MercadoLibre, Inc.

Good evening, and welcome to MercadoLibre's Q3 2024 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. We ask participants to limit themselves to one question and get back in the queue for any follow-ups or additional questions. Please note this event is being recorded. I would now like to turn the conference over to Richard Cathcart, Investor Relations Officer. Please go ahead.

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30th, 2024. Thank you for joining us. I'm Richard Cathcart, MercadoLibre's Investor Relations Officer. Today, we will share our quarterly highlights on video, after which we will begin our live Q&A session with our management team. Before we go on to discuss our results for the third quarter of 2024, I remind you that management may make or refer to, and this presentation may contain, forward-looking statements and non-GAAP measures. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our investor relations website. With that, let's begin with a summary of our results.

Hello everyone, I am pleased to share that MercadoLibre had another quarter of outstanding growth. We had an excellent quarter across all of our businesses and geographies, so the strong performance was really all around. With these results, we reinforced our position as the leading e-commerce and fintech platform in Latin America. Every time we have invested in enhancing our customer experience, in the past, We have been rewarded with strong growth and improvements in a market position. In this quarter, we continue to make strategic investments in our platform, both commerce and fintech, and that resulted in GMB growth of 34% year-on-year in Brazil and 27% in Mexico. This also resulted in market share gains in both countries. In Argentina, item sold grew at 16% and we surpassed the 60 million items sold in our platform, which is the highest ever volume. But we continue to see improvements of the Argentinian market. We have added a record of almost 7 million new buyers into our platform. This is a number higher than the number that we saw during the peak of the pandemic. So let me be clear on that. Not even during the explosion of demand that we experienced in the pandemic, we saw a number of new users at this level. As most of you know, the penetration of e-commerce in Latin America continues to be relatively low when we compare it to other more developed regions. Only 15% of commerce is done online, so there's plenty of room to continue growing. As a leader player in the region, we have a crucial role in driving more volume online and increasing this penetration of e-commerce. For that purpose, we continue to invest in our strategic initiatives such as logistics and our loyalty program. In Q3, we opened six new fulfillment centers, five in Brazil and one in Mexico, and that helps us improve or increase the fulfillment penetration by 4.5 percentage points compared to a year ago. We know that having more volume shipped out of our own fulfillment facilities results in a much better user experience for buyers and sellers, in faster and more reliable delivery speeds, and in much better conversions of volume. In turn, it results in further growth of the ecosystem. Investment in technology also plays a critical role in bringing more business online. Because it removes buyer friction. Our large team of developers continue to be focused on improving the buyer experience and customizing it for each individual vertical. Our advertising business represents a powerful profit engine for MercadoLibre. And once again, we had a strong quarter despite FX headwinds that we experienced in Mexico and Brazil. Most of the volume of advertising continues to come from product ads, so we see a tremendous opportunity going forward on display and video advertising where we're just getting started. In fintech services, the impressive growth of our user base and the rising engagement that we see people having with our products shows that more and more people and consumers are choosing Mercado Pago as their main financial service provider. We continue to invest behind our credit card, as it's a critical product to achieve principality within our users. In Q3, we issued 1.5 million new credit cards, and the credit card TPV grew by 166% compared to last year. As we see improvements in our risk models, we have accelerated the underwriting of credit, not only credit cards, but also consumer and merchant credits. and this resulted in growth of our portfolio of 77% compared to last year. We know that the faster growth of our credit portfolio, combined with a shift towards more credit cards as percentage of total portfolio, puts some short-term pressure on 911 Express. The broader stable NPLs that we have seen, and the fact that the earlier cohorts of credit cards are already becoming profitable, gives us confidence in our investments. Turning now to our financial results, our strong operational KPIs translated into revenue growth of 35% year-on-year, despite FX headwinds that we suffer in Mexico and Brazil. Our successful Q3 performance is not just a result of the great execution of our team, but also a testament of the many growth opportunities that lie ahead of us in our business and our ecosystem. Our EBIT was $557 million with a 10.5% margin. The majority of the margin compression from last year comes from the strategic initiatives, strategic investments that we discussed earlier. Investors can find more detail on those investments in our shareholder letter. Net income rose by 11% compared to last year, reaching $397 million in the quarter, with lower EBIT partially offset by a reduction in FX losses. As we finish our 25th year anniversary, we continue to see tremendous growth opportunities ahead of us. both in commerce and fintech, and now also in advertising. We have a clear vision of the future and are focused on the long-term growth, profitability, and cash flow generation of our business. Now I want to share some examples of innovation that we have implemented during the quarter, so I'll send it back to Richard that will explain those to you.

