MercadoLibre, Inc.

Hello, everyone, and welcome to the Mercado Libre Earnings Conference Call for the quarter ended June 30, 2020. I am Federico Sandler, Investor Relations Officer for Mercado Libre. Our Senior Manager presenting today is Pedro Arndt, Chief Financial Officer. Additionally, Osvaldo Jimenez, 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 on 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, your caution not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and risk factor sections of our 10-K for our year-ended December 31, 2019, Item 1A, Risk Factors, in Part 2 of our form. Thank you for the quarter-ended March 31, 2020, and on any of MercadoLibre Inc.' 's other applicable filings with the Securities and Exchange Commission, which are available on our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our second quarter 2020 earnings press release available in our investor relations website. Now, let me turn the call over to Pedro.

Hello everyone and welcome to our second quarter 2020 earnings conference call. Before we begin, I want to take a moment to highlight that our thoughts and well wishes continue to go out to all the individuals and families affected by COVID-19, both at our company and everywhere. We particularly extend our immense gratitude for and appreciation and recognition to all those brave souls who continue to work on the front lines through this unprecedented global health crisis. As you may have seen, our latest branding campaign, Elbow to Elbow, which promotes social distancing, is one of the ways we are contributing to awareness around prevention, raising funds for treatment efforts and paying tribute to healthcare professionals. I'll detail our other contributions in a moment. We also want to take this opportunity to thank all of Mercado Libre's employees who have shown endless amounts of resiliency, effort, sense of purpose and courage. Whether it be balancing the requirements of family, household and work responsibilities, while conforming to social distancing norms and working from home or showing up to work at our warehouses and service centers every day, enabling us to deliver the goods that our users need. We are all immensely proud of all the hard work our employees are doing during such trying times. Before I dive into the quarterly performance overview, Let me share with you some of the efforts we continue to undertake in response to this pandemic. We have kept remote work for all the teams except for our logistics personnel, for which we have applied the strictest norms of prevention and hygiene in all our logistics centers. Added temporarily to our payroll employees from Le Pen Cotidien in Argentina, while in July we signed agreements with the master franchisees of brands such as McDonald's and Starbucks. In this manner, and together with the agreement that we have already implemented with LPQ, we will total 350 contracts under this collaborative labor initiative in Argentina. We are working towards extending this offer throughout Latin America. We have continued to manage the operation of our commerce, shipping and fintech solutions without significant interruptions throughout the quarter, helping new and existing sellers to continue their operations as well as buyers to get their products on time. We have launched comprehensive support and training platforms for thousands of SMEs and entrepreneurs in the region. facilitating the onboarding of merchants that are starting to operate in the world of online commerce for the first time, as well as generating alliances with some of the main e-commerce platforms that operate in this segment. We continue to strengthen our presence and our offering in the long-tail and mid-tail segments by enabling merchants to process food aid cards in Argentina and Brazil. already representing 10% of our MPoS TPV in Argentina and allowing for more than 40,000 new merchants to accept these emergency payments. We have promoted our payments link to avoid crowds of people at physical points of sale while also allowing small and medium-sized businesses to continue to operate. We improved the private experience and enhanced the communication positioning the payment link as an excellent solution for distant sales in the current context without needing to have an e-commerce site. And finally, we continued with our donation campaigns, helping NGOs and food banks in Argentina, Brazil, Mexico, Chile, Colombia, Peru, and Uruguay through the Elbow to Elbow Challenge and campaigns. With that said, let's recap our performance during the quarter, starting with our e-commerce business. E-commerce surged during the second quarter as we reached new milestones in penetration and experienced powerful tailwinds which drove solid performance and overall execution across the board. Traffic and buyers accelerated strongly versus the first quarter, with an unprecedented increase in engagement rates. Sessions grew by 48% year-on-year, an acceleration of 28 percentage points versus last quarter's growth. We also improved our conversion rates with buyers on our marketplace surpassing the 30 million mark, reaching 31.5 million during the quarter. Engagement rate in terms of frequency of purchase increased from 4.3 items per unique buyer last year to 5.7, representing more than a 30% improvement annually on a consolidated basis. And new buyers attained a record growth of 75% year on year. Consolidated gross merchandise volume doubled over last year, growing at 102% during the quarter with all countries accelerating sequentially on an FX-neutral basis. On a country level, all of our countries accelerated from the first quarter as we delivered FX-neutral year-on-year growth rates of 230% for Argentina, 58% for Brazil, and 122% for Mexico. Colombia and Chile's combined growth was almost 200% year over year. We've become more focused on these two Andean markets given their increasingly attractive growth profiles as the business accelerates in scale. Our other segment grew 69% year on year on an FX neutral basis. Furthermore, underlying the strength of the quarter Units sold growth exited the quarter, growing above 100% year-on-year in all of Brazil, Argentina, Mexico, Chile, and Colombia. At the category level, consumer electronics, which was once one of the most affected verticals at the beginning of the year, started recovering during May and June 2020. to complement the sound growth rates in categories more directly related to COVID-driven consumer behavior changes, such as CPG and health, to name a few. Regarding consumer electronics in Brazil, where we have been doing significant work to improve price competitiveness assortment amongst other initiatives, In this country, we exited the quarter with an almost 40% growth acceleration throughout the period, indicating that many of our efforts are beginning to pay off. In consumer packaged goods specifically, not only have we continued to see improvements in terms of adoption and growth, but we are also continuing to verticalize the experience in this increasingly important category for us. On the product side, during the month of April, we launched our supermarket navigation in Brazil and Argentina, helping us accelerate conversions and growth in that category. In line with that, we also continued enhancing the navigation experience through our shopping cart as we enabled users to bundle items in a single order and be able to access free shipping benefits on this category as well. We have also made solid progress on our cross-border trade initiatives to deepen assortment and selection during the quarter, especially in Mexico. Our improved output was primarily driven by our Chinese sellers being able to recover from the initial impact of COVID-19 to their businesses. Additionally, during the second quarter, we launched pricing per category in Mexico and Chile. This had already been made available in Colombia since the first quarter, where we lowered commissions for consumer electronics categories and increased them for higher margin merchant