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

Good day, everyone. 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 ir.magazineluiza.com.br, where you can find also the earnings release and the presentation in both Portuguese and English. [Operator Instructions] During the presentation, all participants will be in listen only mode. And later, we will hold a Q&A session. [Operator Instructions] I now would like to turn the floor over to Frederico Trajano, CEO of the company. Please, Mr. Trajano, the floor is yours.

Good morning, everyone. Thank you for joining us in this conference call to discuss second quarter '24 earnings results of Magalu. Again, I am here, and I am joined by our complete leadership team, our officers are here and all of us will be available to answer your questions at the end of the presentation. I tend to make a very objective presentation so we can have more time for questions later. And again, we have another exceptional result of the company given some market conditions, particularly in what relates to interest rates, which are unfavorable in Q2 '24, we posted the third consecutive quarter of net income of the company. We achieved a historical mark of operating margin of EBITDA, 7.9% adjusted EBITDA -- adjusted EBITDA margin. This was the margin that was forecast in the consensus for the company for next year. So you can have an idea of how we brought forward this agenda. Since I have communicated in several calls since last year, our focus was to be profitable again. The focus of the company was to resume growth of our results. And this is exactly what we have delivered in the last 3 quarters, particularly in Q2 '24. We reached 7.9% EBITDA margin, and we grew our EBITDA by 62%. In absolute terms, it's not just margin growth. We grew our sales when we grew our margins, and we increased our adjusted EBITDA by 62%. This strategy has proven to be persuaded, the right one because in the beginning of the year, we, as well as the market, we're forecasting a much different interest rates curve than what actually happened. Since what happened in 2021, I promised myself that I would never again be caught by surprise due to interest rate fluctuations or decisions by the Central Bank that would be different than we had in the consensus back in 2021. I remember that focus was estimating 4.5%. And in the end, the interest rates was more than 10%. So we put together an agenda to speed up growth, to accelerate investments. And at the end of the day, financial expenses are much higher than what had been forecast. The 7.9% EBITDA margin shields us from any bad news in terms of interest rates. This is exactly what happened this quarter. Even with the interest rates at a high level with not so positive outlook, we are delivering profit, net income and results, improving the ability of our team to deliver results regardless of the macro scenario. I'd like to make this clear, it was the right strategy that was intensified by our team in the first half, particularly in Q2 with this level of 7.9% EBITDA margin. Last time we achieved this number was in 2019 before the COVID pandemic. So we are celebrating a lot of this 7.9% and 62% adjusted EBITDA growth and BRL37 million of adjusted net income. On the next slide, I would like to stress 2 important points. What led to the margin increase? It's very clear in our income statement. We had a 2.1% point increase in gross margin and this 2.1% point increase in gross margin was driven mainly by the improvement of our 1P. A great channel contributing to the increase in our gross margin was 1P, increasing 3% points as it accounts for kind of half of our sales. It contributed with almost 85% increase in gross margin on merchandise total gross margin in the quarter. And also the growth in service revenue which is part of the gross margin, particularly financial services. We signed agreement with Cardif. Last quarter, we communicated that the market, we sold a lot of insurance and other financial projects -- products that did really well. So everything grew 11%, 11% growth in service revenue above total GMV, contributing to this increase of 2.1% point increase in gross margin in our consolidated results. So 1P and the growth in service revenue, these were the big drivers explaining the increase in the margin. Luizacred is now an equity income above the EBITDA line. Last year, the result of Luizacred was a detractor for our EBITDA margin. We had 16 million loss in second quarter '23. And this year, we posted BRL71 million profit at Luizacred, [ a delta ] of BRL137 million at Luizacred. Still on Luizacred. I'd like to highlight without an agenda of [ getting more ] credit. Everything came from better NPL indicators that are very healthy and continue to be 73%, giving us a very favorable outlook for the second half. So everything that we achieved this quarter in terms of financial results were not due to more loans granted. So it's a very solid result. Luizacred came back on the game and to have positive results, BRL 71 million. By the way, one of the best quarters in the history of Luizacred. And lastly, and here, I'd like to stress this because a good part of the questions as last year and the pushbacks we had from the market last year, we're about to short-term debt. The maturities we were going to have a BRL 3 billion. But I would like to emphasize that the company paid BRL 3 billion in the first half, a little over BRL 1 billion in Q1, a little over BRL 2 billion in the second quarter, a total of BRL 3 billion reduction of debt. We are ending our balance sheet of this second quarter with 0 short-term debt. Next maturities are pushed to the end of 2025 and the end of 2026. And we did this not through court-supervised reorganization or whatnot. And we did that with our cash. We did that by improving our margins, our results and the cash flow of our operations. I think that this is evidence of the company's financial capacity and with a much lighter agenda now in that regard looking forward. On the next slide, I would like to speak about our sales. Even with this agenda of growing gross margin, I spoke about the consolidated 2% points increase in gross margin in 3P, in 1P, but the company still delivered growth, growing 2% points in margin and growing the topline at the same time is very, very hard. If you manage a company as complex as Magalu or [ as any] retailer in Brazil, you know that concomitantly increasing margins with this level when we are growing sales is very hard. And this is exactly what we delivered 4% growth of total sales. And the big highlight of our sales in Q2 were the brick-and-mortar stores, the physical stores. We had the best same-store sales number in a quarter since the third quarter of 2020. And that's when the stores were reopening. There was a pent-up demand and -- for the physical stores. So this is a historical number. Whenever we face a counter cycle as the last 2 years, there are some questions from the market regarding the future of brick-and-mortar stores. Whenever the economy proves a little and the economy is improvement. This is undeniable. We see this in the balance sheets of retailers and the banks. The physical stores are a big thermometer, macroeconomic thermometer. We know that things are improving. We grew 16% in this quarter. And here, I'd like to highlight some specific regions. Super important regions for Magalu. Regions that stores we opened in a counter cycle, Rio de Janeiro, Federal District, stores that were not mature, while they grew more than 20% now in Q2 '24. And they pushed up the average of our same-store sales. So we're getting to a point of balance in Rio de Janeiro and the Federal District. We had exceptional results in Rio Grande do Sul despite what happened during the catastrophic flooding we had in the month of May there. We had an extraordinary result there. It was really good. Families are buying again for their homes and Magalu was a company that was very present in the state. We provided a lot of support. We had a lot of donations. So our brand name is even more strengthened. We even have a product stamp for sellers from [ Rio Grande do Sul ]. So we were a brand that was very sensitive during a difficult moment, and the [ view Rio Grande do Sul] population is responding to our actions. They are choosing our stores to buy in this moment of reconstruction when they are rebuilding their homes. So this is really a [indiscernible] and we are very happy to see these results. They continue as very strong. And the