MercadoLibre is a major driving force of the shift of offline to online commerce and financial inclusion in Latin America. Continuously investing in our value proposition, service levels and user experience is key to making that happen for years to come. We want to share a snapshot of just some of those investments and innovations today. In September, we upgraded the Melimize benefits package to include cashback or extra installments on marketplace purchases and new fintech benefits. This means that users are able to get back much more than they pay for the subscription, making Melimize the smartest choice for our users. Those fintech benefits include cashback on all purchases made with the Mercado Pago credit card and a higher yield on funds held in the remunerated account. These benefits increase the differentiation of our credit card and digital account. Cashback is paid in the MeliDollar stablecoin and is deposited into users' MercadoPago accounts where it can be held, sold or used to make purchases on the marketplace. We also introduced an additional tier in MeliMice that offers a cheaper plan and gives consumers a choice of two plans that best suits their needs. The essential plan includes free shipping, cashback or extra installments on marketplace purchases and all of the fintech benefits, whilst the total plan has all the benefits of the essential plan, plus great content with access to Disney+, Deezer and discounts on other streaming services. Meli Delivery Day continues to be a core and popular piece of our loyalty program. It enables free shipping on lower value items, which drives higher purchase frequency and enables us to dilute our last mile costs. To incentivize the purchase of multiple items for delivery on the user's daily delivery day, we have made our free shipping offer on lower value items more visible to the user as they engage with the platform. Several other initiatives aimed at improving the online purchasing journey have gone live in Q3. In Q3, this helped us to attract a record number of new buyers, even higher than the previous peak during the COVID pandemic. We continue to develop category-specific UX as a way to drive offline retail online, vertical by vertical. In Auto Parts, we launched a new feature that enables buyers to schedule an appointment with a mechanic to install the items they are purchasing, and we ship those items directly to the mechanic. In the Beauty category, we introduced technology that enables users to see different makeup products applied to their face in our app. This tackles a major barrier to consumers buying makeup online. To increase cross-category shopping, we launched a new tool that suggests a new high-frequency category for users to shop, based on that individual user's profile. This personalized suggestion includes a shortcut button to a category on the homepage, a special coupon, a personalized landing page, and push notifications. An important driver of shifting offline retail online is the shipping experience. In September, we announced plans to more than double the number of fulfillment centers in Brazil by the end of 2025. This means 11 new operations, five of which were added in Q3. These investments will enable us to increase the number of cities where we deliver on the same day in Brazil by 40%. 63% of these operations will be outside of Sao Paulo as we increasingly regionalize our network. Some of them will be metro fulfillment centers, similar to the model we introduced in Rio de Janeiro last year, which are smaller operations that target individual cities. This is just a snapshot of the innovations that have gone live recently, and we have a strong pipeline of innovations that will enhance our position as the destination of choice to shop online in Latin America. Because as always at MercadoLibre, the best is yet to come.

We will now begin the question and answer session with Martin De Los Santos, CFO, Ariel Svarnsten, Commerce President, and Osvaldo Jimenez, FinTech President. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask participants to limit themselves to one question and get back in the queue for any follow-ups or additional questions. At this time, we will pause momentarily to assemble our roster. And our first question comes from Irma Scars from Goldman Sachs. Please go ahead.

Yes, hi. Thank you very much for the opportunity to ask a question. I'd like to ask about the credit card portfolio where we saw with a quite pronounced growth and there's a two-fold element to my question. Firstly, what drove the incremental acceleration, the pace of quarter-over-quarter portfolio growth in the third quarter specifically for the credit card where you've sort of been originating at a pretty stable pace over the last couple of quarters. I know the messaging generally has been positive and about acceleration, but just surprised to see that jump from one quarter to the next, and I was curious to understand sort of in which geography or customer cohorts you've been leading into for driving this incremental acceleration and whether we should think of further acceleration from here. And then the second element to that, you emphasized that part of the NEMA spread pressures were also from leaning into larger, longer duration loans to lower risk users in really all your geographies. I was curious if you could just expand a little bit more on that. What does it mean for growth ahead? If you're generally feeling more confident about your underwriting mechanisms, Why wouldn't that make you maybe go into perhaps like slightly higher risk classes where you may be initially seeding smaller loans but then sort of have more of a ramp up over time as you feel more confident with those new customers? Thank you.

