MercadoLibre, Inc.
Q3 2020 Earnings Call Transcript
Published:
- Federico Sandler:
- Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30, 2020. I am Federico Sandler, Investor Relations Officer for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Osvaldo Giménez, CEO of Mercado Pago will be available during today's Q&A session. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements.
- Pedro Arnt:
- Hi, everyone, and welcome to our third quarter 2020 earnings conference call. Before we begin, I'd like to express our continued thoughts and well wishes to those affected by COVID-19, both at our company and everywhere. We particularly extend our immense gratitude, appreciation and recognition to those who continue to help us combat this unprecedented global health crisis. Getting to our results. MercadoLibre recorded another strong quarter, driven by high demand for e-commerce and fintech services. Brazil, Chile and Colombia delivered very strong results in both e-commerce and fintech, while our Mexican operation is still experiencing robust growth, despite slight deceleration. Let me dive deeper, starting with the third quarter e-commerce progress report. Increased demand continued during the third quarter, despite the gradual reopening of physical retail throughout the region. We attribute this to improved service levels and the incremental depth of assortment with which we served millions of buyers during the quarter. In this particular regard, during the quarter we surpassed the 300 million milestone in live listings, reaching 304 million. Since the beginning of the pandemic, we've observed that buyers have diversified their purchases across a wider range of verticals on our platform. This in turn activates and engages them in a greater number of services and increases overall purchase frequency. The step-up in online purchasing has been stable across all sites in the region. MercadoLibre's consolidated gross merchandise volume growth accelerated to 117% year-on-year on an FX-neutral basis. At the regional level, Brazil and Argentina accelerated to 74% and 242% year-on-year on an FX-neutral basis respectively.
- Operator:
- Thank you. Our first question comes from Stephen Ju of Credit Suisse. Your line is now open.
- Stephen Ju:
- Thank you. So Pedro in your prepared remarks you talked about consumer electronics growing at I think 100% year-over-year. I know, it's probably hard to tell given the circumstances, but do you think that is a supply-led acceleration due to the change in the commission rate? Or is there like a price elasticity factor there as well as merchants adjust to the new rates? And also in regards to the CPG effort, you talked about I guess a deeper assortment there also. Is that mostly through third-party sellers that you're getting the deeper assortment right now? Or have you started to form, I guess larger and deeper relationships with the brands directly? Thank you.
- Pedro Arnt:
- Great, Stephen. So on consumer electronics what we highlighted was that we've really focused on some of these categories that we had identified as categories where we were lagging in fair share, compared to our overall expectations for market share. And we've really began to execute better on those categories. So it's a combination of product improvements, new pricing, very strong execution on the commercial front to source better deals with OEMs that are coming across and then a more aggressive pricing and rebate policy also on price points, at which we sell. So to get that kind of a turnaround it really takes I think concerted execution across the board. On consumer practical goods, we continue to have a growing 1P presence, but that business is still primarily 3P. And again we're just sourcing well from existing marketplace vendors. And really that's one of the areas where if you look at the user experience over the last few months, we've been perhaps more innovative than in many other places in terms of supermarket navigation and really improving the purchase of consumer packaged goods. And then, obviously, assisted by the overall pandemic and a very strong shift of demand online in those categories probably growing more than any other throughout the pandemic.
- Stephen Ju:
- Thank you.
- Operator:
- Thank you. And our next question comes from Andrew Ruben of Morgan Stanley. Your line is now open.
- Andrew Ruben:
- Great. Thanks for the question. So we've seen a big pickup in your managed network penetration again this quarter. So I'm just curious for the quarter itself, how the Correios strike impacted the figures and your short-term strategy? And then thinking longer-term any update on where the managed network penetration could reach over time? Thank you.
- Pedro Arnt:
- Yes. So counter intuitively, I think the strikes that we face end up being at an incredible positive for us long run because
- Andrew Ruben:
- Yeah. That make sense. Thank you.
- Operator:
- Thank you. And our next question comes from Irma Sgarz of Goldman Sachs. Your line is now open.