categories like fashion and apparel, as well as furniture, among others. This initiative allowed us to better adapt pricing to our merchants' margin structures and be more competitive without compromising overall monetization and take rates. I'll now turn to logistics, a growth area that continues to unlock powerful synergies with our marketplaces. Our managed network has been central to growing our e-commerce businesses and being able to handle the increased demand resulting from the pandemic, validating the resources we have been allocating to the growth of our own logistics network over the previous years. We are delivering on time and cost efficiently across the region, with our consolidated net promoter score continuing to improve. In fact, our managed network, NPS, reached an all-time high in Brazil, with users highlighting speed of delivery and merchants' quality of our shipping services. We've also been able to maintain delivery speed while growing volume, particularly for deliveries arriving in less than 48 hours, where year over year we improved by 10 percentage points the consolidated share of these rapid deliveries, especially in Brazil, where that improvement was of 13 percentage points. Same-day deliveries also improved on a consolidated sequential basis, with countries such as Brazil more than doubling from prior year quarter share, mainly attributable to a higher penetration of our flex service, which already accounts for 5% of the consolidated volume. Important milestones in Mercado and Vios did not stop there. Our managed network penetration surpassed the 50% mark on a consolidated basis. Brazil and Argentina reached 51% and 79% respectively. Fulfillment in Brazil reached 17% of total shipments, exiting the quarter with a penetration of nearly 20% in June. The remaining 30 points of the Brazilian managed network coming from our rapidly expanding cross-docking operations. In Mexico, we maintain the pace of execution with fulfillment penetration stable on a sequential basis. On the shipping product and technology front, we are pleased to report that MELI Logistics, our integration of microcarriers into our managed network, gained penetration in Brazil and Mexico. We also launched technology for this product in Argentina during the quarter of enabling us to more efficiently manage the pandemic-driven surge in demand we have faced. As a result of this integration, and as our flex logistics solution continues to gain share, we continue to generate efficiencies in our shipping costs, with savings, queue-on-queue, of around 23% per unit shipped. Given the success of our managed network, we've continued scaling this important initiative with the launch of our first fulfillment centers in Chile and Colombia, as we double down on our efforts to maintain our leadership position in these countries. Additionally, we also continued with the expansion and rollout of our flex logistics solution, launching it in Uruguay and Chile during the quarter. The latter should not only help us drive greater penetration of Mercado and Vios in the aforementioned countries, but also enable us to have more influence over the last mile delivery, being able to generate efficiencies on the most cumbersome part of the shipping journey. Additionally, we continued expanding places, our drop-off point solution in Brazil, We now have over 1.3 thousand places drop-off points throughout four states. During the pandemic, given that some of our drop-offs weren't marked as non-essential activities and weren't able to open, we implemented an alternative places offering, MELI branded place trucks. This initiative was deployed in safe, high-density locations in Sao Paulo, providing an innovative experience to sellers at a reduced cost. With that, now let's move on to the fintech side of the business, another critical building block of our ecosystemic strategy. Our off-platform payments business exceeded our expectations during the period due to the strong performance of our online payments business and the relative resiliency demonstrated by our physical in-store solutions, MPOS and QR. Consequently, Mercado Pago surpassed the 52 million payers mark during the quarter, growing 64% year-on-year, accelerating sequentially by more than 21 percentage points. We've also seen better engagement rates with our payment solution, achieving almost eight transactions per quarter per unique payer. During the quarter, off-platform total payment volume accelerated sequentially to 175% year-on-year on an FX neutral basis, with a stellar 339% year-on-year growth in Argentina, a strong performance in Mexico and in the other segments, which are growing over 220%. Brazil, on the other hand, has a greater off-platform total payment volume contribution from mobile POS systems, which rely on foot traffic, which, given the aforementioned lockdowns, was a more compromised segment than online payments. The impact of the pandemic on the MPOS business translated into a slower off-platform TPV growth pace in Brazil of 84% year on year. During the second quarter, our online payments processing business what we call merchant services, delivered one of the highest historical growth rates, reaching 164% year on year on an FX neutral basis. The latest shift towards e-commerce consumption benefited us across all regions. Notably, we recorded year-on-year growth of 457% in Colombia and 258% in Argentina, both on an FX-neutral basis. Not only did our online services accelerate on both number and volume processed, but also on the onboarding of new merchants adopting our payments offerings. This has accelerated the migration of sellers to the online world both large and long-tail, leading to a record acquisition during the second quarter. Mobile Wallet also had a strong quarter as it benefited from a consumer shift to contactless payments, although we did observe a deceleration in the in-store payment solutions like our QR and MPOS products. The latter two continued to be affected by lower foot traffic due to COVID-19 throughout the quarter. As a result, consolidated wallet TPV accelerated to 373% year-on-year on an FX-neutral basis. Overall wallet adoption reached 9.5 million active payers during the quarter with almost 10 transactions per quarter per unique payer, accelerating the frequency of purchase versus prior quarters. Second quarter MPOS TPV grew on a consolidated FX neutral basis by 80% year-on-year. This performance was impacted more negatively during April, with year-on-year growth of 71%, but accelerated through May and June, exiting the quarter at a growth rate of 89% year-on-year, almost reaching pre-COVID levels. Additionally, in Argentina, we are happy to report that we launched our Point Plus device, which should enable us to move up the merchant base and have a more complete value proposition that facilitates better cross-selling to marketplace merchants who also have physical stores. Although, as I just mentioned, the pandemic negatively impacted the physical retail footprint across the region, our active MPOS merchant base increased during the second quarter to 3 million, while on a consolidated basis, device sales surpassed the previous quarter mark, reaching almost 1 million devices sold. This strong momentum of device sales and user-based growth is mostly due to the trend towards digital payments, cash shortages, and an increased propensity towards local purchases in smaller convenience stores. We also implemented different initiatives to accelerate the transactional volume, including but not limited to lowering fees, eliminating interest charges on credits, cross-selling the payments link and enabling the feature of acceptance of emergency aid as a means of payment. Staying on fintech, one quick update on our PayPal commercial agreement. We are very pleased to announce that PayPal is now available for cross-border transactions on MercadoLibre in Brazil and Mexico and also available as a payment option within MercadoPago's online checkout for foreign shoppers. This is a first step that we hope will