Northeast, again, increasing the average of same-store sales for the company. So it's a very good moment for physical stores, 16% same-store sales growth. It is a number to be celebrated, and it continues in Q3. E-commerce sales. In total, we grew 1%. Marketplace continues to grow 4%, even more the take rate in this period. E-commerce online sales focus was to contribute to increase the EBITDA margin of the company. In 1P, the gross margin increased to 3% points, as I said in the beginning. We now achieved a level of 7.9% like I said, which is what is expected, which gives us -- which puts us in a comfortable level, even with a more negative interest rate or an interest rate, which is not as positive as we expected. And we give freedom for the second half year. It gives us comfort to unlock the growth agenda when we increase 3% points to our margin. Well, it's hard to do it and to focus on accelerated growth. The company needs to be focused. The commercial sales, marketing teams need to be very focused. And they delivered what they set out to deliver in the first half of the year. Now we're going to balance that with more growth next year. We don't want this margin of 7.9% to fall. We want to maintain that level and up, and I'll speak about some additional drivers such as ads and the Fintech to improve our EBITDA margin. So we are not going to grow in detriment of the margin. We got to this level, and we want to continue to evolve it. But yes, we will be more focused. And we will be reaping the fruits of initiatives that we started in the first half that will help us resume growth in the second half of the year, and I'll speak more about them in the future. Undoubtedly, AliExpress is a big highlight of these growth pillars, the partnership with AliExpress. I'd like to highlight our fulfillment. An important growth driver in the marketplace is to evolve the fulfillment agenda. As soon as the seller migrates to Magalu fulfillment, conversion rate increases, level of service improves, there's a reduction in shipping costs and better economics also for lower tickets. This quarter and last, then a year, we achieved 21% of total 3P orders in Magalu fulfillment, where it have 8 DCs. We have an operation in São Paulo, in Minas. We have operations in the Northeast. We are expanding our operations in the South fulfillment in the Northeast has been 100% successful inventory turnover, doing really well. Products arrive, products leave with great availability in our fulfillment. It's different than the market fulfillment. Once the seller product is [ in our ] DC, they benefit from the same advantages of our multichannel approach that we have in 1P. For example, store pickup. In 1P, 50% of our items are shipped from store or store pickup or shipped from store. When 3P its also on fulfillment, they benefit from the same things. We have about 20% store pickup for 3P. So we are very excited to continue to evolve this agenda looking forward. We want to increase and expand our operation in the South, and we are in the final stage to have fulfillment also in Rio de Janeiro. So the agenda is moving forward really well. More than 3,000 sellers, more than 1 million pieces in storage 60,000 unique SKUs. Next slide. I'd like to speak a little about some initiatives that can increase the margin, which is already historically high to be even higher. One of them is ads. We completed our go-to-market team. Celia Goldstein joined us in the beginning of the year. She put together a team. We are now finalizing all the platform improvements, which are necessary for us to evolve. We had a lot of deliveries in what relates to self-service, sponsored product and the big highlight with the increase of this platform revenue, plus more than 40% platform revenue. 3,700 active advertisers, [indiscernible] 500 million monthly visits considering visits to all companies of the group. Advertisers on the Magalu platform can advertise in Magalu [indiscernible] the 1,300 stores that we have. There are a lot of TV sets so we can do off-line media. We have just launched the new update of Lu. Lu is also monetizable. It's now part of the Burger King, the first advertising that Lu had for a brand on TV that was now then through Magalu. Lu is also an important source of revenue. We are very excited with the opportunities -- the opportunities of the ads agenda. This has been implemented by practically all retailers around the world and almost always in a successful fashion. Some get 500 to 600 basis points of total GMV with 80% contribution margin. So anything close to that, and if it's not successful, if we get 200 basis points of percentage of GMV that contributes to the gross margin given that it's 80% of the contribution margin. So we are excited with this agenda with the potential to monetize Lu because we have a gigantic scale in Brazil with all the platforms we have in our ecosystem. Next slide, MagaluBank. I spoke a lot about Luizacred and the good moment for our services. Fix transactions, MagaluBank offers to companies of the Magalu ecosystem. It's practically in all companies of the group, Estante Virtual, [ Cardif ] KaBuM!, Netshoes, all of them using Magalu bank services. And just like using Magalog services, we have maximum penetration in practically all channels of the ecosystem. But I would like to highlight the big avenue of growth for the second half of the year, which is the launch of the Digital DCC. We are in a phase of testing. We have a controlled rollout. [indiscernible] will be able to speak more about this in soon for thousands of Magalu clients. We should have more than 2 million customers preapproved. So we'll be able to roll out the system in September. This is a product that will help our sales a lot, particularly in high ticket where we are leaders, but we tend to consolidate our leading position. I'd like to remind you that own credit in the offline world has a penetration of about 40%. But online, it is very low. So there is a huge opportunity to drive sales for higher 1P, 3P products through digital DCC. It is a great opportunity for the group to consolidate sales, consolidate our leadership in higher ticket products where we are leaders, and it will help us continue to have positive results and contribute to the EBITDA margin. We are very excited with this possibility. And lastly, this is an agenda. We don't normally talk about in earnings conference calls, but which I believe is fundamental because this is the passport for our future in terms of growth -- organic growth, which is the evolution of our level of service. Magalu in July, and we spoke about this in the beginning of the year. I mentioned it in prior calls, the Encanta Magalu, Magalu in [ Cannes ]. This year, we focused almost all of our efforts in addition to focus on efficiency and margin. We focused on improving the level of service to end customers. The best indicated to measure whether we are evolving in this or not is the NPS. Our consolidated NPS is 78 corporate NPS. In January, it was 67, a significant improvement of 11% points, very much driven by the improvement in the level of service of our marketplace. So it's a strong agenda. Level of service in the marketplace on average is below the consolidated level of service. We conduct service by units sold. The 3P has a lower number. So of the 78, half of the service came from respondents that bought on 3P. 3P improved almost 20 points from January to July, so a significant evolution. This is one of the highest levels worldwide in terms of e-commerce level of service, considering an important 3P basis. This generates a word of mouth. We were not doing that well in the end of last year, but we were able not only to improve, but rather to reach unprecedented levels for the company, even with a high share of 3P. We had a lot of improvement. Time to cancel, time to return products, first contact resolution rate. We had a significant reduction in several claims, which was an important item in our G&A. So we have our one customer experience indicators improving not marginally, but substantially. And today, they consider Magalu's level of service undoubtedly the very fast in the market, and we will continue to deliver this way above many of our competitors. And I'm sure that even with the growth agenda that we'll adopt for the second half, we'll continue to see improvement in customer experience. I'll turn the floor to Roberto Bellissimo to detail our financials, and I'll be back to speak a little about AliExpress and we'll open the floor to questions. Thank you.

