatives to always pursue, to operate in the most efficient, in the best way possible -- possibly continuing to nominally reduce inventories but this should not happen in the short term. As Fabrício mentioned, we have the second half, we have Black Friday and other events. So pretty soon, we're going to be receiving products for those festivities in the end of the year. And then we'll reduce inventories again as it normally is. In this inventory-supplier relationship, we see more opportunities on the side of inventories rather than on the side of suppliers because with the suppliers, we have already increased those and we have an average term of purchases, which is quite healthy. In addition to this inventory of a supplier ratio, we always try to optimize our working capital line items. We have an opportunity to increase the offsetting of taxes. In the last 2 years, while we accumulated some taxes, in this year, we are kind of flat, stable and slightly offsetting some taxes. And we have a working plan to accelerate monetization of these taxes naturally, organically via expanding the margin and via sales increase and so on and so forth. So we have a strong focus on these lines and an opportunity to improve a lot by year-end and generating a lot of cash as it relates to our working capital. Now I'll turn to Fred to speak about the stores.

Joseph, regarding the physical stores, we have made some adjustments in the last 2 years. The bulk were Marisa kiosks in terms of volume. But this is a dynamic process. We are always evaluating issues related to rent. Most of our break-in mortgage stores, where we have opportunities to improve profitability on new stores, in Rio, in new markets and they're still in a maturation phase. And unfortunately, they were created in a bad phase of high interest rates. We had to scoop into those stores. And they were caught in a countercyclical movement of the market. It doesn't make sense to close these stores now that we expect interest rates to fall just like in the past, in all economic cycles. Declining interest rates is something that is helpful and should in high correlation with the category of durable goods online but particularly offline because credit is related to consumption at the physical stores. With lower interest rates, we start giving more credit and we start selling more and that's very important for our operating leverage. So we believe that with this declining interest rate cycle, that should last many, many quarters looking forward. This will have a super positive impact, not only in the result, in the reduction of prepayment rates but also in terms of store volume sold. I believe that this is going to be super important for these units. But this is very dynamic. We're always looking into this. And I'd like to highlight that to us, stores play a role in the ecosystem. They are not just a stand-alone sales channel, 45% of 1P sales go through the stores, 30% of 3P sales go through stores. A lot of the new sellers come and through the hunting teams at the stores. So the stores to play a role in the Magalu ecosystem. We built an operation, which has in 3P the same characteristics that was super important for us to be winners in 1P and the stores play a significant role in that.

We are now ending the Q&A session. I'd like to turn the floor to Fred Trajano for his final statements. Mr. Trajano, go ahead.

I just want to thank everyone for joining our earnings call. Have a great week.

This concludes Magalu's conference call. The IR team will be available for any further questions you may have. Thank you all for joining us. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]