generate powerful synergies between both companies and boost even further our common objective to democratize payments throughout Latin America. Moving on to Mercado Crédito. During the quarter, we slowed our pace of originations in order to manage our exposure to merchant and consumer credit risk as the pandemic and lockdowns got stronger at the beginning of the quarter. We've been able to mitigate default rate impact due to the swift preventive measures taken. Consequently, non-performing loans actually improved Q1Q on a consolidated basis. This was in large part explained by the slowdown in the pace of originations during April that I just mentioned, as our teams shifted origination towards users with good historical credit behavior, while we also enhanced our collection mechanisms and processes. Along these lines, it's also important to highlight that as we entered into May and June and we had more data in our models, we gained a better, more confident understanding of users, which enabled us to more accurately predict their behavior and also to ramp up originations again. When we analyzed the non-performing loans through the second quarter on a monthly basis, they have kept improving all the way through the end of June. The lower debt levels plus higher interest rates have resulted in an improvement in the profitability of our credits business during the second quarter. Let me now move on to the review of our financial progress report for the quarter. The financial performance we delivered during the second quarter has been stellar. However, I do want to take a moment to highlight two things before I walk you through the actual results. First, I want to acknowledge an event that took place during the quarter which resulted in a bad debt charge of $27 million. Within Mercado Pago, we traditionally have agreements with multiple unaffiliated entities under which our users are able to deposit cash at the agencies of these entities for credit to their Mercado Pago accounts. These amounts are recognized on our balance sheet as receivables from these unaffiliated entities. During the month of June, we became aware that one of the unaffiliated entities we work with in Argentina that acted as a cash collection agent had accumulated a number of receivables that they did not settle to our bank accounts. Upon review, we realized that collection efforts for these balances had not been carried out and that the aging of these accounts receivables exceeded the allowed limits established by our internal controls. As a result, we've booked the charge to our P&L to reflect that the collections are past due our aging policies while we continue to work to recover the amount from the counterpart. We've also identified this event as an opportunity to improve our internal controls on this specific matter in order to avoid a similar situation occurring in the future. We've also revised all other accounts and have found no evidence of similar deficiencies in collections efforts with other entities that form part of our payments value chain. Second, and to state the obvious, this has been a unique quarter. changes in consumer demand brought about by the pandemic have accelerated adoption of digital platforms significantly throughout the region. We believe this has both the enduring impact of greater scale benefits in general to our financials, as well as the short-term benefit of allowing us to significantly decrease marketing spend while still benefiting from accelerating organic traffic. As we see it, That first trend is sustainable. The second one, less so, as we plan to re-ramp up sales and marketing investments in our business to acquire and retain the growing number of users that have moved online during the last few months. With those two comments out of the way, let me start my review of our P&L with comment on consolidated net revenues. For the second quarter, they ascended to $878.4 million, a year-on-year increase of 61% in U.S. currencies and 123% on an FX-neutral basis. As we continue to optimize shipping subsidies and costs that minimize contra revenues from free shipping programs and benefit from the surge in demand throughout our platforms. Gross profit for the second quarter was $427.2 million at a margin of 49% compared to 50% during the second quarter of 2019. The margin compression resulted primarily from an increase in shipping operating costs as a percentage of net revenues, partially offset by a decrease in collection fees as a percentage of revenues. Sequentially, we've improved gross margins by 66 basis points, mostly driven by better margins on the shipping warehousing front and efficiencies both in shipping carrier costs, MPOS purchase of devices, and collection fees. In the slides accompanying this presentation, we've included, as we do every quarter, a detailed breakdown of these as well as the OPEX margin evolution that I'll cover quickly now. Operating expenses increased to $327.7 million, an increase of 15% year-on-year in dollars. As a percentage of revenues, operating expenses were 37% compared to 52% during the second quarter of 2019. The $43.1 million decrease is mainly due to marketing expenditure decreases that were made possible as a result of the extraordinary growth in organic demand brought about by the effects of the COVID-19 pandemic on consumer behavior. This was partially offset by 25.5 million increase in bad debt expenses explained by the recognition of a 27 million charge from the aforementioned accumulated accounts receivables from an unaffiliated entity in Argentina, an increase of 14.5 million in our buyer protection program expenses, mainly in Mexico and Argentina, a 2.3 million increase in chargebacks from credit cards due to the increase in our Mercado Pago transaction volume, a $1.6 million increase in other sales expenses mainly related to marketing initiatives, and a $1.5 million increase in salaries and wages. Additionally, we had a one-time charge in the valuation methodology of how we account for our long-term retention plan of $15.3 million. As a result, operating income was $99.4 million compared to a loss of $29.7 million during the prior quarter. As a percentage of revenues, operating income margin was 11.3%, improving by 1,587 basis points on a sequential basis. Excluding the bad debt one-time charge, operating income would have been $126.1 million, representing a margin of 14.4%. Moving down our P&L, the company incurred $27 million in financial expenses for this quarter, mainly attributable to financial loans entered into during the second quarter of 2020, mainly in Brazil and Argentina, and interest expenses from our trusts related to our factoring business in Argentina and the 2028 convertible notes we have issued. Interest income was $18.8 million, a 44% decrease year over year as a result of lower interest rates in our investment as a consequence of the pandemic. As a result of this, net income for the second quarter ascended to $55.9 million. Before wrapping up, I want to recognize this delicate moment in history, one that has taken a toll on all of us in health, wealth and spirit. At Mercado Libre, our stated business mission is to democratize commerce and payments. With so many businesses being hard hit, we have the unique opportunity to connect and empower millions of Latin American entrepreneurs while continuing to partner with governments across the region in our role as an essential service. Never has our mission been more relevant and never have we felt more determined to fulfill it. We will continue to do our part to help get the world back on its feet. And once we get there, we hope to celebrate that achievement with all of you. Elbow to elbow. Thank you, everyone, as always, for joining the conference call, and we look forward to keeping you updated on our progress report next quarter. With that, we can take your questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the stop and the Y key on your touchdown telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Stephen Jew with Credit Suisse.

