Magazine Luiza U/Adr

Bom dia a todos. Obrigado por aguardarem.

Good day, ladies and gentlemen. Thank you for waiting. Welcome to Magalu's conference call regarding its quarterly results. For those of you who need simultaneous translation, please click on the interpretation button, the globe icon at the bottom of your screen, and choose your preferred language, English or Portuguese. We inform that this event is being recorded and will be available on the company's IOR website at ri.magazineluisa.com.br, where you can also find the earnings release and the presentation in both Portuguese and English. The link to the presentation in English is also available in the chat. During the presentation all participants will be in listen-only mode. Later we will hold a Q&A session. To ask questions, click on the Q&A icon at the bottom of your screen and type your name, company and the language you speak. When you are announced, a prompt to activate your microphone will appear on the screen and then you must enable your microphone to proceed with your question. Questions received in writing will be answered later by the investor relations team. Now I would like to turn the floor over to Mr. Fred Trajano, CEO of Magalu. Please, Mr. Trajano, the floor is yours.

Good morning.

Thank you for participating in our earnings call referring to second quarter 2023. I am here again with the whole executive management of Magalu. available to answer your questions at the end of the presentation. I recommend that you all follow the presentation that you can download from our IR website. Without further ado, I believe that in the second quarter, we once again presented consistent growth. Again, we grew three channels, all the channels of the company, actually. with significant market share gain. I will speak a little about the industry dynamic, particularly the online market on the next slide, but our online grew 7%, while the market dropped 15%, so 22 percentage points above the online market.

Even more than we had recorded previously.

Offline growth, we grew 3% compared to a drop of 2%. I will say later on that I see a recovery of the offline market, but still we are 5 percentage points above. For the online, we use the new trust, and for offline, we use data from GFK. I did an analysis. I asked the team to do an analysis correlating the data so that we could understand the dynamic of the recent years, pre-, during-, and post-pandemic, correlating long-tail and durable categories with the SELIC. using NEO Trust data and correlating with SELIC data. It is important to say that the second quarter of this year represents the last quarter before the start of reduction in interest rates, which opens a much more positive outlook, especially for our operations. Given that, despite all efforts for the diversification of Magazine Luiza, we still have 64 years in the Durable Good category. We are leaders in these categories, and they are representative for our GM theme. Looking at this slide, we can conclude that the correlation, even in the online market, correlation of growth and performance of durable good categories in the whole market, I'm not talking about Magalu, I'm talking about Neotrust data here, with the evolution of the SILIC interest rate, is a very high correlation, much higher than an almost non-existent correlation with long tail categories, which are important for us, but that denied a good part of our revenue. So we see 60% correlation with durable goods and practically zero with long-tail categories. So we see that the high growth we had during the two quarters of the pandemic and the reduction of this category, even online, in the online marketing, the post-pandemic scenario. When we analyze all of these factors, I believe that we need to see a growth trend considering a four-year So if we look at the last four years, next slide, we can see that Magalu was one of the companies in this segment that grew the most, 37% per annum in total. And on the next slide, we can see that we grew 4% per annum of physical stores before the pandemic started. The brick-and-mortar stores had an 8% share in the Brazilian market post-pandemic. That share increased to 20%. But Magalu was able to maintain an absolute volume that was higher than pre-pandemic. So it increased from 3.4% in the second quarter of 2019. to four now. And in brick and mortar stores, physical stores, this growth is significantly higher as of July. Again, physical stores also have a high correlation because they are 100% durable goods correlated with the SELIC rate. From July onward, we have a positive outlook. Just to talk about the coming quarters, we expect those to grow as the SELIC rate declines. This has an impact on the categories we carry in our physical stores. So we have an expectation of improved volumes. So we still gain a one-point market share. In online, we see an even more pronounced dynamic. In the first two years of the pandemic, the second quarter 2020, we grew a lot, 180%, 182%, and in the second quarter of 2020, 46%. In four years, 47%. But even in the last few years, we have been able to grow our revenue, even with the reduction that I presented in the new trust data in durable