- Irma Sgarz:
- Yes. Hi. Thanks for taking my question. In your opening remarks in the press release you made a comment about that you're starting to strive for the highest segments of the merchant pyramid. Can you just expand a little bit on any disciplinary measures that you're taking that you'd call out for Fintech and e-commerce on that front? Thank you.
- Pedro Arnt:
- So I'll quickly start with commerce since I've already mentioned some of it. We clearly are seeing incremental traction in our efforts to complement the historic core base of SMEs that sell on our marketplace with a growing number of flagship store and official stores across multiple categories. And so this is somewhat driven by rapid consumer demand online that is forcing many of these brands and OEMs to engage more constructively with online channels like our marketplace, but also as we improve our product and we improve our ability to sell into enterprises we are able to onboard a growing number of companies that sell direct through us. We mentioned some of them in the CPG category in the prepared remarks. And there are others across consumer electronics. Samsung is rapidly becoming one of the largest marketplace sellers in many countries and a slew of others.
- Osvaldo Giménez:
- Irma with regards to Fintech, on the POS front as you know in the past, we consider mostly on individuals. A few quarters ago we launched our Point Pro, which is a device with a printer on it. And what you saw was that the average volume of sales per device was over twice what we had on the MPOS segment. And now more recently we launched Smart POS. And again, we are seeing a step-up with TPV which is roughly 12% higher than the one we already had with Point Pro. So we continued to see increased volumes per device and we are starting to be able to penetrate SMBs which is a tad were out of our scope.
- Irma Sgarz:
- Great. Thank you.
- Operator:
- Thank you. Our next question comes from Bob Ford of Bank of America. Your line is now open.
- Bob Ford:
- Thank you. Good evening everybody and congratulations on the quarter. Pedro, can you talk a little bit about your use of air cargo? There seems to be a lot going on besides the dedicated aircraft in Brazil. And I'm curious in terms of what the implications of excess passenger capacity means for freighter availability and your costs now whether or not this has implications for network design and your build-out priorities. And how should we think about other markets when it comes to air cargo?
- Pedro Arnt:
- So the overriding objective is how can we increase the number of parcels delivered in less than two days and then eventually continue to shorten that time. And for that especially in the larger geos like Brazil and Mexico air is a critical piece of this. We started with air as you mentioned using excess capacity on commercial carriers. And as we understood that part of the business better and the volume began to ramp up, we've continued to sort of integrate in that value chain and we now start having freight-only 3PLs that provide exclusive routes and exclusive planes for us, hence the news yesterday of the yellow-liveried MercadoLibre Air airplanes. And that will be a growing part of our network design as we strive to go faster. Importantly, there's no CapEx involved in that. These are third-party logistics air providers and when we look at unit costs, we're trying to be selective in terms of routes where we have enough scale where the overall negative impact on unit cost is manageable yet the acceleration in delivery times is impactful. And no it's not just a Brazil thing, it already happens in Mexico. And I assume that as the networks grow in other markets, we will also look into it.
- Bob Ford:
- Makes perfect sense. And just one other question if I may. Can you talk a little bit about app usage year-on-year in terms of engagement conversion rates, improved navigation, impacts for client acquisition costs? And then is there a reason to maintain separate Mercado and Pago apps? Or is there an opportunity that we should be considering longer term?
- Pedro Arnt:
- So, we continue to see traffic and volume migrate increasingly obviously to mobile. I think we're already above 80% of volume is mobile and two-thirds is already app volume. And obviously that's a consequence of a combination of consumer demand shift, but also our continued focus on improving those app experiences. In terms of number of downloads not always an ideal metric because our cadence of investment in downloads may vary Q-on-Q, but we continue to grow that base. And we believe that our installed base of both MELI apps and MFA apps continue to be one of our strongest competitive advantages across the region.
- Bob Ford:
- Great. Thank you very much.
- Operator:
- Thank you. And our next question comes from Gustavo Oliveira of UBS. Your line is now open.
- Gustavo Oliveira:
- Hi Pedro, good afternoon. I have two questions. The first one is I would like to understand a little bit better the impact of the -- on gross margins and perhaps on overall operating profit margin coming from the elevated penetration of 1P in the business. I think in one of the charts, you show here there is a 210 bps impact coming from cost of sales of goods. I wonder whether this is already coming from the increase in 1P penetration. So, if you could explore that a little bit. And the second question is with respect to the growth of off-platform unique payers in Brazil, the 4.2 million new unique payers that you had in this quarter what are the drivers of this growth? Is this related to kind of any of your efforts associated with peaks and making sure that that's probably helping your growing unique payers base? Or there are other drivers behind that?