Okay, thank you. So, Pedro, can you talk about the changes to the fee structure that is now expanding out of Colombia? Presumably, this should result in greater listing selection and hopefully purchase velocity, but we wanted to confirm that you are indeed seeing this pickup, although it might be difficult to disaggregate the impact versus the pandemic's impact. Also, when do you anticipate rolling out the fee structure changes to Brazil? Thank you.

Hi, Stephen. Thanks. So the fee structure aims, as you anticipate, to better match the fees we charge merchants with the economics of different categories and therefore should drive more merchants to want to list fees We're trying to accomplish this in a way that is take rate neutral. So we're not trying to raise take rates nor diminish them. And you are correct. Disaggregating impact from the overall context is extremely difficult. I think the one assertion we can make is that the balancing of take rate has worked well in the markets where we've done this. And obviously our marketplaces are on fire across the board. So, we anticipate and we are working on the rollout to Brazil. We haven't communicated a specific date yet, I believe, but this is something that given the positive impact in the other countries, we are looking to roll it out to the other markets.

Thank you. Our next question comes from .

Yes, hi, good morning. Thank you for taking my question. In the monetization of e-commerce, the commerce revenues, the commerce GMB, you had some impressive results. I know there's a couple of different forces at play, and you mentioned in your opening remarks the impact of reduced, optimized free shipping subsidies and control revenues. But could you just maybe touch upon, with a little bit more color, on what were the main drivers here and how you maybe see that progressing into, if there's anything sort of one-off that we may not be seeing into the back half of the year. Thank you.

Irma, sorry, I'm not sure I understood the first part of the question.

It's about the monetization rate or the implied take rate of the commerce revenues over the GMV. which improved year over year and quarter over quarter by an impressive amount. And I wanted to understand, we had to sort of separate the different impacts from, I think there's probably also to some extent some accounting effects that some of the revenues or some of the shifting costs are shifting to different lines. But how should we think about this into the back half of the year in 2020 and 2021.

So I think what you're seeing now probably already begins to reflect a more stabilized level in terms of representation of where the revenues are presented. And in terms of free shipping, I think we're analyzing going forward where there are opportunities to increase free shipping, but given that there also have been significant improvements as we called out in cost of shipping and whatnot, we actually see pockets of opportunities to offer more free shipping without negatively affecting monetization. So, um, I think the quarter should be a reasonable indication. of where the year could play out in terms of the monetization level on the marketplace. The other issue, Irma, that drives the deltas in monetization on a consolidated basis is if you look at the growth rates, we are seeing tremendous performance out of Colombia, Chile, even Mexico continues to drive phenomenal growth. Brazil rebounded significantly, but when you compare growth rates to these other markets, It's lower, so our mix shift is moving to some of these newer markets with big opportunity, and they typically have lower monetization levels on the commerce side as they are earlier stage.