Thank you, Fred. Good morning, everyone. Thanks for participating on our earnings conference call. So I'll start here talking briefly about our financial highlights. We've already mentioned BRL 15.4 billion in sales, growing 4% with a strong highlight for physical store performance with the same-store growth of 16%, a great increase on gross margin, EBITDA with more than 60% growth. And net income for the third consecutive quarter with net income and cash generation also being great highlights and cash position and net cash that we're going to talk a little bit later as well. On the next slide, we detail a little bit more on nonrecurring events. This quarter, we had recurring net income of BRL 37 million. And considering the nonrecurring adjustments, our accounting net income for the market was of around BRL 24 million. And the net effect of nonrecurring adjustments was of BRL 13 million to BRL 14 million. And they're concentrated here in 2 major launches. Just to explain, one is a positive tax credit referring to the review of the calculation methodology of excluding ICMS from the calculation base for PIS/COFINS. It's a PIS/COFINS tax credit that was integrated to our asset. And on the other side, we made a complement, reinforced the provisions related to DIFAL of around BRL 200 million, which is a provision that's in our liabilities. There's no cash effect. We had already had a DIFAL provision of close to BRL 400 million at the end of last year. And due to the recent publication of this ruling, the legal advisers recommended that we complemented the provision, but it's a noncash provision still pending. The modulation of the effects and the decisions to be made regarding DIFAL and we also have BRL 1 million already deposited in court on our asset side. In addition to these 2 records, we had in other nonrecurring expenses in part related to closing stores. We closed 17 stores this quarter of only BRL 15 million, less than BRL 15 million. In the same period of last year, we had nonrecurring expenses of BRL 155 million in that line. So we had a significant evolution in reducing nonrecurring expenses, which have continued to drop in coming quarters. In addition, the tax effects on this [indiscernible]. So we again go back to the evolution of the EBITDA margin, that's very consistent. By seeing the main drivers that have been explaining our evolution of EBITDA margin. Again, it includes the growth of marketplace and service revenues, the increase of the merchandise gross margin, the expansion of fulfillment, operational leverage and the increase in profitability of the physical store channel and the significant results of Luizacred this quarter. The next slide, I think the evolution of the EBITDA margin becomes very clear from 5.1% to 7.9%. This came mostly due to the expansion on gross margin that Fred already explained about the evolution of product and service margin, and it also came from the equity income that contributed with 0.6% points. Also note that in SG&A, sales, general and administrative expenses remained stable compared to the same period of last year, very controlled. The allowance for nonperforming accounts that also very stable even considering the relative growth of our DCC portfolio in the last 12 months and the other revenues here that reflect the renewal of the exclusivity agreement with Cardif. On the next slide, we highlight the evolution of working capital in 12 months. We improved it in BRL 1 billion significantly improving in terms of inventory reduction, the extension of the average [indiscernible] purchases, monetization effects. So all of the main working capital points have improved greatly in the last 12 months. In this quarter, there's not a lot of seasonality this quarter for working capital. So it remained stable. We have further reduced inventory, so that was offset somehow because more sellers migrated from the receiving an installment to the prepayment of receivables model, which is not as great for working capital, but it is very good for result for Magalu Pagamentos and so on. And now we get into the second half of the year, that's when we have a trend of improvement in working capital getting into the best stage in terms of the year's seasonality, and these numbers will continue to evolve in the second half. On the right side, we talk about the financial expenses. We've been significantly reducing our financial expenses since the beginning of last year. This quarter, specifically, we -- this dropped 25% compared to last year. BRL 130 million less in terms of net financial expenses. It could have been even lower. It could have been BRL 30 million lower if it weren't for the payment of the debt maturing in this specific quarter. So due to that payment, we had a prepayment of more receivables. And as you know, when we prepay receivables, we account all of the costs in an advanced manner. So that ends up leading to a mismatch in a higher volume of prepayment, generating a growing nonrecurring expense of BRL 30 million which will be reduced in coming quarters. So the trend for the third quarter and specifically the fourth quarter is of a significant additional reduction in financial expenses in nominal and percentage terms. And that irrespective of interest rates, we've been working around the interest rates since the beginning of the year. Everyone expected the interest rates to go down faster. But still, we've been able to work around them with interest rates that are slightly higher than anticipated. We are improving in working capital. The capital structure, increasing sales through the Pix payment, and we believe that we have a very positive trend in terms of financial expense reduction. On the next slide, we see the evolution of cash flow with the operations over the last 12 months. For this period, reaching a record level of BRL 2.2 billion of operating cash flow accumulated until June, even higher than the cash flow of 2020 in the height of the pandemic. And this is completely related to our evolution in EBITDA growing more than 60%, the improvement of working capital as well and the reduction of the prepayment of receivables expenses. So due to this improvement in the operations cash flow and the capital increase we've done this year, we've been increasing our net cash position over the last 12 months in more than BRL 1 billion, totaling BRL 2 billion in net cash. On the next slide, we again show you that we've reduced our short-term debt by BRL 3 billion this year. And the total debt was reduced also in pretty much BRL 3 billion. So all of our debt now is in the long term. BRL 4.5 billion compared to a cash position, investments and receivables of BRL 6.5 billion. So we have a very high rate of liquidity even paying those BRL 3 billion in debt. And I'd also like to stress that this quarter, it was very clear how net our receivables are. We discounted BRL 2 billion with additional BRL 1 billion in receivables. We prepaid more than BRL 2 billion in debt this quarter and still maintained cash position and investments of BRL 2 billion significantly reducing our bank debt without affecting cash position and financial investments. Next, again, showing the drop of the delayed payments at Luizacred portfolio significantly getting to 9% of NPL over 90 days and 3% on NPL up to 90 days. It's one of the best levels we've got in our history. The result of Luizacred significantly evolved as well. As Fred mentioned, it's one of the best quarterly earnings in the history of Luizacred, and there's a very positive trend looking forward as well. This quarter, there was a reduction in the – due to the expenses of almost 20%, funding costs of more than 30%. And we just capitalized Luizacred, preparing it to -- preparing it for a new cycle of more profitability and gradually more growth as well. So with that, I conclude the financial highlights and turn the floor back to Fred. Thank you.