Hi, Emma. Let me start with the second part of the question about Nimal, and then I move back to credit cards. With regards to Nimal, yes, Nimal fell a quarter, 15%, driven by basically three drivers. The largest one is the ramp-up, I'll refer to in a minute, of the credit card business. whose share in the portfolio rose from 25% a year ago to 39% now. And since this is a lower spread product, this increase in product mix or in product mix affected Nemo. Also, we are continuing moving up market. We are very, very happy with this. We have started in the low end and we're happy with the move up market. And the way to do that is with longer durations and also offering larger lines to lower risk customers. And these are credits that are very profitable, but that have lower spreads than the one we had, which were smaller to lower income customers. And the third part of it is simply by the fact that we have been accelerating the size of the portfolio. Whenever we grow the portfolio, initially we have a higher proportion of provisions, and then the revenues from the interest comes afterwards. So whenever we're growing very rapidly, there's a hit to nemo. Having said that, I would say asset quality indicators are solid. We have had broadly stable growth rates, both for the 1590 days NPLs, which has been stable at 7.8%. Now, moving on to the first part of the question with regards to credit cards. Yes, we are excited with how this business is evolving, both in Brazil and in Mexico. Brazil is the country where we have been doing this for longer. And the good news we have is that when we look at all the cohorts from 2021 and 2022, all of those already have positive results. variable contributions and even some cohorts in early 2023 also have a positive value of contributions are already net positive so the fact that we are growing so fast and that and the the recent cohorts represent a significant part of our total portfolio makes it has an impact in our returns or in our P&L in the current quarter, and we are very excited with how the product is evolving, not only because other cohorts are already profitable, but also because we see all of the drivers that the increased penetration of credit cards bring us, from higher net promoter scores, higher increased transactionality in users who have credit cards both on the marketplace but also off the marketplace, increased use of other marketable power products, and in general, an increase in principality. So we are excited with how that is evolving. You mentioned, too, regarding the number of cards we were issuing. I think that beyond the number of cards, which is growing, I think that we are doing two other things. One is increasing the size of the lines and, therefore, increasing the TPV, which we believe is the more relevant metrics. in the TPV of the portfolio of credit cards. All of that has resulted in the increase in the penetration of cards in the portfolio, as I mentioned before.

The next question comes from Andrew Rubin from Morgan Stanley. Please go ahead.

Hi. Thanks very much for the question. Hoping to dig in a bit to the shipping investments, given the five distribution centers in Brazil in a quarter being quite sizable. So hoping you can help give us some color on how long a distribution center typically takes to ramp up and reach productivity. And you mentioned the reach outside of Sao Paulo, but perhaps if there's any incremental category or capabilities otherwise these facilities give you. And then related, we recall last year you had some network capacity constraints during the 4Q holiday season, so I'm curious with the network expansion so far this year, what are your views on how the capacity now compares to your demand expectations during the holiday season? Thank you.

Hey, Andrew.

Ariel here. So, yeah, as you said, we made a significant difference progress in terms of facilities for our fulfillment operations. I think we've been seeing this for quite some time. Fulfillment leads to higher GMB because of faster delivery promises, higher conversion rates, stronger buyer and seller MPS, and from there, higher retention rates. And I think we were clear in the past that we need to grow our fulfillment capacity because of three things. A, because of the expectation of future demand, we need to grow capacity with what we think the business will continue to grow in the future. And luckily, we see huge opportunities for growth in our marketplaces, both in Brazil and in Mexico. Second, we need to build capacity because of the increases in fulfillment penetration that we are consistently having in Brazil. And last but not least, there's a normalizing effect of capacity available in Mexico. So overall, we are confident that with this capacity that we are bringing into the network, we will not only They require square meters to deal with big demands from our sellers and buyers, but more importantly, to continue growing and expanding our business in the different regions. In terms of the first part of your question, ramp-ups and productivity, we are consistently making progress in shortening the productivity ramp-up window from our representatives, but it's natural, right? So every time we open a fulfillment center, we start operating with lower utilization, which then tends to grow. So yes, to your point, in the short term, you can see some cost pressures, but this capacity is crucial for our growth, for our scale, and for our long-term strategy of serving our users.