Perfect. Thank you very much.

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

Hey, good morning, everybody, and congratulations on the quarter up. Peter, I wanted to ask three questions if that's okay. Can you talk a little bit about adoption rates at QR enabled points of CLO links and your other Brazilian partners and how you expect that to ramp? And also, how are you thinking about remittances and the adoption of a digital solution given the very high cash orientation of the market today? And then you've made tremendous progress with respect to the managed network, particularly in Brazil. Can you talk a little bit about the possible impact in the event of another Correio strike in Brazil and how you can mitigate that given the greater integration?

Hi, Bob. This is Osvaldo. With regards to adoption of QR codes in Brazil, what we saw in general, not only in Brazil, but in general during the second quarter, was that due to diminished food traffic, in the case of wallet, we saw an acceleration in those flows which do not require people to be in person. So we saw acceleration in in P2P payments, in top-up of mobile phones, and also in payment of utilities. In terms of QR code, given that there was a significant decrease in food traffic and that some of the categories where we have been stronger are related to food or gas stations, what we did was we reduced the number of incentives and discounts we were providing. With regard to your specific questions of how do we expect the run-taps with CLO and links, so far we have seen some transactions there, but it's difficult to discern quite the effect given this reduction in overall food traffic and lower use of install payments during the quarter. I'm not sure I got your second question right. Was it related to remittances, right?

It was, and given the cash orientation of the market today, how do you plan to change that behavior pattern? I would expect that certainly the fees and the point exchange spreads have to be much more competitive with your value proposition.

Yes. With regard to remittances, we have been doing more business development and partnering with other companies to to become stronger here. As you know, part of the agreement we have with PayPal is that we will leverage their Zoom platform and we are already working on together managing remittances from the U.S. into Mexico. They have a huge distribution of people who could fund those accounts in the U.S., and they would be able to pay to our account holders in Mexico. Beyond that, we have also started working with Western Union and providing them with the ability also to both fund and disburse payments. It's not live yet, but we have announced it already. You can already fund transactions using MercadoPago, but you will also be able to disburse transactions using MercadoPago.

Great. On the managed network, just to quickly level set, so the managed network has been our build-out of our own logistics network over the past few years where we control transportation, cross-docking, and fulfillment. Within the managed network, there is an operation we call MELI Logistics, which further has driven the success we've had in terms of managing the surge in demand over the past few months, which is where we begin to rely less and less on large transportation companies and are able to rely on smaller middle mile, last mile, and first mile operators. The consequence of all this is that our overall reliance on Correos has continued to diminish month on month and queue on queue. So if you look at the rumblings of a Correos potential strike, I think we anticipate it to not be very long or severe. We believe that Correos will try to maintain level of operation as well as possible. We are in constant communications with them, but most importantly, We are much more able today to shift volume away from Correos. We are not entirely unreliant on them, but we are incredibly better equipped than in all the previous strikes we've had to face as a consequence of everything that we've been building on the logistics front, which is really, really one of the highlights of our execution over the past few months and quarters.

Thank you. Our next question comes from Andrew Rubin with Morgan Stanley.

Hi. Thanks very much for the question. I was wondering if you could please talk some more about some of the assortment initiatives. First, you mentioned CPG and supermarket. Just curious how meaningful these categories are now and how you're viewing the pace of rollout. And then second, on the first-party assortment, any similar color there on your targets for 1P within the mix? Thanks very much. Sure.

So, consumer practical goods, of which supermarket is a sub-initiative, is a category that has been obviously surging throughout the COVID period, but it still represents mid-, single-, to high single digits for us in the most successful markets, with tremendous upside in opportunity as we begin to focus more and more on it. Our first party initiatives are still smaller than that. They're probably in the lower single digits. But again, also a lot of building blocks that we have put in place over the last few quarters, and we feel we are increasingly better equipped to be able to accelerate investments and execution behind 1P to complement inventory gaps or to drive greater price competitiveness of our 3P efforts. And I would say that the third element in terms of assortment that you don't mention but is important is the current crisis has also generated a significant pickup in inbound interest and in pipeline of brands and merchants working with us to onboard into our marketplace. So that has also been another area where, because of all the building blocks that we've put in place over the last few years, we feel we can be of assistance to many merchants, large brands, OEMs as well, that weren't working with us in the past and can start working now. or for merchants who are already working with us to be able to double down on their marketplace efforts. Great. Those building blocks make sense. Thank you.

Our next question comes from Robbie Shane with HSBC.

Hi, Peter. Good morning. A couple of quick ones from my end. In terms of the investment priorities, what do you see as maybe more strengthened or accelerated for 2020 now, and maybe what is something which is slightly delayed, both maybe on the marketplace and the fintech end. And the second one is specifically on fintech. I mean, you announced a partnership with HBO recently. Should we expect in the future to have multiple streaming partners or services that you would kind of work with? And what are the features could you kind of give us some color on that you're planning for the loyalty program? And do you expect that there will be a strong marketing campaign around the loyalty program at some point? Thank you.