Thank you, Roberto. So before we get to the Q&A, I'd like to highlight one of our most relevant projects for the company that without a doubt will greatly help with our agenda for the online platform and the growth of our online operation, which is our strategic commercial agreement with AliExpress. It's a unique agreement for [ both hands ]. It's the first time that Magalu will list its own inventory 1P products in a third-party competing platform. And it's also the first time that AliExpress, who has operations in more than 100 countries, a unified platform for all of those countries that they'll deliver or they'll integrate their portfolio with a local marketplace. So I'd like to announce here that in the next -- in the second half of August, we're going to begin with this partnership less than 2 months after the announcement when we announced the MOU at the end of June, that's when we'll begin the sale of Magalu's 1P products in AliExpress platform. We have high expectations for selling these products there. They don't sell the products that we sell and the audience of the digital channels held by AliExpress in Brazil, it's 40% of our consolidated audience. So we'll start selling our 1P catalog for a much larger audience with great possibility for growth and sales increase for our 1P in the second half and we will start in the second half of the month of August. And in the first half of next month, we intend to launch AliExpress in it. So that would be the sale of AliExpress Choice line products in Magalu's platform. So there's thousands of items that will be included. We are in our digital channels, this modality is going to be run through Magalu's Remessa Conforme program. We will collect the taxes of this operation and we're going to have it on Magalu web pages. You'll find AliExpress products in specific sessions and it will also be included in the product lines. There are also products that completely complement our product. We're going to provide a much wider range of options to our customers. We estimate thousands of sales per month or actually millions of sales per month of these products, increasing our conversion rates, increasing our audiences. In addition to selling these products, I'm sure that is also going to help in the sense of network effect, It will help the sale of other 1P products at our platforms as well as products from other sellers. I had a very positive surprise from the sellers. Magalu sellers had huge goodwill with this initiative because they know that this will bring a greater audience to our platform, more visits, more stickiness with the customers, more purchase sequence. And that will also be good for their products. So the way this [ perpetuated ] by the sellers was very positive, and we're going to be with them on the 21st at Expo Magalu, we're going to bring together thousands of sellers at [indiscernible]. There's going to be a large event. It's been a long time since we had Expo Magalu as well. So this partnership came to fruition very quickly, hundreds of people from Magalu and AliExpress, China, Brazil, were involved implementing this. It's a lot more complex than it may seem involving integration of catalogs, APIs, shipping issues and product information reviews as well as all aspects related to cross-border payments that are complex issues. So our teams were able to implement this in record time, and this will already benefit us. In the second half of this quarter and fully in the fourth quarter, we're going to be very strong when Black Friday comes and we're very excited with the outlook for the fourth quarter. We've done our homework and the second quarter we've reached EBITDA margin that the market expected for only next year. We're in a situation that protects us from any negative possible surprise of interest rates. I don't want to be caught by surprise because of a decision of the Central Bank anymore. And we feel that one of the main drivers for interest rates decreasing was the American interest rate. So with this news about the weakening of the American economy and the trend of American interest rates going down will be important. There's also the tax aspects, but the main one in my head was the American interest rates. We don't need and we don't depend on any type of good news in that sense. We've proven that. But the trend now is that finally, there will be room for us to get good news, especially for next year. But again, we've done our homework so that we don't depend on that. We are protected against any potential negative surprise in that sense. And now we are consolidated with the growth agenda for the second half of the year without reducing margin. I want to make this very clear. That's not our goal. There's no trade-off in that sense. We have avenues to grow margin irrespective of anything else. With that said, I open to the questions and feel free to ask your questions. The directors are here to answer.

[Operator Instructions] Our first question comes from Luiz Guanais with BTG. Luis.

I have 2 questions. First, Freddy you spoke about the evolution of the EBITDA margin, which indeed is close to what you expected for the full year and you achieved it in the first half of 2024. I'd like to understand is there room for additional gains in the margin due to operating leverage or new initiatives and some monetization of services. My second question is about the partnership with AliExpress, whether we can expect an evolution in the portfolio of services that we can provide to AliExpress. Also considering advertising, fulfillment. These are my questions. Thank you.