- Osvaldo Giménez:
- Gustavo let me start with the second question the one regarding the acceleration of platform payers in -- mostly in Brazil. And I would say peaks did not yet have an effect on that. But what was a significant catalyst for that was Auxílio Emergencial emergency payments made in Brazil. We saw a significant ramp-up in the number of people connecting their cash account with the Mercado Pago account to be able to access those funds and to make payments afterwards using Mercado Pago. And so we saw a spike in terms of downloads and of accounts being funded and then of payments made in Brazil driven by Auxílio Emergencial.
- Gustavo Oliveira:
- Okay.
- Pedro Arnt:
- Yes. And then on the 1P business Gustavo, this is a business that we are investing behind. We think that it has a key role to play going forward in terms of being able to step in with 1P offerings where there are inventory breakage or inventory gaps from our marketplace. It allows us to be very competitive versus other 1P competitors in terms of promotional calendar and pricing. And so this is an important part of our strategy going forward. In the early years, it's a business that has less scale than what it will have in the future. And so when you look at current pure product margins and the overall P&L it does compress gross margins. I think the important thing here is to understand that we're investing into it because we trust that as it scales and grows there will be leverage on PPM on down. And that business longer term isn't necessarily going to be as much of a drag on gross margins as it is in the very early phases.
- Gustavo Oliveira:
- Currently, Pedro, what's the penetration of 1P in your total GMV? Hello? Hello, Pedro. I think we can't hear you.
- Pedro Arnt:
- Yeah. I'm not sure, if we got cut off. I think the last part of the answer was that we don't –
- Gustavo Oliveira:
- Yeah, Pedro. I think –
- Pedro Arnt:
- Yeah. Sorry. So we were saying that, we don't disclose what the percentage of 1P is, but it's growing nicely and it's still relatively small in the single digits.
- Gustavo Oliveira:
- Okay. Okay. I could hear. Thank you, Pedro.
- Operator:
- Thank you. And our next question comes from Ravi Jain of HSBC. Your line is now open.
- Ravi Jain:
- Hi. Thank you for taking my questions. So the first one is given that your electronics GMV is growing nicely, is there a change in the way you think about like the big holiday sales like Black Friday et cetera, in terms of promotions and things like that? And the second one, was more on the Andean region. That has obviously been growing nicely. And when you look at the revenue split, it's still under-indexed quite a bit. So maybe some color around, what exactly do you want to focus on in Chile, Colombia in terms of whether it's going to be CPG electronics? Is it going to be logistics that's going to drive a lot of – or is it going to be the payments and the loyalty together? So some color on what exactly are your main focus for the Andean region? That will be helpful.
- Pedro Arnt:
- So let me start with the Andean region answer. I think, this goes to show the enormous opportunity that exists in those markets, once we begin to have enough resources to continue to aggressively invest in Brazil and Mexico, but also start investing more aggressively in those markets. And by investing aggressively, I don't necessarily mean spend. Those markets were actually profitable, during the quarter. But I do mean having greater and greater human capital, primarily engineering resources to be able to take the user experience and the technology in those markets to the level that Brazil and Mexico are at. And so there is no different strategy for those markets. It's all of the things you mentioned that have allowed us to be successful in the other markets. Yes, logistics is already a big piece of the acceleration. We have as you know, warehouse in Chile operational, one in Colombia on the way, and the growing managed network in those markets. We have a strong CPG business. So in a way they – as we have more and more resources we can focus on those markets. And they have the benefit of being able to leapfrog some things, because they can benefit from a lot of the innovation that's occurring in Brazil and Mexico that maybe wasn't present in those markets, when they had the size that Colombia, Mexico – sorry, Colombia, Chile now have. So, similar strategy, greater ability to invest behind them, the demand and the market opportunity we believe was always there, and we're now beginning to capture that. And going forward, we continue to expect solid growth from those markets.