Great. Hi, Ravi. So at the risk of being repetitive, but I think this is important, our strategy and our investment cycle by and large remains unchanged. If we were scrambling now to try to react to the opportunities arising because of COVID-19, I don't think we could be as successful as we're being. This is a consequence of work in logistics and category expansion and overall user experience that obviously we've been highly focused on over many years now. Fortune comes to those that are prepared. So at the margins, I would say we have accelerated even further the rollout of our own logistics network because that has been key throughout this period. and it's been tremendously encouraging to see how well the logistics operation has been able to deploy an even greater number of nodes in our own networks at an accelerating pace successfully. Obviously, from a category perspective, we have redirected resources and focus potentially away from some slower categories over the next few quarters, like apparel or auto parts. to some of the faster growing ones like CPG, supermarket, health and beauty. But again, this is not a change in strategy. It's marginal reallocations of capital. On the fintech side, I would say there is an increased focus on the overall digital account as we see greater digital adoption and a somewhat slower adoption of certain in-store QR categories, primarily in restaurants and food. So there's a bit of a shift there. We still see restaurants, foods, and other in-store QR categories and MPOS as tremendous opportunities long and midterm. So I would say this is more of a pause before we start re-accelerating. And we've already began to see that when you look at our comments on MPOS in Brazil and other markets as we compare the exiting of the quarter to the beginning of the quarter. The final point I would say is We have also, as a consequence of this, seen and been able to work with governments in helping them distribute a lot of the aid that is being distributed throughout Latin America, particularly in Brazil, that has generated a ramp up in users receiving account balances as a consequence of these aid services and fundings by governments. And so that's also driven the focus I mentioned previously on digital accounts. On your second question, we do intend and the strategy is to be able to work with leading entertainment and content companies in ways that are accretive to their objectives of customer acquisition. and billing and charging of those customers throughout Latin America, given the capabilities that Mercado Pago has, while simultaneously being able to generate value for our users within the loyalty program from discounts and special benefits and promotions that we are able to negotiate with these partners. So the idea is to generate a sort of a subscription hub for our users with benefits while at the same time driving incremental customer acquisition of digitally savvy and high frequency users and also help these partners with the challenges in billing, charging and credit that exist throughout the region and that we've solved very efficiently with Mercado Pago. But content is only one of the prongs behind the loyalty program. Free shipping, obviously, was the initial one that's been incredibly successful. But our idea is to continue to overlay other benefits as we partner with more and more companies in the region that want access to our growing user base of loyal users and are willing to give benefits and discounts to those users in order to acquire them.

That's helpful. Thank you, Pedro.

My next question comes from Gustavo Oliveira with UBS.

Hello, Pedro. Hello, Federico. Good morning, everyone. I have two questions. The first one, Pedro, it may be a bit repetitive, but Do you foresee any logistics bottleneck in your entire system with acceleration of growth, or are you very comfortable with the pace of the investment that you're making? And if you could highlight where you see more critical volumes and capacity to drive. And the second question is related to the payment link. You mentioned in your opening remarks that you are promoting more the payment link as a feature tool to help reduce in-store agglomerations, et cetera. But do you foresee a long-term opportunity here of both engagement and monetization, if possible?

Right, so let me take the first one, and Osvaldo can take the second one. We are extremely focused on continuing to generate incremental capacity in our logistics networks. And we are investing significantly behind that. We have already communicated incremental warehouses for Brazil. We have recently launched a new warehouse in Chile. We will be doing so in Colombia and very, very rapidly building out what I mentioned before, which is MercadoLivre logistics, which allows us to access capacity from small companies, independent truck drivers and whatnot. So our expectation is that we can continue to generate that incremental capacity as our volumes grow. So far, so good. It's an ongoing process. It's challenging, but most importantly, we believe that it generates an enormous competitive advantage because what we are building is truly unique. And if you look at service levels, of that logistics part of our overall network throughout the COVID crisis. They have been extremely good while at the same time driving down prices. So this is a strong competitive advantage as we build it out.

With regards to the payment link, technology we've had for many, many years, but it has clearly accelerated As a consequence of COVID, part of what has happened is many individuals and small businesses which in the past did not sell online or could always be able to collect in person were not able to do so. And so they had either started to sell online and probably through very basic means, probably sometimes sharing a payment link through WhatsApp or other social media or even deliveries where they are able to collect online. And this has seen a significant acceleration. We see this as an opportunity to engage those small merchants and help them move along and start doing more e-commerce in general. We see that the monetization is pretty healthy because usually these are The merchants is a very long tail, so we do not need to offer any discounts on our fees, so monetization is very good. With regards to the long-term opportunity, we saw it mostly as an entry point into e-commerce for these individuals and small merchants. Thank you.

Our next question comes from Edward Yorma with KeyBank Capital Markets. Hey, good morning. Thanks for taking my questions. Two quick ones for me. First, thank you for the commentary on marketing. I guess at what point do you believe that you'll have to relayer in marketing again? Will this occur in the third quarter? And second, given some of the favorable quarter-on-quarter trends in Mercado Credit, though, are you expanding now at this stage credit issuance? Thank you.

Sure, so very quickly without guiding which we don't, we have began to once again invest behind customer acquisition and even more so brand building. This is a unique opportunity with tremendous fast forward in digital adoption by consumers throughout the region. And so this is not a time to focus on marketing efficiencies. We believe the scale benefits from the business will still be there, but certainly we want to be aggressive and to capture the opportunity. So we have already began to spend more on marketing. Q2 really was anomalous in that marketing spend we cut back entirely as we tried to understand what was going on and the organic demand was still there. We've now began to take the learnings from all that and to selectively deploy capital in both sales and marketing again. it should still be efficient. But yes, we are already spending.