Thank you for the questions. I just want to mention that our margin is above what we expected for the full year, okay. What I said is that Magalu's EBITDA margin is in line with what the market consensus was for us for next year. We are way ahead in our agenda of EBITDA margin. We accelerated it. Because the strategic option, Luiz, was that we didn't want to be caught by surprise by a negative agenda of the Brazilian Central Bank and with financial expenses has happened in 2021. So we had a strategic choice to focus on our margin. We have no target of change in this because in the beginning of the year, everyone expected interest rates at 9.5%, some people 8.5%, and it is actually at 10.5%. This adds financial expenses – this takes financial expenses to a different level. For us, the correct solution was to increase the margin, bring our agenda forward. So it's above what we expected. This year, in my opinion, it's close to what the market expected for us in the end of next year. The consensus of the market for this year was 7.4%. We are at 7.9% in the second quarter. I just wanted to clarify that. So as to your questions, we do have growth avenues, ads and monetization of services. I'll ask Edu to speak about ads, [indiscernible] to speak about services, and then I will be back to speak about AliExpress.

To speak about Magalu ads. I think that Freddy kind of gave us some highlights in his initial presentation. The main highlights in the first half was Celia joining the commercial team and the whole team that she built during this time since she joined. We have a complete trained team to deliver a lot of results in the second half. We also have a number of technology improvements on the platform to improve the results of the advertisers. So in that context, we believe that we'll be able to speed up even further our growth, which was 40% in this last quarter Q2. Thank you.

Sorry, Guanais. I was trying to get an update here. I didn't hear your question. Could you please ask again regarding monetization of services?

I was trying to get an update here about Luizacred.

Well, you see today, financial services and insurance, specifically, actually, credit and insurance are the 2 main monetization drivers for services. And Luizacred has started to deliver part of that. We started with Luizacred being a detractor of contribution margin to being now a contributor to contribution margin. And at the end of the day, insurance has also been a great growth driver of service revenues that you see in the net revenues of the company. Looking forward, we have 2 big growth avenues for service monetization, which is evolving these 2 themes on digital. So we had DCC. We do have an agenda that is improving, that is evolving in insurance, in our digital assets year-on-year, growing 70% to 80%. So the trend is that in the coming quarters, we should see even more substantial growth and contribution margin coming from these 2 elements among our digital assets.

And regarding the question about AliExpress, when I say focus in the coming quarters will be to implement the current stage of the partnership, which is selling our products, our 1P that tends to drive the results of 1P in the second half, particularly Q4. We're going to have 1.5 months in Q3, but for Black Friday we'll come in strong. And AliExpress on our platforms will help a lot in terms of services revenues because we're going to receive take rates of these sales, and this is going to contribute to this number that increased 11% this quarter has helped a lot of our gross margin. So we're going to have a positive impact starting in September in the last 4 months of the year. And other agendas will be developed later on. It has been complex enough to have this stage of the operation. I would like to add visits and sales. So their sales on our platform and our sales on their platform. So that's already complex enough. We'll focus on that. Once we achieve our goals or exceed them, which is my expectation, we'll be able to expand the partnership to other fronts. We have a lot of complementarity, very few conflict sense There is, no reason why the partnership should not evolve. But first things first, let's do a homework. deliver the first stage of the partnership first.

Our next question is from [indiscernible] with Itaú BBA.

I'd like to speak very briefly about physical stores. We had another quarter with strong same-store sales growth and without accelerating credit. So I'd like to get some more color about this performance, the breakdown of categories, if there's anything that is selling more. So that would be my first quick question. And linking to my second point, thinking about 1P question about the strategy of physical store growth. Of course, the bases are not comparable. You had the work to pass through default. It's all very clear, but perhaps you could elaborate more if there's anything more than that to explain this disparity. If there is any difference in the performance of the categories, the mix of categories, or something related to the competition, price aggressiveness. So that would be another theme. And if you could comment on the dynamic in the beginning of the third quarter?

I'll start with the highlights, and then my colleagues will help me. I've spoken a little bit about this, but let's see. The results, the extraordinary physical stores results was extraordinary across the board for all categories. It's hard to highlight one category because I think that we performed well in many. But the white line, it was kind of latent, it sold a lot during the pandemic, then we had a hangover. Furniture selling really well, portable electronics. So it was kind of across the board, but I believe that these categories would stand out in terms of regions I mentioned that we had a very good performance, practically all states growing a lot. Highlight going to the ones that I mentioned. We had market share gain, and I would like to stress that I feel that physical store consumers, they are more low income. And we are in a macroeconomic situation where, apart from interest rates and more recently, the exchange rate, which are the 2 negative indicators. All of the other macroeconomic indicators are good. We are in full employment, inflation relatively under control compared to any other country in the world. So that is a tailwind for people at the bottom of the pyramid, which people who are the ones that buy the physical stores, and we are gaining share. So it's kind of generalized almost all categories, almost all states. So it's all very positive. Stores do not pay default. In January of last year, e-commerce lost 5% points of margin, 1P, 3P does not pay DIFAL. The seller pays. 1P is an important business for Magalu. Half of our e-commerce sales are relevant part of the total GMV of the company. Having an agenda of increasing 5% points. In this quarter it was 3% because we had already passed through a part of that in Q2 last year. It's very hard. It's very complex. It requires a lot from the commercial team. We lost 5% points of the margin. Those points would go to our margin and started going to the government in the form of tax. So it was a miracle. We didn't have a reduction in 1P sales. We have competitors that have 1P as strong as ours, and they have significant losses. So the commercial department did drill it more. It was passing through DIFAL without losing share in those categories. The agenda is done. If we look at the comparison base of last year, in the first quarter, we haven't passed through any DIFAL. In the second quarter, we passed through about 15%, then it increased to 75% in Q3. In Q4, we have passed through practically everything. I would say 90%, almost 100% last year. So the comparison base of the second half will be much more favorable than it was before. Having said that, I think it is important to highlight that there was a big discrepancy, not in Magalu's 1P price compared to stores, but the price of electronics e-commerce in the market compared to the stores because the stores would pay more taxes than online and there was a discrepancy for some products. The gap was 20% in price. It was 20% cheaper online than at the stores. But now the stores are more competitive. I commented on this in the last earnings call,. I said petition to physical stores because the price difference from 1P to physical stores, the gap decreased a lot and the stores will become more competitive. Back then the physical stores weren't competitive because they paid ICMS and 1P did not. But this main physical store is more competitive. So it's basically this 1P was the channel that contributed the most for the EBITDA margin of the company. Physical stores contributed the most to growth. And looking forward, the situation should normalize. Rego, could you help me with that? Anything to add?