- Ravi Jain:
- That's helpful, Pedro. And on the holiday events like Black Friday, do you see any change in your thought process?
- Pedro Arnt:
- I think in previous years, we have been quite willing to stay on the sidelines in some of these year-end promotions that typically were dominated by 1P retailers. As we improve, both our 1P capabilities, but in our general sourcing and execution, across some of these key categories, I think we believe we can invest somewhat more aggressively, because the user experience and the price competitiveness is there on our marketplace. And so you will see us, I think be less on the sideline during the Q4 critical promotional period.
- Ravi Jain:
- That's helpful, Pedro. Thank you so much.
- Operator:
- Thank you. And our next question comes from Edward Yruma of KeyBanc Capital Markets. Your line is now open.
- Edward Yruma:
- Hey, guys. Good evening. Thanks for taking my questions. I guess, first on Mexico, I know, you kind of highlighted the share opportunity there. I guess, as you think in the medium term what kind of investments are necessary to kind of continue to propel growth in Mexico? And then second on Brazil credit, nice to see you leaning into that. I know it was maybe about a year, a-year-and-a-half ago that you ran into some issues in Brazil. What are you doing this time around to ensure that delinquencies and charge-offs don't tick up, knowing that I think you mentioned using AI more as a tool? Thank you.
- Pedro Arnt:
- Okay. So, I think, recapitulating on our Mexico story, if we look back over the last four years, where, as you know, we've invested very aggressively, certainly, that was the right strategy. We look at Mexico and the growth it's had, the competitive position we continue to maintain in that market and the incredible advances we've made in terms of the user experience we're able to offer. This is exactly how we want to manage our business, which is to take a long-term view and invest behind the kind of things that we know generate long-term value. And obviously, the logistics network there is the first one that comes to mind, but there are other things we've been doing. So that will continue to be the case in Mexico. We're not going to take a short-term view on that market. We continue to take a long-term view in a very competitive market. Having said that, as you all know there are scale benefits to our business. And so, if you look at the level of losses and the margin structure, despite us continue to be extremely aggressive in absolute dollar terms, that's also continued -- has improved consistently over time. And so, I think, Mexico has been playing out very positively and we will continue to pursue the long game, investing, but also understanding that scale benefits will come to our P&L as we continue to grow that business. And it's a business that continues to double year-on-year.
- Osvaldo Giménez:
- With regards to operations -- with regards to price in Brazil, I would say, in the second quarter, we took a cautious approach as the pandemic was just starting. We were not sure how both our merchant and consumers would react to that. Nonetheless, the industry, as it stands, will continue improving our model, collecting more data and improving our collection efforts. So we felt very comfortable during the third quarter and we were able both, on the consumer and merchant side, to triple the number of loans we offer and that's where you see an increase in more hand on the size of the portfolio and at the same time a decrease in nonperforming loans.
- Edward Yruma:
- Great. Thank you.
- Operator:
- Thank you. And our next question comes from Thiago Macruz of Itaú. Your line is now open.
- Thiago Macruz:
- Thank you. Thank you for taking my question. Pedro, we've seen several players endeavoring into fresh goods and foodservice categories, especially here in Brazil, in an attempt to generate traffic and decrease customer acquisition costs. Do you think you guys will play a part in those two categories as well? I would like to understand what are the pros and cons of doing that. And regarding peaks, there is clearly an impact here in the money in and out of digital wallets in the country. I'm curious to hear what other opportunities you believe can come from the launching of this payment to in Brazil this month. Thank you, guys.
- Pedro Arnt:
- Yes. Look, I think, we aim to be able to supply whatever our consumers want from us and where demand pockets are. We don't comment on future category developments or where we might be going, but we are -- we look to be the stop and the online solution that our consumers go to for all the things that it makes sense for us to sell. So, clearly, category expansion is a part of our growth story, as we continue to aim to gain share of wallet of consumers, but we'd rather comment on specific category expansion, once we launch something rather than in advance.