And Ed, with regards to Mercado Credito, initially in the second quarter, we were cautious because we wanted to see how each merchant and each consumer was doing. But as you were saying, we are expanding the offering, the credit issuance. In fact, our credit offering is already above pre-COVID levels.

Great. Thank you.

Our next question comes from . Great.

Hey, guys, thanks for taking the question. Pedro, I realize that you don't want to provide guidance, but can you provide some additional color on what you're seeing in July and August on the e-commerce and fintech business? Obviously, these are volatile times, but it seems like e-commerce has stayed strong through July in many markets. But can you talk about what you're seeing? And then the second question on NPOS, you mentioned that it's close to pre-COVID levels already. What type of businesses are driving the recovery at this time? And can you talk a little bit about, you know, how much of the merchants that you had in 2019 are likely lost permanently in this business? Thank you.

So I think very quickly, we mentioned in the prepared remarks that we exited the quarter and entered the July period across most markets in a stronger fashion than we did in the beginning of the quarter, which was already quite strong as a consequence of consumers moving online. But I think there's still a lot that we need to wait and see what happens on a macro level. So we will give you an update when we report the next quarter, but certainly we have gone from strength to strength.

With regards to NPOS, as we mentioned in the prepared remarks, we did see an acceleration in the number of active merchants. We have 3 million active merchants. And this, I would say, is related to two facts. On the one hand, as people prefer to stay away from cash, we have seen an increased demand of devices. And for the first time, we sold about 1 million devices in the quarter. What type of merchants? It's mostly small merchants. Nonetheless, we have been able to move up the merchant base. We're starting to move up the merchant base both in Argentina and Brazil. In the prior quarter, we have launched the NPOS Pro in Brazil, and we launched an NPOS Plus in Argentina, which are added to this higher merchant base. And something that's worth mentioning, and I say it varies a little, categories varies a little bit on a country-by-country basis. In Argentina, it's more, we're seeing more small supermarkets and mom-and-pop stores using our NPOSs. And in Brazil, it's mostly smaller individuals and merchants. And Additionally, a driver behind increasing volumes in the quarter has been government aid, both in Argentina and Brazil, which is disbursed through bank accounts or special cards. And we have been able to launch the possibility to accept these cards both in Argentina and Brazil, and this has driven debit card volume in both countries.

Thank you. Our next question comes from Jamie Friedman with Susquehanna.

Hi. Thanks for taking my questions. I'll just ask the two up front. So it sounds like, as we've seen elsewhere, the payments business is clearly benefiting from the e-commerce business. I was wondering if you would say the opposite is true. Is the e-commerce business also benefiting from the payments business? Maybe you could reference some examples, because it seemed like there was a big boost in Mercado Pago net new actives or accounts on file in their usage. So that's the first question. And then, let's see. Oh, about this CPG mix, we recognize it's a great opportunity, and it seems like you've monetized that opportunity But where are we in that journey? When do you see it being more material than just mid to high single digits? Thank you.

So let me take a stab at both, and Osvaldo can compliment. Clearly, we have a unique platform approach to our business where we combine commerce and payments. in as synergistic a fashion as we can. So all these users that are onboarding the digital wallet and coming into payments, eventually through the loyalty program, through cross-sell, but I would say the loyalty program is the big bet there. We should be able to convert those to commerce users as well. I would characterize that one as more opportunity than actually immediately happening because a lot of these users will first come on to the payments wallet begin to use the systems, and then we have to, with time, be able to cross-sell to them. On the CPG mix, I think there is still a lot to come. We will continue to expand our CPG offering and our supermarket offering. We will continue to invest in the technology and the front ends to make purchases more verticalized within those categories. We will combine this with more and more 1P mix So I would say this is in the very early innings. It's gotten to mid to high single digits faster than we thought because of COVID, but there is still a lot to grow. And when we look at share of wallet and overall consumer spend in the region, this is obviously one of the very big categories that we still under index. So I think the upside there is quite significant as we continue to build user experiences around that category.

The only thing I would add is that we are already seeing, as you mentioned, both Mercado Pago uses transactions on MercadoLibre and vice versa. For the quarter, we had in total 52 million payers. And if we were to look at each of the 30,000, 31 millions were on platform, 30 million off platform. So there was a 9 million overlap, people doing both on and off platform transactions during the quarter. And what we're seeing is increased number of transactions in payments per quarter, and we believe this extra visibility will result in extra driving in both particles.

Thank you, Pedro. Thank you, Eduardo.

Our next question comes from Marvin from VTIG.

Great. Thank you very much for taking the time to answer my question. Two questions. You know, just one quick one on the new commission structure in certain countries. Could you just help us understand if we should just assume that the overall take rate will stay consistent with prior history, or would it move one way or the other, up or down, as a result of the changes? And then the second one, Professor Osvaldo, the new PIX initiative that should be coming into play in Brazil, starting November. Just curious what your thoughts on that are. Do you see it as a major catalyst for new user adoption of digital wallets in general? Thank you.