There was a technical problem. Can barely hear Mr. Rego. Presently we cannot hear Mr. Rego. We apologize. Please bear with us. We have a problem here with Rego's microphone.

No, it's okay. I think that the answer has been very clear. Thank you very much.

So you consider the question and answer. Well, I'm sorry for the technical problem we had here. But I think that Freddy was very complete regarding the stores explaining that growth was starting in the end of last year. Regarding e-commerce, there's only one fact in this quarter, almost all our categories start posting growth. There is one specific category, which kind of pulled us down, which was [ telephony ] category, particularly because you all read about the growth of the gray market in telephony. So that has an impact also more on 1P than in physical stores. Other than that, all category is posting growth in 1P.

Next question. Irma Sgarz, Goldman Sachs.

I'd like to ask a little about the opportunities in commercial margins. I think you've already detailed the advances, the progress you made in different fronts. But considering you are also gaining a lot of share, specifically in the physical store market. I'd like to see whether that's also bringing new opportunities with suppliers, considering the larger reach that you're getting compared to your competitors. And the second question. About logistics. If you can tell us about the adjustments in the logistics network. I believe you reduced expenses. But when you think now about a growth agenda again, of course, physical stores is already growing and resuming grow in 1P as well, is there any need in terms of additional capacity? Or are you comfortable? Thank you.

Irma, thank you for your question. About opportunities with suppliers, and just to clarify what led to the increase in the company's consolidated gross margin was especially that evolution of 3% points in 1P. The percentage of the store goods was stable because they didn't have to pass through any taxes. So it didn't change. But what improved in the store was the penetration of services that's in that math about the service revenue that increased 10% above the company's total GMV. So that's part of the stores group income, but it was not in terms of merchandise of goods because there's no DIFAL pass-through, but it contributed so that, that revenue would grow 11%, as I said, in the opening remarks. And in terms of opportunity, I'd like to take your question to develop this a little bit more. I think there's 2 ways for us to relate with the industry. One is 1P either on the store or online. It's the same relationship. I buy the product. It's the same purchase team that buys and stores and plans to sale that's 1P. And then there's 3P, when suppliers sell directly through Magalu's 3P platform. That's 2 ways, that's for us and for the market. There was a cycle of expansion of suppliers selling through the 3P model. So brands selling directly on their platforms, the B2C in Brazil and in the world that happens. And what I feel now, Irma, is that suppliers want to balance this. I'll give you the example of Nike abroad where they turn things around hugely for B2C to sell online, and they lost a lot of their 1P seller thing of physical stores and e-commerce who used to buy their products. And now it turns swiftly back around to try and restore the partnership of those companies because in the terms of planning, working capital for them, it's a lot better. So just as they had that turnaround and they struggle, they could not sustain everything in B2C to keep up with what they used to have in the normal supply chain, I feel that in the industries here as well. The industry saw that they need to balance their B2C with 1P. And there's no better partner in terms of 1P for the industry than Magalu. So we're consolidating as the top 1P partner for the industry, not only in electronics, but it's the same thing as Adidas and L'Oreal because of EPOCA and other suppliers of computer peripheral with KaBuM! So we're one of the main 1P partners for all of those companies. They need us, and they are trying to balance more their B2C with 1P, trying to resume their growth in 1P. And the only thing is that we need to be cautious in doing that without blowing up our inventory levels, doing that with positive margins for them and for us in doing that with balance. So we're at a very favorable position in the market and a good moment of the market, and we'll make the most of this opportunity. But of course, we want to gain, but we understand our suppliers want to gain as well. So we have a very good comfortable position, but we want to be balanced with a long-term vision of all of that because most of our supplier relationships are excellent, long-term win-win relationships that are mutually beneficial, but we are at a very comfortable position in that sense.

Next question, Nicolas, JPMorgan.

On our side, we have 2 questions. First, Fred, about the competitive environment. If you can give us more color of how you see the market and how do you see the competition getting into the second half of the year? And the second question is related to credit. We saw Luizacred with great improvements in the last 2 quarters. But to understand if you see the possibility of opening the credit tap a little bit more in the second half.

Thank you so much for your question. In terms of the competitive environment, there is one significant change for the second half. One of the competitors became a partner, AliExpress. So that's one competitor that was there competing for the market, and now we're going to join forces and explore the market together. Aside from this significant change, the competition is exactly the same as it was in the first half, both in terms of physical stores and online. And about Luizacred, I'll turn to [indiscernible].

I'm sorry his audio is blowing up. I apologize. Can you hear me? Hi, Nicolas, can you hear me?

Yes Mauad.

So we do have a process to open credit a little bit strongly in our high-yield structure with SEC, both stores and digital. We will promote portfolio increases in the second half of the year. And in cards, which is a product with a little bit of a tighter economics, we do have slight openings including in August. We've been running some tests of new audiences to try and accelerate a little bit more in terms of acquiring and trying to grow this portfolio a little bit more. So the answer is, yes. In a deeper, more acute way in our high-yield portfolios and for credit cards in a more controlled way, still watching the family's compromises and being confident that we'll get to the other end with a very sound credit environment so that we can maintain monetization of financial services. Thank you, Nicolas.