The next question comes from Robert Ford from Bank of America. Please go ahead. Hi, Robert. Is your line muted? Our next question comes from Marcelo Santos from JP Morgan. Please go ahead.

Hi. Good evening. Thanks for taking my question. I wanted to ask you about the differences between the Brazil credit card experience and Mexico so far. So you have these two markets where you're growing. Can you contrast like perhaps NIMAL, NPL frequency, whatever information you could bring would be interesting.

Marcelo, I'll say that probably the most relevant difference for us is that when we launched the credit card in Brazil was the first time we were doing this. So initially we started relying on the models we had built for consumer loans. And then we learned and iterated on how to adjust those models, and every roughly six months we have been able to roll out a new generation of models. We did learn quite a lot along those lines, and therefore when we launched the product in Mexico last year, we had more experience and probably were more reliable. in terms of what to expect. Therefore, I would say the ramp up in Mexico has been significantly faster than it was in Brazil. And also, there are some, I would say, significant differences in the structure of the market for credit cards in both countries. Clearly, the penetration of credit cards in Brazil is significantly higher than what it is in Mexico, and therefore, we believe the opportunity in Mexico is huge. Having said that, there is less public information about how and credit scoring for the users in Mexico, so you have to rely a little bit more on internal information and less on third-party information. Also, there are differences in terms of how the working capital works in each country, because you have to sell a transaction in Mexico the next day, and in Brazil it's after 30 days, so the working capital requirements are higher in Mexico than they are in Brazil. I think those are the main differences.

The next question comes from Jeffrey Elliott from Autonomous. Please go ahead.

Hello, thanks very much for Go back to the point about the investment you're making in fulfillment. You've opened quite a few fulfillment centers in Q3. You've got another, I believe, five or six planned by the end of 2025. Can you give us a sense of how long this is going to weigh on margins, weigh on profitability? Because it's clearly had a pretty significant impact relative to where you were a quarter or two ago.

Hi, Jeffrey. It's Martin here. How are you? It's just like you said, you know, we continue, and I think Ari was mentioning this before, we continue to invest in fulfillment centers in the case of Brazil to increase the fulfillment penetration and to take it to the same levels, similar levels that we have in Mexico, and in Mexico just to give up the growth of the business, which this quarter grew at 27% year-on-year. And I think if you look at the margin pressure this particular quarter, there wasn't a lot of margin compression because of fulfillment. Most of the compression came from credit cards, as Waldo mentioned recently. So to answer your questions, we will continue to invest business as usual, as we have been doing it for the past five years. And if you look back over the past five years, fulfillment penetration increased significantly. He had always put some short-term pressure on margins, but because of the incremental volume that it brings, because of the better user experience and so on, then we are able to dilute those costs in addition to all the focus that we put on productivity. This quarter will improve significantly the productivity. The actual cost per shipment is down year on year, even though we have higher penetration of fulfillment. So I think this particular quarter, there wasn't a significant pressure for margins because of that. But we will continue to invest in fulfillment and business as usual as we have done it in the past.

Just to compliment Martin, Jeffrey, another point to highlight here is that not necessarily every new warehouse that we open is a 100 square meter facility, right? So a few quarters back, we announced that we were testing our first metro fulfillment center in Rio de Janeiro. This quarter, two of the warehouses that we opened are metro fulfillment centers, and potentially in the coming years, we'll open more of those, which have a different profile, a different type of investment, and of course, different unit economics.

The next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Hi. Thank you for taking my question. I wanted to ask about slide 19. It's the margin bridge and specifically about the bad debt call out here. I'm wondering is that like the fail first of new originations or is there something underlying the credit quality that's maybe different than you had modeled?