goods categories. These categories in the last two years dropped a lot, which led the new trust data overall to drop. So, this growth of 2% in the second quarter last year and 7% in the second quarter this year, they represent a significant market share gain for our operations. The big growth driver, and this is what I'm going to concentrate our call on, is 3B. 3B has been the biggest growth driver for a few years now. We have been saying that our focus at the company is on growing 3B channel. Here we have a much wider range of categories. In those four years, 3EP grew 64% per annum. We were the players that grew the most in 3EP in the market, and we continue with a solid growth, even with a decline in the online market, as mentioned earlier. So we have been walking the talk in terms of our strategy, improving that. In 3EP, we are growing rapidly. by increasing monetization of 3P, increasing take rate, improving our shipping, etc. And we are doing that simultaneously to total GMV growth, which comes to show that this category has been growing. And during the financial part of the presentation, we'll see that this accounts for an important part of our margins. I think that this is a highlight to be mentioned. And it is one which is fundamental because we're growing. in a moment of difficulty, after the difficult part. Starting in Q1 of this year, 3B accounts for almost 30% of our total sales. For the first time in the past quarter, it exceeded, it surpassed the physical stores that have existed for 64 years. And it accounts for almost 40% of the total online sales of the company. The trend is that this share will continue to grow. We continue to grow well in our physical stores. This market share gain is not in detriment of physical store sales. No cannibalization, but this channel has the potential to grow, and it has been the focus of our investments and efforts. Next slide. Another benefit and advantage of our 3P model is that it helps us in two important indicators for our business. New customers, 60% of the new customers were originated by 3P in this quarter. I think that this DataPoint shows that 3P has a strategic importance for the company to help us increase our already very relevant customer base. And 70% of the total base of active customers have bought products on the 3P channel in the last 12 months. So this is a very important channel for us in terms of activation and increase in shopping frequency. We achieved a historical mark this quarter. 300,000 sellers growing in all types, large, mid-size and even small sellers. Of these 2,000, 200,000 sellers were small or mid-size sellers. We started during the pandemic to use the Parcero Magalu program. These are physical stores that had never sold online before. So this is the vocation of the Parcero Magalu program. We continue to grow the space with a great contribution of the brick and mortar stores, physical stores do play a role in our ecosystem, and we'll detail that during this presentation. So a good part of the efforts to attract new sellers happens through the hunting teams, in the physical stores helping us achieve this historical mark 300 000 platforms of 300 000 sellers regarding our the online market we are leaders in products the cost More than 1,000 BRLs. We come from this category. We've been operating 1P in this category for 23 years. And, of course, we grew very quickly initially in 3P in these categories, the more expensive ones. Here we have a share which is disproportionately high. And we defined the strategy because we have to pick our battles where we have competitive edge to win and where we would be able to replicate this share in categories and families between 200 and 1,000 BRLs. So, again, Magalu, for some quarters, you can see our presentation in recent quarters, has been focusing on families in this category. We identified more than 200 families with this profile. So it's the whole process from marketing all the way to promotions, team hunting and payment logistics to compose a strategy to gain market share. In these categories, we are obviously a company that does a lot of curatorship to onboard sellers. Because when customers buy products that cost more than 200 reais, they want to feel safe. They want to be sure that the product is true, certified, approved, not a counterfeit product. These categories are traditional for Magalo. We brought this from 1P to 3P when we started our 3P model, and now we are applying this as a competitive differential so that we can indeed replicate the share above 1,000 BRLs to the category of 200 to 1,000 BRLs. Why did we choose this? We have the competitive edge, but more than that, when we look at the profit pool of these categories, about 85% of the profit pool of the market are in categories with a higher average ticket. Very low average tickets. contributed with a lower margin because the shipping rate over GMV is lower, because the cost is higher, because the cost of marketing is higher, GMV is higher. So we have a unit economics which is a lot worse. So although, yes, there is an important share of total GMV in e-commerce coming from products under 200 bureaus, but the profit pool of these products is very little.