Next question from Danniela Eiger with XP Investimentos.

I have 2 questions. The first is about the credit dynamic. You talked about accelerating credit, but in a more controlled fashion. And we see other players with the same approach being cautious, but at the same time willing to accelerate. My question is the inflows to Luizacred, do they help give comfort to accelerate credit? That's my first question. And my second question, actually, it's just one question.

What we have been doing with Itaú and with the recent improvement of Luizacred's results, well, it feeds back to all of our acquisition models when we can monetize better the relationship of our consumers that carries one of our payment methods. This helps make the acquisition process more flexible. Both Itaú and Magalu want to put Luizacred again in the path of growth above what the cards market is seeing. What we do not want to do is have a loan strategy regarding volatile acquisition. No, we want to take consistent solid steps to make sure we will not be operating credit in cycles, so we can operate credit in an evolution ensuring that the customers will have the ability to pay. That net pay will help them bring back to the ecosystem through the payment method. So more and more, we are optimistic regarding the movements we've been taking, particularly because we see our results improving substantially. So again, the fact that we were able to put Luizacred back in blue. This gives us some more safety margin to invest in acquisition. And in terms of growth, to invest in portfolio initiatives, such as having higher limit thresholds, bolder limit thresholds. Products to increase balance also gained some traction. So this helps improve the portfolio and accelerate the top line of the company.

Next question from [indiscernible].

Regarding the performance of physical stores, what about this dynamic in the quarter? Was there any internal operating change that helped improve the performance of physical stores? That's my first question. Second question. You have a new department of Gen AI. Could you elaborate on this new initiative?

I'll answer briefly the first one. Here's what I can tell you. I do not think that there was any significant change from the standpoint of store operations. What happened was we previewed in the model. We sustained a good environment with our store teams. We didn't let the turnover behind in bad moments because what happens in that moment is that retail overall tends to divest. There's a bigger store turnover. People get demoted – demotivated, a lot of stores closed their doors, a lot more than the few store closures that we had. But then when the tide changes, when the good moments come back, you need to have a strong solid team ready to capture the opportunities of a tailwind. So I guess what we did was we persevered. We kept a good, solid, strong safe team waiting for the tide to change. And when it changed, the stores did well did really well. I feel that we are in a super positive level. And we're reaping the fruits of this good moment. It's a cyclical business for physical stores as well, and we take advantage of that. Regarding AI, I'll turn the floor to André Fatala.

With the arrival of [indiscernible] in our [indiscernible] since last year, we had a number of initiatives to research Gen AI to implement in the processes and business of Magalu. And now we have somebody who has a strong record with AI, a vast experience with AI. He has been – he worked with companies like Booking, Nubank, Amazon with AI. And now he joined us to help us in many of our deployments and research so that we can put into production some things. Some things have begun. We have some initiatives to use models to improve search. We'll expand this to recommendation to improving the catalog. The idea is that we believe just research about the technology, and we'll move to deployments implementation so we can derive optimization gains using AI in general. Specifically, about Gen AI, we started an initiative last year that we called Brain -- Lu's Brain that is that will expand the experience using Gen AI for aftersales for Magalu and also thinking about transforming the experience in the sales process.

And to add to what Fatala said, I've been working with e-commerce for 24 years now. And you've seen a lot of fads, a lot of trends that never materialized. One example is the Metaverse. But in AI, I see something very similar to what I saw in the year 2000, that this is a revolution that came to stay, that it is solid, structural. It will change the way in which customers relate with companies and many sectors of the economy. It will change the way in which people work. So this disruptive potential of AI is similar to what I saw in the year 2000. Something close to it was the appearance of the smartphones in 2007, the apps and the super apps in 2010. But I think that AI has the potential to really disrupt the current processes. Just like the Internet [indiscernible] in the 2000s. Very few things have I seen with this model. And Magalu has a differential. We have our Lu, our digital assistant who is famous, recognized, hired by other brands, the main communication channel with our clients. So WhatsApp, WhatsApp handles order follow-up, one of the context of retail with customers. Lu is looking more pretty now, and having her brain more powerful, driven by these technologies that are so powerful. Finally, we have a technology that will make Lu the primary interaction point with customers during presales and post-sales, aftersales. And this is available now. We are confident that we'll be able to use it and drive this discussion in retail. I'm very confident that this will be an important agenda for Magalu looking forward. People will buy in a different way, and AI will be the main reason behind that.

Next question, Felipe Reboredo, Citibank.

On [indiscernible] the more [indiscernible], I would like to understand how you see the future cycle of the resumption of growth, the advancement of physical stores and the expansion of gross margin and 1P attracted our attention. But should we think about Magalu more focus on the sale of this core asset, consolidating this role of the [indiscernible] player in Brazil. Does that make sense? Can you give us more details of how you see the next growth cycle? That would be helpful.