Hi, Jamie. How are you? Let me start with the last part of your question. In fact, we are very confident about the credit quality and the prediction of our models, and this is the reason, as Osvaldo explained, that we're accelerating our credit origination. So that part is not explained in this 3.4 percentage point compression that you're pointing out to. Here what's happening is that we increased roughly $1 billion of our portfolio quarter-on-quarter. If you were to look at it year-on-year, we increased it by 72%. And as Osvaldo mentioned, when you increase the portfolio very rapidly, as we did this quarter, you provision the losses up front. And that happens not only on credit cards, but also consumer credits and merchant credits. which are very profitable books, but as we accelerate, we need to provision upfront, and that generates an incremental bad debt, which is generating a compression margin this quarter. So it's not related to the performance of the portfolio. When you look at NPS, which we also published here, you can see that they are pretty much under control. And the fact that we are accelerating, I think it speaks out with our confidence on the way we are originating. Which, by the way, we're accelerating all of the markets and all of the products. We feel very comfortable with the quality of our books.

The next question comes from Craig Marr from FT Partners. Please go ahead.

Yeah, hi. Thanks for taking the questions. I wanted to ask if you could perhaps separate out the margin compression related to one-time costs of setting up new facilities versus the the ongoing cost of operating those facilities. And second, the ad penetration rate was flat or unchanged quarter over quarter. I was curious what your expectation is for penetration going into the fourth quarter and perhaps next year, if you can comment on that. Thanks.

Hi Greg, how are you? It's Martin here. We don't disclose specifics of the margin compression, which part we are treated to ramp up versus overall incremental cost of fulfillment. But if you see on the disclosures on the investor letter, you can see that the impact of our investments in fulfillment was relatively low, less than one percentage point of compression. So that's as much as I want to say about that. I think, as I mentioned earlier, over time, we make up for those short-term pressures through incremental volume, and we feel very comfortable about the investment we're making in fulfillment.

So, hey, Craig, this is Ariel. To your question about ads, we are pleased with the performance we had this quarter. We grew 86% in FX-neutral ads. 37% in U.S. dollars. And as you said, we reached 2% of revenues over GMB this quarter. That's an increase of 0.3 percentage points year over year, with Brazil and Mexico reaching record high penetration once again. So we are happy with the fact that ads revenues are growing well above our GMB. We continue to see great potential for our ads business in the future as we develop more technology, a better product stack across the full funnel of advertising. Still growth will never be linear, so we are not focused on analyzing what's happening quarter over quarter, their seasonality, mix effects, effects, whatever, many, many levers. They do explain changes, but conceptually, we are excited about the progress we are making and see great results from all of our efforts. Thank you.

Again, if you have a question, please press star, then 1. Our next question comes from Deepak Mathavanan from Cantor Fitzgerald. Please go ahead.

Hey guys, thanks for taking the question. So on the ramp in credit cards, can you give us some color based on historical cohorts, how it's likely to drive volume growth either on e-commerce or fintech over the next few quarters? Is there anything you can share on typical customer behavior? you know, post the issuance of the credit cards just on terms of the benefits to e-commerce and then on the processing side. And then secondly, just to get some specifics on the Nimal difference between the various products, how does it differ between credit cards and consumer credit? How much is Nimal generally lower on credit cards so that we can think about modeling the headwinds for the future a little more precisely? Thank you so much.

A little bit back. So with regards to the impact the credit card has on our users and our ecosystem, and what we see, the first thing we see is those users who have access to a credit card start using it. And on top of that, start using also a credit line. are the users who are happiest with Mercado Libre and with Mercado Power. They have the highest engagement. The user posts the more often. They buy more on the marketplace. So clearly it increases the engagement those users have with us. And then you... Those users who have all of these products. Then second next are those who use our credit card and then those who use our credits and so on. But basically, getting a credit card significantly increases engagement. Also, another factor that is very relevant is when you look at and penetration of payment methods within the marketplace we see that we were already building a proportion of mix that was coming from our consumer loans and Mexico probably is a great case because it was the exact the case where we had the highest penetration of consumers loans within the marketplace and on top of that we are adding the layer for the credit card so we continue gaining share with great products of all of the volume in the marketplace, and therefore it becomes more profitable. I would say those are the most relevant impacts. In terms of ramping, we'll continue increasing the cars we issue, we'll continue increasing the lines, and so on. We're comfortable with how this is working.