As a result, this is not the focus, but indirectly, this strategy of ours kinds of hedges and shields. vis-à-vis regulatory changes which took place in the cross-border market. These are significant changes, and they bring some risk to retail, but particularly bring a risk to electronic retail of lower tickets, particularly when we don't have to pay federal taxes up to $5 items. It's a recent measure. In Brazil, being, well, foreigner has changed. I hope it becomes a competitive advantage. I don't think it makes a lot of sense, this reality. Looking at radically, because by the way, this topic was very controversial, many questions from analysts in recent months, we had a thorough analysis. And whenever you have this kind of change, it's important to quantify your risk, precisely given numbers and figures, in order to make it clear what is the potential impact. And because Madalu is focused on categories like the ones I described in the previous slide, we had a thorough in-depth analysis by category, categories up to $50 or the kind of category there are brands or not. and we identify that only 3% of our GMV is subject to the risk of this recent regulatory amendment. Cross-border as a whole, I see it as an opportunity. Naturally, we are adopting measures in order to also make available to our customers products from foreign sellers. More specifically, right now, I am showing you the impact of the regulatory change of tickets up to $50 with no federal taxes. I guess this is where we have the greater risk and the most severe risk. when it comes to competition. Because our ticket is higher, not only Magalu, but also Caboon, Natchews also have high tickets. And the same goes for Epoca Cosmeticos, always tickets above 200 reais. And now we only have 3% risk in our GMV. If we check risk families in the Brazilian market, we can see for pants and clothing, many fashion segments, unbranded, So naturally, we've been focusing on families which are branded and higher tickets than this. Next slide, please. Still about 3P, we have a positive outlook and a very significant performance in our logistics. Today, 80% of 3P orders go through Magalu entregas, Magalu deliveries. We evolved a lot up to two-day delivery from 40% year-over-year to 50% this year. and the take rate, which was already high, to days of 83 to 85. Remember, we have huge capillarity in our distribution centers, and this increase has also helped us in conversion and also helping us to keep on growing in 3P in a very fast manner. On the next slide, I highlight our fulfillment. It took us a while to launch fulfillment, and this is because we wanted to have absolutely integrated to our 1P and physical store operation. When we launched 1P in the past, we launched logistics integrated to physical stores, and that brought us a lot of competitive edge in 1P, becoming a leader in 1P in Brazil. We used the network of physical stores to deliver 1P with better conditions, and we wanted to replicate this successful model to 3P. And that's how we developed this. So the whole fulfillment of sellers that store Magalu products, they store at the same distribution centers. for our own products, and they use the same networks. So today we have 7 DCs, 1,900 sellers in our fulfillment, and today we hit the mark in less than one year of 10% of total 3D orders. They already go through our fulfillments. Sellers whose products, the turnover of the inventory is great, 30 days, and we sell more. So this inventory turnover is even better today than 1P. We're doing great. And we're opening some costs, a reduction of 25% of delivery costs for those who are in fulfillment and an increase of 25% in conversion. So fulfillment is now at an important stage. We expect to grow a lot. Like I said, we have seven DCs enabled, and our schedule is very aggressive and fast to replicate this competitiveness. Once the seller is here, our fulfillment is multi-channel, greatly increasing, for instance, the click and collect or the in-store pickup rate. If you look at the quarter, for instance, we hit almost 30% in-store pickup. store pickup. Forty percent have more than 1.1 thousand stores enabled for 3P. So once again, it's part of logistics in 3P. helping in hunting for sellers and also for consumers, so they can buy the seller's product and have in-store pickup for a lower cost. We don't even charge a delivery fee for 3P for products that are over 70 reals. So that's a very good competitive edge, considering the present capillarity. Another important point when it comes to the equation for logistics, is the fact that they also run with Magalu agencies or branches. So for hunting efforts, they are also important when it comes to sellers shipping the goods. 77,000 sellers using our stores rather than post office branches for goods drop-off. and Magaluz Network also supplying and providing reverse logistics and routing of these products. I'd also like to highlight other monetizing efforts in our marketplace. We have our FinTech, We had a milestone in our FinTech this quarter, which was the integration of Magalu payments by FinTech. Hub FinTech acquisition about one and a half years or two years ago. The main goal was to buy a regulated FinTech so we could plug all our volumes in. for advance payments from sellers, everything in the regulated market, because our size was enough for that. When we recorded, we had more than 10 billion TPV in Magalu Pagamentos, and this year we included in the FinTech. And this will generate huge benefits in our operations at the company. We used to have two platforms, Hub and Magalu Pagamentos, two development teams. And at the end of the day, The growth in our operations were very challenging. Most of our products and development and innovation and digital account was not connected to Magalu Pagamentos platform. So we couldn't scale up because the flow of funds was not going through that. Now, with the integration of Magalu Pagamentos by Hub FinTech, we'll scale up a lot of products. For instance, the digital account. We'll have 56,000 digital accounts, 300 million reals of TPV in the seller's account. We intend to grow. And Hub FinTech already processes fixed transactions for Magalu and also for some companies of our ecosystem, 7.5 million fixed transactions. We don't use a bank. It's made by Hub FinTech more than twice than last year. And we're also putting all our process, payment processing into our group companies, Stanche Virtual, Kaboom, We already included Netshoes last year. So with this reverse integration right now, all the benefits from all systems developed by Hub FinTech in previous years will be shared by all companies in the ecosystem and by all our sellers. So a potential of monetization is very interesting. Now what about ads? Magalu ads evolving very well. In the last call, we announced that The sponsored search by a great development brings significant growth because it's highly important for our advertisers. More than 5,000 active advertisers and more than five campaigns created over the quarters, growing by 45% over the first quarter and more than four-fold growth over the second quarter. So all these efforts generated not only a higher GNV, and growth in revenues, but also improve profitability. Revenues with commissions, general revenues, monetization and GMV more than doubled to only 32%. And we vote greatly in our contribution margin because we reduce financial expenses and shipping expenses owing to all the initiatives made by the marketplace team in order to improve the contribution margin. The business contribution margin was negative and now it's positive. In other words, the channel, which is our main strategic bet, has been growing above the market and generating contribution and positive results to our company, showing that our strategy is on the right track. And once again, the most traditional channel, benefiting from lower interest, interest rates owing to the cycle, and once we have historical levels of growth in profitability in normal market conditions, we'll see both things overlapping, adding to one another. In other words, all our initiatives, all our investments in innovation, reflecting positively our core business, which is cyclic, and now going back to a new cycle of lower interest rates, of Well, we've been a listed company for 12 years, and we can see that when we have high interest rates, the cyclic pattern affects us. But once interest rates go down, the evolution is very positive, more than average in the market. and that's what we see down the road we'll keep on focusing our efforts in our current channels with future opportunity for growth and diverse revenues but once again we want to benefit from these tailwinds and try to evolve and grow also in these traditional channels which we are leaders we are very strong and we tend to benefit from this new cycle of lower interest rates. Now I turn it over for Beto to talk more about profitability, and then we go back to the Q&A session.