- Osvaldo Giménez:
- Thiago, with regard to peaks, it's still very early, but we are excited by the initial result. So now, I would say, the last time central bank published data, we were second in the number of big . And yesterday started also the top launch and at least are this payment. So far our debts are going on track according to our plan. The ramp-up will be in the next couple of weeks on November 15, surgically all loans have to be lived for all clients. And we believe this will have an impact. It started out with the possibility that will provide. And the one hand we believe that it will have an impact in terms of transfers of loan and debt transfers for P2P and then also for P to merchant. In that case, nonetheless, we believe that the fact that Ps does not support the installment probably will make it less than what we thought it would be. Now definitely we are developing features and of to allow big segments in of our flows.
- Thiago Macruz:
- All right. Thank you very much, guys.
- Operator:
- Thank you. And our next question comes from Deepak Mathivanan of Barclays. Your line is now open.
- Trevor Young:
- Hi. It’s Trevor on for Deepak. On the commerce side can you talk about how cohort level trends over the last three months have evolved? Are you seeing active buyers that came to the platform in April and May still continue to exhibit similar frequency and spend? And how about on the new customer trends are cohort sizes still similar? And lastly, any commentary on active buyer growth coming from like truly new customers versus existing customers that were dormant kind of reactivating? Thank you.
- Pedro Arnt:
- Yes. So cohort performance has continued to be very strong and improved sequentially across most key metrics. If we look at the quarterly evolution of new buyers acquired during the growth of online demand because of COVID. So users who we acquired over the last few months at a very rapid pace have continued to remain engaged and the overall cohort performance has actually improved sequentially quarter-after-quarter. In terms of the new cohorts, I would say, the last quarter was in line with the previous pandemic cohort perhaps slightly below in terms of their initial performance but still historically strong compared to any other prior quarter we could have.
- Trevor Young:
- Great. Thank you.
- Operator:
- Thank you. And our next question comes from Marcelo Santos of JPMorgan.
- Marcelo Santos:
- Hi, good afternoon. Thanks for taking my question. The first question is in the post – regarding the post office strike. So was there a negative impact in the end in terms of growth? And could you help to like for us to have a feeling or the migration to manage logistics in the end help to offset completely that? And the second question is about EBITDA margin, EBIT margin. So profitability also came quite strong again this quarter. Are you reaching a point, where you should kind of keep a more positive profitability at the more mature businesses like generated results, as you mentioned last year like the more mature ones should build more results? Or should we still ramp up more investments and end up doing more the trade-off in terms of – in growth? These are the two questions.
- Pedro Arnt:
- Yes. So Correios like I tried to transmit, we believe long-term is something – or the Correios strike, sorry is something that ends up being very beneficial to us, we migrated thousands of incremental large merchants away from the drop ship model onto our managed network as a consequence of the strike. Short term, it's still a headwind. So I think we calculated anywhere between mid- to high single-digits of growth that we lost because during the strike delivery promises were longer, conversion rates dropped, parcels took longer to arrive in doorsteps. So again, it's short term, it's negative. Mid to long-term it's positive because it gives us incremental arguments with merchants to move them onto the managed network. And we saw that significant increase in sellers now fulfilling through us or using our network for pickup and then injection into our logistics network. In terms of profitability profile, as you know we don't guide. But I think conceptually the way you've laid out the question is accurate. Our more mature businesses and the larger more mature geos have strong natural scale in them. And so they should continue to be able to drive some operational leverage. Now don't forget that this is a highly competitive market. And again, we will continue to take the long road. So if we need to err on the side of remaining aggressive on our investments and driving growth and market share that continues to be our number one priority. If we're able to accomplish that and also take advantage of economies of scale, fantastic. And then there are newer business units and newer initiatives that we've launched, CPG, 1P, insurtech that could be very, very large opportunities and that we will invest behind.
- Marcelo Santos:
- Perfect. Thank you very much for the answers.
- Operator:
- Thank you. And our next question comes from Jamie Friedman of Susquehanna. Your line is now open.
- Jamie Friedman:
- Pedro, do you have any view about the impact of the corona vouchers, the stimulus program? Any way to detect how much that may have helped your TPV?
- Osvaldo Giménez:
- I would say they basically had an impact in numbers of payers during the quarter on those accounts. In terms of TPV, I don't think there's a number we can specifically point to because there were many you can use, especially paid to the corona vouchers that we had impact us in a number of ways.