Hi, it's Martin here. Regarding animal spreads, we don't disclose specific spreads by country or product, but I can give you directionally. Consumer credits and personal loans have highest animal margins throughout, followed by merchant credits, which has also a relatively high margin. In both of those products, as we move up the market, we expect to reach users with lower risks, with whom we charge lower interest rates, and they will result in lower, smaller spreads, but it will be incremental volume, as Osvaldo was mentioning before. The credit card itself, as it is ramping up, remember the credit card, it takes several months, a few months to reach profitability, so as we are scaling, the nimble spread of the credit card is neutral or marginally negative, But we have seen the older cohorts becoming positive already, so we are confident that as we continue to increase our portfolio and clean the older cohorts, we will reach profitability at a portfolio level.

The next question comes from Neha Agarwala from HSBC. Please go ahead. Hi, Neha. Is your line muted?

Hi, can you hear me?

Yes, we can. Yeah, we can. Go ahead, please.

Okay, perfect. Sorry, zooming in again on the credit cards, could you just give us a breakdown as to the usage of credit cards on platform and off platform, roughly, both in Brazil and Mexico? And also, any sense of what percentage of your credit card portfolio is in Brazil versus Mexico? My other question is on the software business. You mentioned that in Brazil, in the acquiring space, you launched software to increase the monetization of the acquiring business. How the software business is in-house? Are you building software in-house or are you working with software providers and attaching it with your POS to make the usage seamless for the merchants? And what is the ambition there? If you could elaborate a bit more on that. Would it be organic, M&A, partnership? Thank you so much.

So, Mija, the first part of the question was related to credit card use between the marketplace and off-platform. I would say that, in general, the majority of the volume we do, both in Brazil and in Mexico, is off-platform. I would say over 60% of the volume we do in both countries is off-platform. Even though we do give extra incentives for people to use a card on platform, we believe it's great because this shows that

they're not just using the card for those incentives but that we are gaining principality and in many cases this is the car that gets a top of wallet and gets used more more frequently with regard to software i think it's a as you mentioned it's an important part of the strategy of our acquiring business and we are making good advancements in the trunk we mentioned some of those in the letter uh but for the most part it will be in terms of developers Typically, we have not been very acquisitive in terms of buying other companies, so most likely it will be our own development.

Let me compliment that, Martin. Thank you. I would say that two things. On the one hand, there are many things we want to develop. We have started with catalog, the ability to invoice, and also to keep stocks. And then I think that we will develop related to basically becoming really the neural system of a – small and medium stores. There are many things that we need to do to be able to achieve that, but we are starting to see good results in terms of engagement and driving higher use of MercadoPago, particularly with SMBs where they usually have several NPOSs in front of them. Also, with regards to acquiring, we have seen some, I think that this is typically very complex, because you really need to integrate it with all of the payment systems, and we have seen other companies struggle with this in the past, so it's likely, it's always something we look into, but we usually prefer to develop it ourselves.

The next question comes from Robert Ford from Bank of America. Please go ahead.

Hey, Martin. Thanks for taking my question. Can you talk a little bit about the rate of adoption of my mice in Brazil and Mexico? You know, and more specifically, how behavior patterns change subscription on the marketplace and also across other verticals? And are there any early indications of incremental principality? And then how is my mice impacting blue funding as well. Thank you so much.

Hi, Bob. How are you, Martin? As you know, we did, we implemented change in our loyalty program this quarter where we, you know, we opened two tiers of the program. One priced at $2, which included all the benefits of free shipping that we traditionally had, including also now the fintech benefits of cashbacks, both on the marketplace as well as when you use the credit card outside of MercadoLibre. And then we have the other, the traditional one, which is called minimize total, which includes all the benefits plus the content from this mail. We don't disclose specific numbers on the loyalty program, but we have seen very positive options. The new program, the one that the lower price one, we have seen a lot of users engaging with that loyalty program. And then the effects of people enrolling into a program are similar to what we have seen in the past. We've seen more users, better conversion, better engagement with our platform. So it's all very beneficial to us. So we're very excited about the relaunch of the program. But it's still too early to... to share actual numbers on that. And then you refer to the blue money. As you know, we're giving cashbacks on purchases on Mercado Libre, as well as purchases done with the Mercado Pago credit card. Those cashbacks are done on mainly It's still too early. I mean, we're seeing users accumulating those balances. They're accumulating more than spending it, so actually balance on their accounts is increasing, but there's nothing ready to report so far. It's too early.