Good morning, everyone. Thank you for joining us in this earnings conference call. Let's move to the next slide to speak a little about the financial highlights. Let's talk about sales increase across all channels.

Let's talk a lot about sales.

Total sales of almost 15 billion BRL. Oh, just waiting for the slide to change. Okay. I think that the highlight on the slide was the growth margin, 28.8% growth margin. This is the highest growth margin or gross margin in the last three years, 0.2% over last year and growing a lot quarter on quarter, 1.5 point. So the performance of the gross margin for us was significant in still a very challenging environment with the market shrinking and still very high interest rates in Q2. With this expansion and all of our initiatives, we improved EBITDA margin from Q1 to Q2, 4.9 to 5.1. So we were able to improve our operating results, and we were able to reduce the negative net result this quarter over the previous quarter, particularly given a strong reduction in financial expenses. And I will be speaking more about that momentarily. And just one observation, this result is adjusted for non-recurring expenses of about 155 million BRLs. These expenses, what most of them are related to the integration process of Magalu pagamentos related to Huffington, as mentioned by Fred. And also, another relevant point is that we have started the consolidation process of all the logistics companies that we acquired. You will remember GFL, ThinkLog, and others. And we have Magalog, which is our delivery platform. And very soon all of them will be under one single corporate taxpayer number serving all of the companies in the ecosystem. Just like we have just one, a single one be serving our whole ecosystem. Oops, there's some problem here with the slide. We are back. Okay. Before moving to the slide, in addition to these expenses related to consolidation and integration, we also had expenses related to adjustments of capacity, We closed two distribution centers and some trust docking units in our logistics business. Now, moving to the next slide, we'll speak a little about the evolution of EBITDA margin compared to last year. The main explanation, the main variation here still lies in the margin on goods that reduced 1.7 percentage point year over year. Here in the middle of the slide, I kind of had an additional breakdown to explain the evolution of the gross margin on merchandise or on goods. It dropped from 23.1% to 21.4% this quarter. But as you can see, this margin in this quarter is already evolving 1.2 over Q1 23 margin. In Q1, the margin had dropped 2.4. Now, it dropped just 1.7. And when we look at this 21.4%, it is one percentage point only below our 2022 average, which was about 22.4%. which means that of the total impact of default of about three percentage points, Since the beginning of the year, given the increase in the tax burden, now with 21.4% total gross margin, we practically passed through two points of the total impact of three points. So we just need one percentage point for us to pass through in the gross margin on merchandise. And we believe that by year-end, everything will be behind us. So the default impact, it's like we always say, it's temporary, it's short term. And we are passing it along. The best news on this slide is the impact of the service margins. This quarter, it offset the impact of default. It was even greater. And here, the trend is that we are going to have accelerated growth in the long run. This is why we are very positive regarding the dynamic of gross margin that we should observe for the coming quarters and years. Now, to speak about selling expenses and administrative expenses, well, they varied very little, both nominally and compared to net revenue. If we look at total sales, including the marketplace, we even had a dilution of expenses. The marketplace has, or pulls selling expenses related to marketing logistics. It has some impact, but let's remind you, it is our most profitable channel. And this is more than offset in the margin on services. And the trend here is that our expenses will continue to be very much under control and we'll look for operating leverage as the traditional channels grow more and allow us to have a greater dilution of operating expenses as well. Lastly, speaking a little about LuisaCred and allowance for doubtful debts, we'll show you that recent cohorts have had a very positive performance. Very soon, both Louisa and CRED should start contributing positively to our results, as well as our provisions related to CDC should be diluted. So we also have very positive expectations regarding the performance of these two line items looking forward. On the next slide, which is for this one on working capital, I would like to highlight but again we evolved a lot with our adjusted working capital this quarter one more time we reduced our inventories we improved inventory turnover by almost five days compared to last year we improved the average term of purchases in another five days compared to last year we generated a lot of cash from our working capital we reduced the volume of confirming operations which are part of the financing of our suppliers in 3.8 billion down to 2.8 billion this year. So it's a very positive trend in working capital. And this was also reflected in a reduction in financial expenses. This quarter, we spent 100 million UAS over Q123. In Q1, we mentioned this, that this was seasonal, that there were a lot of repayment to suppliers. Last year, financial expenses increased over the year, given the increase in CDI. But this year, we should have the opposite dynamic, a reduction in financial expenses and a dilution of these expenses along the coming quarters, together with a reduction in CDI. Not only a reduction in CDI, but reduction Working capital PICS has been a highlight. growing 15 percentage point in our e-commerce. We have reduced the cost of repayment of receivables, and we have a cash position which is more sound, more robust. This quarter, we increased our cash position by 1 billion BRL, a very strong performance, given the cash flow of operations of about 800 million BRL. More than paid for our CapEx and interest and leasing expenses. And we also had the receipt. The renewal of operating agreement with Cardiff will still have Louise's SAG receipt pending approval by SUSAP. Hopefully, this will happen soon. And with that, we go to 8.1 billion bureaus in cash, including receivables. On the next slide, we see that with this cash position, we resume a net cash position of around 1,900,000,000 Bureaus of net cash position. So from the capital structure and leverage standpoint, we have a very net and very Liquid position was a very competitive capital cost. Our average capital cost is about CDI plus 1.25% per annum. And our gross debt relatively distributed all along the next three years and a total cash over net debt of practically three times. Moving forward, LuisaCred. Here we continue with a base of approximately 7 million cards. TPV growth getting to 14 billion and 20 billion in the loan portfolio. In recent months, we have seen a pickup in the issuance of new cards. at the same time that we have seen a significant reduction in the previous indicators of delinquency and PL. Here on the slide, we bring you managerial indicators for CDC and LouisaCard. And we see a trend of improvement, a reduction trend in delinquency, which is quite pronounced. We can see NPL of 15 days improving. So we are very confident in terms of resuming profitability and credit granting levels in the coming quarters. Well, luckily, in addition to everything that we're doing to increase our gross margin, habitat margin, and all of our operating results, and also in the attempt to reduce financial expenses regardless of the macroeconomic scenario, we bring you here sensitivity analysis. Just to give you an idea of the potential impact of a select rate reduction on our financial expenses. Our expenses are practically all linked to CDI, all packed to CDI. In the last five years until the pandemic, between 2017 and 2020, interest rates were dropping consistently. And in this period, our financial expenses oscillated on average 2 to 2.5% of net revenue. Last year it was 5.5%. And we believe that with the CDI going back to a normal level, our financial expenses tend to go back to historical levels. The sensitivity here is that every one point reduction in interest rates is equivalent to approximately 150 million savings in financial expenses, not to mention sales increase, and the positive impact on the cost of funding of louisa credit reduction in npl delinquency and in the capacity to grant a lot more credit to our customers very well then with this we are going to end the presentation and now i would like to invite you For the Q&A session, thank you very much. We will now begin the question and answer session. To ask a question, click on the Q&A icon on the bottom of your screen. Type your name, company, and the language you speak so you can get in line. When announced, a prompt to activate your microphone will appear on the screen, and then you must enable your microphone to proceed with your question.