- Jamie Friedman:
- Okay. Thanks for that as well. And then, do you happen to have any update on the PayPal operating agreement? What are you guys doing together? What do you have operationalized in the market at this point? And what are your future plans?
- Osvaldo Giménez:
- So, Jamie, what we have already launched for the ability for PayPal payers to pay cross-border in MercadoLibre in Brazil and Mexico and also for PayPal payers to pay in the merchant side at the customers at São Paulo in these two countries, and now we're working on the other parts. One of them is for MercadoLibre payers to be able to pay on global PayPal merchant. And the third one is to focus on remittances from the U.S. into Mexico driven by someone on the PayPal side and by our distribution network in Mexico. But those two we are working on them and have not yet been launched.
- Jamie Friedman:
- Great. Thank you Osvaldo.
- Operator:
- Thank you. And our next question comes from John Colantuoni of Jefferies. Your line is now open.
- John Colantuoni:
- Hey, thanks for the question. Can you talk about how efforts across the Brazil retail landscape to spread out sales events this holiday season could impact overall promotional spending this year? And related to that dynamic, I'm curious whether you're seeing any signs that competitors with large physical store footprints are putting even more effort into driving sales to their e-commerce offerings given the impact the pandemic may have on consumers' desire to shop in-store? Thanks.
- Pedro Arnt:
- Yeah. I think I feel more comfortable recapping how Q4 plays out once we've actually gone through the quarter and anticipate how competitors might play and what might happen. Like I said, I think, we're focused on our own Q4 execution. You should see us see less on the sidelines than in previous years. We feel that we are better equipped to participate aggressively in those promotional activities and let's see how it plays out. And then in terms of where consumer affinity for online versus for physical store purchases, I think as we've seen gradual reopening of retail, we are seeing more traffic rising that we see primarily in the gradual rebound of our MPOS business and our in-store to our businesses in FinTech. So I do think that slowly consumers are beginning to return to physical stores.
- John Colantuoni:
- Thank you.
- Operator:
- Thank you. And our next question comes from Kunal Madhukar of Deutsche Bank. Your line is now open.
- Kunal Madhukar:
- Hi. Thanks. Thanks for taking my questions. A couple if I could. One with regard to the recent Amazon Prime Day and the awareness that we could have generated for e-commerce in general. Typically what we see in the U.S. is a lot of other retailers competitors to Amazon kind of report like higher growth, higher trading volumes around those days. Curious what you saw? And then again picking up on what Amazon is doing in the U.S. in terms of Amazon Flex where they've actually helped finance trucks and trailers and what-have-you advance for last-mile delivery. Is that something which is -- which would be an option for you guys in Brazil as a way to kind of get around the couriers' bottleneck?
- Pedro Arnt:
- So let me attempt an answer. I think first of all Prime Day was -- we had some initiatives that we think blunted the value proposition. We increased our free shipping offering during those weeks and we saw good results on our end during those weeks. And then in terms of network design and what they're doing, I think my only thought is we've historically always tried to understand very well what's happening in the global e-commerce landscape. And if there are things that are applicable, or things that are worth emulating, I think we've always been very adept at doing so and adapting it to whatever the local reality is. And our network is a case in point in that. We firmly believe that we are building out the most efficient network in the region across multiple geographies not just in Brazil or just Mexico. And that obviously requires hiring the right people, investing aggressively, but also learning what others are doing globally and replicating where apt.
- Kunal Madhukar:
- Thank you guys.
- Pedro Arnt:
- Thank you Kunal.
- Operator:
- Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. Thank you for participating on today's conference call and you may now disconnect.
Other MercadoLibre, Inc. earnings call transcripts:
- Q1 (2024) MELI earnings call transcript
- Q4 (2023) MELI earnings call transcript
- Q3 (2023) MELI earnings call transcript
- Q2 (2023) MELI earnings call transcript
- Q1 (2023) MELI earnings call transcript
- Q4 (2022) MELI earnings call transcript
- Q3 (2022) MELI earnings call transcript
- Q2 (2022) MELI earnings call transcript
- Q1 (2022) MELI earnings call transcript
- Q4 (2021) MELI earnings call transcript