The next question comes from Joao Suarez from Citibank. Please go ahead.

Thank you. Two questions on my side. First one, I just wanted to hear your thoughts. I mean, we're looking to Brazil, the credit environment, right? It seems like October had a slight uptick in households with outstanding debt, right? So it seems like there's some, of course, with the interest rates increasing, right? The components increase interest rates here in Brazil to 11.25. So it seems like you're very confident in growing and keep the origination at this pace, right? But how are you thinking about the macro? Could it impact somehow, right? And just going back to the question about Brazil and Mexico, I didn't understand how much is Mexico growing versus Brazil. If you could please clarify, thank you.

Hi, yes, it's Joyce Martin here. Yeah, it's correct. We've seen, you know, this increase in interest rate in Brazil. We have seen it in different countries where we operate. But the reality is when we look at our credit business, much more important than, you know, one or two points of increasing interest rate or the cost of funding is our ability to predict defaults. Now, that's the biggest part of the cost structure of our products. And again, once again, we are accelerating because we feel very confident about the improvements that we have made on models. And we're reaching new segments of the population that are lower risk. So I think macro overall, it does not affect this product as much as our ability to predict bad death.

And on the second part of the question, we don't disclose precise numbers by country. What I was referring to is that if you compare the first year or the first quarters of Mexico to the first ones in Brazil, we are issuing cards in Mexico at a significantly faster rate than we did in Brazil, basically because we have had more prior experience building credit card models.

Again, if you have a question, please press star, then one. And our next question comes from Josh Beck from Raymond James. Please go ahead.

Yes, thanks for taking the question. I wanted to ask about the Fulfillment Center ambitions. You said, I think, five in Brazil and one in Mexico. Is this a – multi-year investment cycle. And then I'm also curious, as you have a higher density of fulfillment centers, maybe a little bit more hub and spoke, you know, what type of benefits are you seeing in terms of cost to serve and ability to do shorter delivery windows?

Hey, Josh. Ariel here. So, to the first part of your question, there is no new multi-year cycle or change in ambitions. We've been always saying that we pretend to continue building the capacity that we need in order to make sure we can deal with the growth in demand that we are forecasting for MercadoLibre, the growth in penetration that we'll have in Brazil and other countries. and normalizing the capacity required to operate in Mexico after a few years in which we were running super tight. So no new direction, no changes in terms of investment cycles, just reality on what we think we need to continue gaining market share as we have been doing over the last few years. To the second part of your question, there is definitely an angle in terms of geographic expansion. We are not only building warehouses in the main capitals of the countries as we have announced. We are also regionalizing our capacity more, and that means that we'll be better equipped to serve our customers with faster delivery promises and hence better, hopefully, retention rates coming from them. Different profiles of warehouses have different unit economics. I think we have never gone that deep into disclosure and will probably not do so in the future. But as I was saying before, the story and the type of unit economics and investment modes that we're thinking are not changing from what we were thinking in the past. This is the type of investments that we need to continue growing and serving our users.

Let me just to compliment from a cash flow perspective, these are investments that are business as usual. If you look at the capex in this quarter in which we opened six fulfillment centers, our logistics was $120 million. Just more than last quarter, of course, but that percentage of revenue is relatively stable compared to, you know, the past several quarters. So it's something that, you know, it's not an investment cycle. It's not, obviously, this quarter we opened more fulfillment centers than the past couple of quarters, but this is business as usual, as Ari mentioned.

Our next question is a follow-up from Jeffrey Elliott from Autonomous. Please go ahead.

Hello, thanks very much for taking the follow-up. I just wanted to get some explanation on one point. There's a note that G&A expenses rose 1.1 percentage points year-on-year, of which 0.8 percentage points due to a non-recurring expense that relates to certain customer refunds for prior periods. What happened there? Why refund customers for prior periods?