As a reminder, if you have more than one question, please ask all your questions at once. First question, Vinicius Strano with UBS. Vinicius, please go ahead. Hello, good morning, everyone. Thank you for taking my question. I would like to dive deeper into the growth potential in the market for categories higher than 200 reals. Some of them have a slightly higher than average online penetration. Second question about default. Which stage of the pass-through do you consider to be today and maybe future? What about the impact on gross margin down the road? Lastly, you mentioned changes to FinTech Magalu. What about the new products that you intend to launch? Any funding alternatives about the FinTech? Thank you. Thank you for the question. Three of our managers will answer Edu, Fabricio, and Mark. Good morning, Vinicius. Thank you for the question. Overall speaking, these families of products between 200 and 1,000 reais account for 45 to 50% of the current online market. Potential growth in penetration. When we look at these families, we base on our share, a slightly lower share, lower than 7%. So when we compare it with a share that we have in our traditional families, over 25 or 30, some of them even 40%, that's how we calculate our potential growth. This is the rationale behind these growth families. Just given more color, Fred speaking, today they are around 80% of the estimated market GNV above 200. So all of them, very significant so they tend to have a very they have they are very important they will be very important in the future as for default Fabricio good morning thank you for the question Fabricio speaking Like Beto said in the presentation, we managed to have a pass-through of 60% to 70% of default to date. Like we said in the previous call, we had exceeded one-third in the first quarter, and now we pass through another third, so two-thirds total default. And we keep on passing through. We expect that by year-end, we manage to pass through 90% of default, 95%. We're very confident owing to the competitive performance. market about FinTech Vinicius thank you for the question FinTech's agenda is pretty much concentrated on profitability and growth so we work for a lot of time building up the very competitive good profile and portfolio both for our sellers and end users so now we are building scale and making these products more profitable now that we have these great two stakeholders in our value chain. So at the end of the day, Everything related, particularly to digital accounts, we have a lot of things to become mature. Products to our sellers also need to evolve very significantly. Payments with token in Magalu, and we need also to speed up the conversion process. in our digital sales. So our agenda is very intense if we think about all the work that we've been doing over the last three years so we can effectively build scale and monetization on top of these assets. As for the outlook for funding, we are working with the central bank trying to improve the increase or capital increase owing to the reversal operations and deals that we had in these two instances in Magalu and right after the approval we are going to work on something that is 100% ready on our side so we can have this financial party not only provide us a balance for credit risk assets, but also bringing us instruments for funding via CDBs, letters, and all papers and securities related to the financial company. I hope I've answered your question. All right. Just adding to Mawadji's answer, an important thing to mention about scale has to do with this integration that we recently had, the reversal integration. Like I said during my slides, we used to have all functionalities developed in the Hub platform and all the volume in Magaluo Pagamentos. In order to gain scale, it's highly important to put together volume and functionality. And that's what we managed to do. So the whole volume of 3P will go through the hub where all functionalities are developed. All the efforts of recent years and obviously in this direction, putting together volume and functionality will allow us to have gains of scale, particularly products related to sellers, but not exclusively so. Perfect. Thank you. Thank you, Vinicius. The next question comes from Irma Scars with Goldman Sachs. Please, Irma. Hello, good morning. Thank you for taking my question. I'd like to go deeper into the competitive dynamics and the demand scenario. particularly for 1P online and physical stores. Based on the comments on the release, I understand that July was better at the store level. But I wonder if you give us more color about what you expect to be the reason to generate this improvement in this growth trend. Was it demand-wise? Was it the demand that is definitely better or any in-house measures that generated these better results. And the second quick question, it's very cool to see the service revenue growing up above GNP. Naturally, it brings an increase in take rate. Could you break down and let us know how much of this increase was owing to an increase in commissions? what you did over the first half of the year and how much was owing to other supplementary revenues like ads and other services. Thank you. Good morning, Irma. Thank you for asking the question. I'll begin answering and then I'll turn it over to Fabricio. First, about 1P. I began my presentation by showing a correlation between these categories with a selic rate, a high correlation. That's how it materialized in the past. I believe that now that we're starting the interest rate reduction cycle, one of the main impacts we'll see on our operation is an increase in the revenue in these precise categories. Naturally, that's a step-by-step process.

But we have a very positive trend.