I don't think so. I mean, without a doubt, we want to consolidate our leadership in the core assets, and they will remain important elements for our growth and the strategic viewpoint that we're very well positioned to continue leading and being a leading player in the sale of discretionary products of high-ticket brand products. Magalu has a relevant presence and leadership in these categories. We don't want to let go of that, and we want to continue to gain share in these categories. But the partnership with AliExpress itself indicates that we're not going to be limited to that. We now found a way to do that in a profitable manner because our difficulty to grow in low ticket categories before was to be able to do that with profitability. We talk a lot about [indiscernible] Brazil and others, but they can't turn results. We see the number of visits that go up, but we don't see profit. It's not broken down, and it's not positive. They burn a lot of cash and lower tickets. So for us, with AliExpress, we found an equation that is positive to expand our assortment of lower ticket items, increase the selection of the assortment for our consumers in a positive, profitable way. So one agenda does not rule out the other to maintain and expand our leadership or expand our leadership in core categories will not prevent us from growing in other opportunities. We looked and searched and found a smart way to do that. Same thing with fulfillment. Fulfillment enables lower-ticket categories economically in the right way. So we put 20% and in less than a year. But there's fulfillment operations that are a lot more consolidated at 40%. But Magalu in just over a year got to 20%. So this is a very good agenda and fulfillment also help us sell low-ticket categories. We're expanding and resuming market 1P as well. We divested a little bit in the recent years, but now we're resuming the agenda of CPG products, reinforcing our team, investing in inventory. So market 1P will also have great growth in coming years. We thought that it is important for -- to maintain active consumers for frequent purchases. And we are resuming our contact with the industry and front name this category. We adjusted the operations to make it more efficient. For example, if I buy multiple items, I don't pay shipping. We consolidated pack for deliveries. So we will run strong in the lower ticket items agenda as well with fulfillment 1P per CPG, that's consumer goods and with the AliExpress partnership. So we will not be limited in maintaining and expanding our share of traditional categories.

Next question, Andrew Ruben, Morgan Stanley. The question will be asked in English, but the answer will be in Portuguese.

I'd like to focus a bit more on the 3P marketplace. It's been decelerating for a couple of quarters now. We know there's been a profitability focus on increasing take rates as well. And now you have AliExpress. But if we maybe put all the Express to side for the moment, what other factors do you think are needed or still remaining to drive another leg of reacceleration in 3P? It would be very helpful.

I think when we found that additional tax in 1P that was -- what happened last year, we started to pay an additional BRL 1.5 billion in taxes per year. And that affected 1P, but it affects all of our online profitability. That's 1P plus 3P. To pay that bill for the 1P, 1P increased its margin, but we also had to improve the 3P contribution margin. So there was a series of initiatives to increase take rate, reduce subsidies in shipping. We forced 3P to provide a high contribution margin to the company. And we made this improvement over the last few years. And now we got to a level where we no longer subsidize rebate, we don't reduce or to subsidize free shipping so much anymore. We don't overinvest in marketing. 3P needs to stand on its own, and it also has to help pay the bill for 1P. So when you look at service revenue going up over the last 3 quarters, that was greatly done due to the increase in take rate, the deliveries on Magalog for a seller. So all of these factors have also impacted 3P growth and were rewarded with things like, for example, fulfillment. So the fulfillment agenda is essential to the growth of 3P, but in solid positive contribution margin. So the more it grows, the more 3P grows in a profitable way. So the fulfillment agenda is very important. The digital DCC will go in for 1P and 3P, so it's also going to help with 3P sales in the higher ticket agenda. 3P is also one of the leaders in higher ticket items and 3P. So the digital DCC fulfillment and AliExpress cannot be put to the side. It's going to join our 3P and we're going to go win in categories we didn't operate on before, and it will make a difference for our results. I'd like to highlight that the 3P agenda for our partners is going very well on Netshoes, 3P is growing greatly. KaBuM! also 3P is growing. And we launched 3 for EPOCA as well now. So these are all excellent channels. So the beauty sellers will have EPOCA to sell the product now. The sports sellers is also doing great on Netshoes. So the agenda is actually accelerating in these channels who had less developed 3Ps that were less developed than Magalu. So we also have initiatives to extend 3P in the group's channels, KaBuM!, Netshoes and EPOCA that we're launching now. So there's a series of initiatives for 3P to reaccelerate. And again, we cannot rule out the AliExpress partnership that's also going to accelerate 3P.

Next question from Bob Ford with Bank of America.

What about -- how much are you thinking about the competition from Amazon? How are you thinking about all this?

Well, I'm not sure I understood your question. Well, one important growth driver for us in the second half is the navigation and purchasing experience. We evolved a lot in the Magalu delights and everything that is related to aftersales, cancellation, returning the money fast, delivering in the promised time, recovery of login and password. There were a number of initiatives to improve customer experience after they have paid, after they've gone through checkout. Now we're doing work to improve experience presales. We identified the need to improve our search and recommendation algorithms. Fatala mentioned some AI initiatives to improve the process. And also [indiscernible] that we should accelerate. But [indiscernible] better job in terms of showing the best options for consumers. So it is what I call initiative of better offering. We have a lot of items, a lot of products, but we don't want to have just a lot of items and products. Also in 3P, we want to have the best market prices. We have to help customers find these best prices and do it consistently. It involves fostering the seller through the platform so that they can have the best prices. Once they have the best prices, we have to show this to the customers. And this should be a priority. It involves a clear definition of the setup of the algorithm we're setting up for price and price means price of the good plus shipping. This is what makes a price. The lower the shipping, preferably free shipping, the lower the price of the good, the better. So we are setting up the experience in order to be more focused on having the best offering to customers. And we're doing a lot of work with the sellers, with 1P so that we can be competitive without hurting the margin. So it's about setting up the algorithms to improve experience. It is to improve the findability, if I can invent this word. And the second point was competition, the categories. Well, the core categories are doing quite well. Bob, we had a challenge. And I've said this over and over, of passing through margin to 1P. Competitors didn't have 1P or had a very small 1P, much smaller than Magalu. For them, the defining factors was minimum. We had a huge impact, and we had to push through prices to customers. But again, I want to emphasize, passing through 5% points to a margin in a category like ours is not easy. This has nothing to do with competition. We are in a very positive moment. I spoke about the 1P dynamic. Suppliers need a strong 1P. In 1P, we are, by far, the leaders with a very solid market position with 20 [indiscernible] 1,300 physical stores. It's almost impossible to be there as in 1P.

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

Thank you very much for participating in our earnings conference call. I'd like to particularly thank the whole Magalu team because they all delivered an excellent result.

Magalu's conference call has come to an end. The Investor Relations team is available to answer any further queries or questions. We appreciate everyone's attendance. Have a nice day.