So, on the changes in take rates, again, just to level set, we are rising take rates on categories where merchants typically have higher margins and we are lowering take rates in categories where merchants typically have lower margins and we are trying to accomplish this in a take rate neutral fashion. Consolidated take rate for MELI should continue to consistently grow as consumers and merchants adopt more and more of our services and we're able to better monetize our user base from this incremental adoption of services. But the specific marketplace pricing, we are trying to carry this out in a take rate neutral fashion. We've been successful in doing that in Colombia, and so far in Mexico and Chile likewise. But it is a moving target.

And with regard to PIX, we are very excited with the initiative. We believe it will have lots of effects, but we want to speak about one in each of the online and offline. Online, we are excited mostly because up until now, it was very difficult to accept debit cards in Brazil, so most of the commerce was done only with credit cards, and we believe that PIX will enable millions and millions of users who did not have either a credit card or did not have available balance in the credit card to do more transactions online. And then with regard to offline, we believe that it will drive acceleration of acceptance of QR codes in Brazil. I think that we are preparing to work there in increasing the number of stores and our sales force to reach out to these stores. We believe that QR in PIX combined with the ability to process credit card transactions, which we already have, will also enable to accelerate the deployment of QR code payments in the country. So we are working on that.

Great. Thank you both very much. Appreciate it. Our next question comes from Marcelo Santos of JP Morgan.

Hi, good morning. Thanks for taking my question. I wanted to ask about your long-term strategy for logistics, especially in Brazil, where we see some of your marketplace competitors operating some sort of omni-channel, using their network of stores as advanced inventory locations. Do you think this could create a disadvantage in the long term? Do you think they would be able to provide quicker deliveries, given that they would have the inventory closer to the consumer? What's your view on that?

Um, let's see, first of all, I think we have always said that we believe that long-term as consumers get more demanding as they do in developed markets, home delivery beats pickups. Um, so our approach is to build out the number of FCs we have to get inventory closer to consumers, but continue to deliver to your doors, to your doorstep, not have you have to drive to the retail location to get the product, which at the end of the day is the same thing as an offline purchase. Two-year doorstep also allows us to get things to you quicker. Having said that, we also have initiatives that look to replicate some of those elements of having a physical store footprint. So we are rapidly growing our pickup and drop-off points throughout most of our network to be able to have greater nodes for merchants to drop things off, which would be the equivalent of what some competitors could try to do with the stores. But clearly, our network design does not try to turn a physical store, which we don't have, into a highly optimized e-commerce fulfillment center or cross-docking or service center, but rather we focus entirely on building out capabilities to get things to your doorstep faster and cheaper than anyone else.

Okay, thank you very much.

Our next question comes from Kunal Mandekar with Deutsche Bank. Hi, thanks for taking the question. I wanted to understand the competitive landscape, not only within online, but also with offline. you know, in terms of, you know, you just mentioned competitors using, you know, their stores as fulfillment centers or, you know, as part of the logistics network. So what do you see in terms of them kind of going more and more online in Brazil as well as in Mexico? Thank you.

So, look, I think we really continue to focus on our users more and building out our capabilities. If we do that, I think history has shown that we are in a unique position because of the platform we have, the capabilities we have, the brand we have to continue to gain share over long periods of time and to be the market leader in this rapidly expanding space. So really our focus is how do we continue to execute the way we have been executing continue to launch innovative products, get into more categories, and that is how we believe we will build competitive advantages and continue to be successful in the competitive scenario. Obviously, the region is competitive. Competitors also have their initiatives, but we stay focused on ourselves and our consumers. We trust that we will continue to lead and gain share as this market expands.

Thank you. Our next question comes from John.

Thanks for taking my question. It sounds like you made a lot of progress in supermarket and CPG during the quarter. Can you discuss what initiatives you have in place to help retain CPG sellers once the pandemic is over? Also, can you talk about any key changes in purchasing frequency and retention that you've observed in other categories? that you directly attribute to the expansion of your CPG offerings? Thank you.

Thanks. Great questions. So, there is a lot of work on front ends and product initiatives. We've launched our supermarket navigation in more markets now. We've continued to try to optimize pricing for CPG, eliminating flat fees and offering more free shipping even on lower ASP items in some countries. So that should move volume, and merchants will go and remain where volume is moved for you. We've also began to complement with 1P purchasing, which deepens our relationship with a lot of the CPG brands because we are now both buying from them and also helping them with marketplace. We have began to build deeper advertising relationships with these CPG companies, where there is co-marketing and co-spending occurring. So we offer them consumer insights, consumer data, and ability to also market their CPG lines on the marketplace in addition to it being highly transactional, and they can even go direct to consumer. And we are seeing interesting evidence that consumers who purchase in CPG are more engaged across other categories. Again, the CPG category is still small, and we need to see how well this data holds up. But the initial data is very encouraging in terms of CPG purchasing cohorts showing very good behavior across other categories posterior to having purchased CPG. So that's also encouraging for us.

Great. Thank you. And ladies and gentlemen, so let's conclude the Q&A portion of today's conference. I'd like to turn the call back over to our host.

Great. Thanks, everyone. We are incredibly encouraged by the last four months. We are incredibly proud of the work of our teams in a difficult time, but we still have a lot of work to do. So we will get back to that and look forward to reporting again to you in a few months' time. Thank you very much. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.