If we follow all the other interest rate reduction cycles, we can see that right afterwards, that category begins to respond. And I can see this scenario happening both in physical stores and online. In these categories, we are leaders. We are leaders in 1P. I cannot say this happened in July because the reduction cycle started in August, but we can see a better competitive dynamics as of July. sales in-store sales improved vis-a-vis june and irma we were pretty much concentrated in default pass-through particularly online 1p when you pass through a lot of price it's very hard to do that and grow the sales at the same time so you have to choose our choice in the first half of the year was default pass-through we are up to two-thirds we still have something to do but once we conclude the pass-through i believe we'll go back to 1p online focusing on a slightly focused heavier focus on growth so i can see a very positive dynamics in the midterm but in the short term owing to the market dynamics we begin to see better growth compared to what we had in the first half of the year anything to add fabricio Good morning, Irma. Thank you for the question. Fabricio speaking. Like Fred said, the competitive environment is more rational, which is to our favor. When you do the pass-through, price goes up, and it takes us some time to be stable and have the price perception by consumers. This is pretty much stable, particularly online. You can see the online market goes down. We grow a little, a lot of share. Physical stores grow. is already at a high digit. We had a good Father's Day this year, and an important thing that brings us more confident in the macro scenario is that we have a good schedule until the end of the year. Our inventory quality is very good. We don't need any adjustments, which is very beneficial to us, and we're doing fine with our suppliers. Magalu is one of the few alternatives for suppliers today. So we've been managing to do good business, and we're very confident for the end of the year. Great, thank you. As for the take rate, Edu, good morning. Edu speaking. When it comes to take rate, the bulk of this increase in revenue that also include the base in our commissions, be it in shipment and take rate in general, and also an increase in additional revenues, but the bulk in the first half of the year comes from this increase in commissions. Overall speaking, considering our position in the market, we understand we have competitive rates for sellers, our growth in our seller base. At the same time, we post growth in our revenues. Okay, thank you. Thank you, Irma. Next question, Maria Clara with Itaú BBA. Please go ahead, Maria.

Maria Clara, you may begin. Hello, can you hear me now? Yes, please go ahead. Thank you for taking my question. I'd like you to elaborate on the dynamic for profitability looking forward. If you could comment on the expectation for margin improvement along the year. And I'd also like to hear from you whether you believe that after these adjustments of restructuring in this quarter, do you think the company has the ideal structure to enjoy more gains related to operating leverage in the coming quarters? Thank you.

Good morning, Maria Clara.

Thank you for the question. I will try to answer. Well, you know we don't provide formal guidance, so we have to align expectations qualitatively. With that slide that I showed on the EBITDA margin, I think that we spoke a little about the main initiatives taken by the company to resume our operating margins, to bring them back to historical levels. You will remember that we had some EBITDA margins before the pandemic between 8 and 9%. Today, we are at 5 to 6. EBITDA margin of the marketplace is way higher than the average. It is in the high two-digit range. We have been seeing this. It is our most profitable channel, the channel that grows the most and that has been increasing in profitability, a channel that also has the potential to continue to grow in an accelerated fashion without... working capital investment with low fixed costs and not requiring fixed investments. So it is a channel that has the potential to be a game changer in the gross margin. For example, we're investing a lot. I think that the whole presentation was very much focused on growing the marketplace. In addition to the marketplace, We have been improving the margin on goods, on merchandise. We also spoke about this. We expect a second half that will be stronger in terms of sales with better product margins. And the combination of these two things tends to favor and to drive the gross margin and the EBITDA margin, especially the gross margin. And in terms of the gross margin, we intend to continue to work efficiently on our operating expenses, optimizing marketing and logistics expenses, and more and more. with an expectation of having a lower delinquency level at Louisa Critt, CDC, and so on and so forth. All of these factors tend to contribute to a positive and growing EBITDA margin. With no need for intervals, but with a very positive trend. Second half, sales seasonality is historically better. Historically, the margin evolves in the second half of the year. And with all of these initiatives and investments that we have been making. Now with a macroeconomic scenario that is a little better, we are very excited regarding the evolution of these indicators, both for the second half of the year and in the coming months. We are very confident regarding a consistent improvement and evolution in the coming years. Perfect. Thank you very much. Thank you. Thank you, Maria Clara. Next question from Pedro Pinto with Bradesco. Please go ahead. Thank you for taking my question. I have two questions. Fabrizio spoke a little about a balanced and good quality inventory. So I'd like to ask a question regarding Black Friday expectations for this year. How are you preparing for this event from the standpoint of inventory? I want to understand how we intend to bet on physical channels and 1P channel for this year. That's number one. Second question has to do with working capital. In the beginning of the year, we had a stressful situation regarding funding. We saw the supplier's line reducing in Q1, and now it's resuming in Q2. Do you think that the appetite for funding is normalized, or should we see these suppliers going back to the level that we had last year?

Thank you for the question.

This is Fabrício speaking. Regarding Black Friday, like I said, we have a good quality inventory. Preparations for Black Friday are starting now. We are negotiating with suppliers this month and next month. We are confident on having a great Black Friday. Last year, it was our very best Black Friday. We expect this year to be even better. both in the online channel and in the brick and mortar stores so we are going to be ready our inventory should increase a little in q3 already preparing for end of year activities So there's also heat coming. If we have the heat that we're expecting, well, that changes our sales in terms of white line goods. So we are prepared with our suppliers to face that moment.

Pedro, thank you for the question.

I'm going to comment on suppliers.

We reported a reduction in Q1.