Hi, it's Martin here. Yeah, as you mentioned, there was a 1.1 compression on the margin because of G&A. Most of that is related to a non-recurring expense this quarter, which is a refund to fintech users for the past several years back. What happened is this quarter we made a change to our consumers and merchant credit products in Brazil. But from now on, when a user pays an installment a few days before the actual due date, they're going to be refunding them the days which the advancements, sorry, those are the days that they prepay. So even if it's a few cents, we will refund them for that installment. So since we're going to be doing that going forward, we decided to go back in time and refund our users for the past several years. And those refunds are very, very small. On average, $4 per user, $0.40 per actual installment paid in advance. Those are a few days. But we felt that it was the right thing to do to make it up for them since we're not making the change going forward. So this is the one-off that we registered this quarter. You know, that's it.

Our next question comes from Rodrigo Gaston from IBBA. Please go ahead.

Yeah, thank you, guys. Just two questions here on the loyalty program. First, if you're, you know, seeing any kind of margin pressure coming from the loyalty program, given that you just revamped the program.

So any, you know, margin pressure on this front, how much we're investing on that, that's the first point. And the second one, What are the main unique economics differences between the essential plan and the total plan that just launched? So just curious here to understand how you see that, what are the main KPIs and the differences in terms of unique economics. That's it. Thank you, guys.

Hi, it's Martin here. I think your question is related to potential margin pressures because of the loyalty program. First of all, all the benefits that I was mentioning before, the FinTech-related benefits and the cashbacks, we started it this quarter, so it's still ramping up. And the way we're investing that is we're relocating marketing dollars to the loyalty program. So we don't expect that to generate significant margin pressure, but also keep in mind that the expectation of the loyalty program is to bring incremental volume that should compensate whatever investment we make on the program.

Just to complement on unit economics, while we don't disclose the the whole details on our program, bear in mind that in the total subscription, we need to pay Disney for a big chunk of what we collect as part of our agreement with the subscription for content, while in our essential subscription, we are basically giving our users the same type of benefits within our ecosystem, but we don't have to pay content. So basically, the revenues we get from the subscription do help us sustain or pay for the benefits that we are providing our users.

And the next question is a follow-up from Jamie Friedman from Susquehanna. Please go ahead.

Hi. I was just hoping you could elaborate or share some observations about Argentina. On the marketplace side, I see in here that In the presentation, you describe it as Argentina improving significantly, being driven by growth initiatives and consumption trends. But could you elaborate further what's the market environment looking like in Argentina? Thank you.

Hey, Jamie. Ariel here. So, yes, as we mentioned in the presentation, we see an improvement in the growth rate and the health of our business in Argentina. It's on the one hand, there is an improvement in general consumer behavior and the macro scenario that definitely play a role for us in terms of a tailwind to expand our business, but also there's something around our own performance, right? So we continue to roll out experience improvement, assortment improvement, removing frictions from our users. We've also taken measures to help our buyers and sellers while taking care and preserving our P&L to boost frequency and drive conversion rates like installments, shipping prices, et cetera. But in general, we remain very, very optimistic what we are seeing in the country. Demand is performing well, and we are satisfied with the turnaround that we saw over the last few months.

Yes, just to complement that, on the fintech side of the business, we're also seeing very good traction in Argentina with interest rates coming down, the MPLs under control and very good spreads on our product, on our credit product. We also accelerated credit this quarter in Argentina. So very positive signs as well from the fintech side.

There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Martin de los Santos for any closing remarks.

Thanks everybody for joining the call tonight. We had another quarter of strong results and great growth throughout our business. As we mentioned, we invested during this quarter on credits, which is strategic for Mercado Pago, as well as logistics, which is critical to continue bringing volume online. Many is very well positioned to capture all the investment of the growth opportunities that we have ahead of us, and we are investing behind those with discipline, focusing on long-term and sustainable growth. Let me take a minute now to remember Mario Vázquez, who passed away a couple of months ago. He was a board member for MercadoLibre for 17 years, and he left a very strong mark on all of us, all of us who had a chance to work with him for those years. So we're going to miss him. And now I close the call. And thank you again for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.