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

Next question, Filipe Heborero with Citibank. Please go ahead, Filipe. Good morning, Beto. Good morning, Fred. Thank you for the opportunity to ask my question. We are in Citi, and we want to better understand evolution in 3P. We showed 1P was a little bit more shielded and had with focus on higher ticket products. How does it communicate with the core, 1P and Magalu? Does it compete with the core products, particularly items greater than 1,000 rials? Another point is about monetization of 3P. so to speak, of a higher ticket VP. Is it easier to monetize this kind of seller, particularly in take rate negotiations or fulfillment? So that's about it. Thank you. Thank you very much for the question. I'll begin by answering. Well, we did some strategic planning for the next three years. And we pinpointed 200 families of products which are absolutely complementary to the ones we currently work with, traditional families. We provided codes to the size of these families, their relevance. For Brazilian e-commerce, Eduardo already gave us some color about their size. And on top of that, we are working. The growth of these families, these are families with low share, and we want to replicate the share of traditional families. We're speaking of tickets above 200, not only above 1,000. So 200 to 1,000, that's the great opportunity. to expand and replicate share above 1,000. That's what I mentioned in my slides. So, these actions add to one another. About 1P categories were very rational. 1P is very positive. It's contributing to our earnings. So the decision tomorrow to move 1P to 3P is very dynamic. And it depends on the profile of the category results. If it's better to continue in 1P, we'll do it. We are very pragmatic today. 1P today is a positive, profitable channel for the company. Sometimes when you don't have a lot of turnover, we can work with that. And some families are migrating into 3P, but nothing so significant. The bulk of the families are families where we didn't have 1P and we want to specifically address via 3P. When it comes to dynamics and economics, it's not only that the take rate is different, it's even slightly higher proportionally. Think about take rate in fashion compared to higher tickets. So this is more specific about unit economics. Shipping costs on GMV is lower. Marketing costs over GMV is lower. So it's more related to contribution margin dynamics, which necessarily of charging more. Think about companies like Flipkart in India. Tickets are very similar to Magalu, also with a big base of higher tickets, and they have monetization greater than 2% ads. So these categories, they have a potential for monetization. Another thing about monetization, which is a service we launched, which is very important, to show the importance of our fulfillment and how it's different from other markets. So for high tickets, products of higher coverage like furniture and fashion, we only have fulfillment for sellers. And we keep on starting to chart this modality, which will be important because we have a lot of idle space in our DCs. And it will help us to monetize this idle area. As fulfillment grows and as we grow the number of sellers paying for this room as fixed rents, We'll manage to monetize as well. So these categories have profile and different monetization dynamics, but an important potential. Once again, we have this vocation. It's part of our mission. Our logistics is unequal, and we are developing credit for higher product categories. So we have an area. a significant area in this regard. And we also have hits. These categories at Magalu, they generate a lot of hits and have credibility. Consumers will not trust a website that sells a lot of smuggled, counterfeited products. They are not going to buy a 500 to 600 real product. So it doesn't happen to us because we have this credibility and we have high chances of having a very similar share to what we have for 1,000. And it's a driver for growth with profitability for 3P, which is materializing in practice this quarter. And the figures are evidence of that. And we'll keep on working for future quarters. Crystal clear. Thank you. Thank you, Felipe. Next question, Eric Huang with Santander. Please go ahead, Eric. Good morning. Thank you for taking our questions. On our end, maybe it's a follow-up of the previous question. Maybe just to summarize what we mean by the main pillars so you can manage to keep on growing in terms of monetization. And maybe you can make some comments on ads. What is missing or what do you still have to develop? in order to speed up your share of ads. And maybe a last question on our end. This is more related to cross-border. Freddie, you quickly mentioned that you want to tap into this area. I wonder if you give us more color what you mean by that and how you see this opportunity. It would be very cool to learn more about it. Thank you. Thank you for the question. Fatala is joining us today. So there is a lot of complexity when we develop an ads platform. Maybe Fatala can give us more color about what we're doing and what the teams or labs are also doing on the ads platform. And then when it comes to monetization and cross-border, Edu is going to answer the question. Eric, good morning. Speaking of the ads platform, we started development last year. This was when we began to integrate in Magalu channel at first. The idea behind ads basically was to work on traffic that we have in the whole ecosystem. And for that, we need to explore the most relevant positions. where we have more users, so we can have space for ads. The breakdown when it comes to the ads platform are twofold. In one of them, we work with sponsor products, and the other one is for display. We started with sponsor products. We had the integration at first with a search for Magalú, And afterwards, we started part of the learning curve at Magalu, expanding for connection and other sales channels. Another example was Netshoes. Today, the e-commerce platform where we run Netshoes and other stores are already integrated with ads. We are on a pilot study and working a lot. As for challenges, like Fred said, the most important thing is to come to a balance. between the bidding system and the inventory delivery. So from this point onwards, we managed to analyze results that are taking place ROI for advertisers and bidding processes in order to have good pricing. for the sponsored products in these areas, and at the end of the day, have revenue generation, good for the platform, and at the same time, something that is very relevant result-wise for advertisers, in our case, our sellers. As we speak, we're doing an integration in other areas too. We're also beginning to work with product recommendation at Magalu, and also, we are ready with a pilot phase for Matt Shoes. And from then onwards, we'll also expand with the integration for displays. So this is about the roadmap of what we're doing. Like Fred said, it's not so simple to do it in practice. When we think about other players, they work on development about 10 years, and we've been managing to speed up the process a lot, owing to the learning, lessons learned from other players, and also the relationship with a very nice player, like Flipkart Stories, which is very similar to us, and how they worked on their ad development system. Next, with the answer, let me talk about monetization. In January, we had an impact in the second half of the year. So now we announced some new adjustments in our orders and some reductions for Passeiro Magalu platform to make sure we have good monetization for the second half of the year. Like Fred said, it was... and now we have collection announced to the market. And we're trying to model collections from when the comment comes, we also work with labs. Fatala worked a lot, talked a lot about the ads platform. We work now that we expand inventories to other platforms and will be a strong driving force for profitability, no doubt about it. As for cross-border, if we think about the upside, we see it as an opportunity, trying to explore it and support our strategy. Our strategy is higher ticket products, fast delivery times. So it's an additional opportunity based on what we already have. Crystal clear. Thank you for the answers.

Next question from Gustavo Sendai with XP. Hello, good morning. I have two quick questions. One regarding non-recurring expenses. We saw the quarter-on-quarter evolution of that amount. So I'd like to understand from you, what do you expect looking forward to this amount normalize with integration of Hub FinTech? And a follow-up question on take rates. It called our attention in the pass-along off-take rates this quarter. I'd like to understand from you any specific category that is room for increase and in what categories have you made adjustments in the last quarters? Thank you.

Good morning, Gustavo.

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

Lower ticket categories have a higher commission.

We had made some adjustments in January, and now in July, we made some other adjustments to increase this fixed amount from 3 to 4 reals. This is going to be repeated in the second half. In the Parseiro Magalu program, we also made some adjustments in the take rates in the commissions. And as mentioned before, we have the evolution of ads. And we'll see how monetization will evolve in the future. Perfect. Thank you very much. Thank you, Gustavo. Our last question comes from Joseph Giordano with JP Morgan. Mr. Giordano, go ahead. Good morning. I have one last question. Going back to working couple, we could see significant improvement. which accounted for the gross part of the cash generation of the company. So I'd like to hear from you. What would be the next drivers to improve working capital? Or is this kind of normalized? And my second question has to do with restructuring. Last year, there were some store restructuring, and this year, some internal restructuring. Do you see any opportunities to revisit your pool of stores? considering a great focus on digital ads because that's an easier venue to get monetized hello joseph i'll start speaking about working capital Well, we continue to reduce our inventories marginally. A good part of the reduction took place last year and beginning of this year. If we compare with the peak of inventory in the end of 2021, inventories were reduced by 1.5 billion or more in the total value of inventories. As Fabricio mentioned,

Our stock-up level is at a very healthy level.

We have a sound inventory level versus a surplus inventory. Now, naturally, we'll always try to improve inventory turnover. This continues to be one of our obsessions at the company. We see more room in increasing sales than in reducing inventories. Of course, we can have some efficiency gain. We had a number of internal initiatives to always pursue efficiency. to operate in the most efficient and the best way possible, possibly continuing to nominally reduce inventories. But this should not happen in the short term. As Fabrizio mentioned, we have the second half. We have Black Friday and other events. So pretty soon we're going to be receiving products. for those festivities in the end of the year and then we'll reduce inventories again as it normally is in this inventory supplier relationship we see more opportunities on the side of inventories rather than on the side of suppliers because with suppliers we have already increased those and we have an average term of purchases which is quite healthy In addition to this inventory over supplier ratio, we always try to optimize our working capital line items. We have an opportunity to increase the offsetting of taxes. In the last two years, we accumulated some taxes. And this year, we are kind of flat, stable, and slightly offsetting some taxes. And we have a working plan to accelerate monetization of these taxes naturally, organically, via expanding the margin and via sales increase and so on and so forth. So we have a strong focus on these lines and an opportunity to improve a lot by year-end. and generating a lot of cash as it relates to our working capital. Now I'll turn to Fred to speak about the stores. Morning, Joseph. Thank you for the question. Regarding the physical stores, we have made some adjustments in the last two years. The bulk were Marisa kiosks in terms of volume. But this is a dynamic process. We are always evaluating issues related to rent. Most of our brick and mortar stores where we have opportunities to improve profitability are new stores in Rio, in new markets, and they're still in a maturation phase. And unfortunately, they were created in a a bad phase of high interest rates we had just opened the doors and they were caught in a counter cyclical moment of the market it doesn't make sense to close these stores now that we expect interest rates to fall just like in the past in all economic cycles declining interest rates is something that is helpful. I showed a high correlation with the category of durable goods online, but particularly offline because credit is related to consumption. at the physical stores. With lower interest rates, we start giving more credit, and we start selling more, and that's very important for our operating leverage. So we believe that with this declining interest rate cycle that should last many, many quarters looking forward, this will have a super positive impact not only in the result, the reduction of prepayment rates, but also in terms of store volume sold. I believe that this is going to be super important for these units, but this is very dynamic. We're always looking into this. And I'd like to highlight that to us, stores play a role in the ecosystem. They're not just a standalone sales channel. 45% of 1P sales go through the stores. 30% of 3P sales go through stores. A lot of the new sellers come through the hunting teams at the stores. So the stores do play a role. In the Magalu ecosystem, we built an operation which has in 3B the same characteristics that was super important for us to be winners in 1B. And the stores play a significant role in that.

Perfect.

Thank you very much, Beto and Fred. We are now ending the Q&A session. I'd like to turn the floor to Fred Trajano for his final statement. Mr. Trajano, go ahead.

I just want to thank everyone for joining our earnings call. Have a great week. This concludes Magalu's conference call. The IR team will be available for any further questions you may have. Thank you all for joining us. Have a great day.