Magazine Luiza U/Adr

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Welcome to Magalu's conference.

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Good morning, everyone. Thank you very much for joining us in our conference call to discuss fourth quarter 2023 results. Again, I am here with the whole executive committee of the company, and we will all be available to answer your questions at the end of the company's presentation. I would like to say that fourth quarter 23 results represents a very important symbolic moment for Magalu, a turning point for Magalu. I took over the company in 2016. And at 22 borders presenting sales increase, net income increase, and cash generation. After the pandemic, with a macroeconomic context, high interest rates, high taxes, we faced a very hard reality. For two years, we did not deliver the expected results. Myself, together with the whole Magalu management team, decided to absolutely focus on helping the company resume its profitability, which was exactly what we delivered in Q4 2023, and which we'll continue starting now. And this week was not trivial, to give you an idea. Higher interest rates in the post-pandemic period, increased taxes, particularly the return of default, added 3 billion BRLs to the company's cost, or 1.5 of financial expenses, with the interest rates increasing from 2 to 14, and practically 1.5 billion BRLs with increased default last year. to be able to extract the 3 billion BRLs from the operation is not a trivial task. It required a lot of effort from everyone, from the 35,000 employees in our leadership. We increased the margins, we reduced expenses, we improved the working capital, added services, revenues, more revenues coming from the marketplace, from financial operations and sale of insurance, sale of financial products. And with that, in Q423, we had 100 million barrels of recurring net income with the highest EBITDA margin, 7.2% in the last four years. In 2020, it was 5.2%, dropped to 2.6% in 2021, increased to 6% in Q422, but then we did not have default yet, and now 7.2% in Q423. It is a lot of hard work that is finally allowing us to reap the fruits. On slide number two, we show that in the quarter, we posted sales of 18 billion BRLs. If we look annually, 63% of sales, 5% growth year on year, 2023 over 2022, and practically stable in Q4 23. Our focus was to deliver profitability Thank you very much. We had a heavy comparison base, heavy operation, particularly for 1P physical store sales, and we maintained sales flat in GMV flat in Q4 and deliver margin of 7.2 with a 30.3% gross margin, even with the black riding. when we operated differently compared to previous years. It was the first Black Friday with a positive contribution margin. To us, this was a fundamental change in strategy, fundamental for us to help deliver our earnings. Now, on the next slide, slide five, when we break down sales, we can see that from the standpoint of brick-and-mortar stores, even with a very high comparison base with the World Cup in 2022, and I think this shows a trend for this year, and Fabrizio Garcia will be able to talk about our physical stores in 2024. But in 2022, compared to 2021, physical store sales have grown 15% because of the World Cup. And we were able to grow 4% in Q4 23 over Q4 22. So after a long period of difficulties in physical stores, we are resuming the growth of sales in this channel. In January, February, we are posting Close to double-digit growth for physical store sales with a great potential of improvement ahead. Because if we stop to think about it, interest rates have not yet dropped significantly. So there's a huge opportunity for this channel. Our market share is lower than online. We have about 20% market share in physical stores. in the traditional categories, about 35% online. So there's a lot of room for improvement and gains for physical stores. And as I said, Fabrício will be able to detail more of this in the Q&A if you want. On the next slide, let's talk about e-commerce. In e-commerce, we had two different situations, 1B dropping 8%, 3B growing 10%. In the full year, we closed with approximately 46 billion bureaus in online sales. We are vice leaders in this segment. We've been investing in this channel for 23 years. 46 billion bureaus is a considerable amount. On the full year, online grew 5% in this quarter. In the flat AMV concept, we had some drop in 1P, given the comparison base of the World Cup. But 1P also had to recover about 300 million bureaus of default. Because default, like I said, accounts for about 1.5 billion, 1.3 billion in the full year. If we break it down by quarter, about 300 million reals that we had not withheld in 2022, which we started having to withhold in 2023. So there was a significant increase in prices, a big focus on 1B margin. And with the World Cup included in the comparison base, that led us to an 8% reduction. But in In Q124, we have a more stable situation. Last year, we already paid default, so we could have a fairer comparison base for 1P. So, I see new opportunities for 1P this year. Regarding 3B, we continue to boost 10% growth, which I would like to highlight. Next slide. The growth of our revenue in 3P, we grew 10% GMV 3P, but with an increase of take rate that we had along the year of 3P in the quarter. In terms of revenue increase from services, we had 26% increase. 10% GMV with 26% revenue increase increase. better monetizing our operation. 3P, which contributed negatively to the EBITDA of the company in 2021, now started having a contribution in 2022 and in 2023 posted a significant contribution to our EBITDA. This reality tends to continue looking forward. We are at a good level of percentage contribution margin and we want to continue to increase the 3P sales. I'll speak a little more about this As regards 3P, we also added from 260 sellers to 340,000 sellers. We continued to increase the number of offers from 91 million offers to 128 million offers. Practically half of the online GMV does not sell traditional categories, and 3P has helped the company diversify. To give an idea, 40% of all items sold at Magalu come from 3P. 3P has exceeded the physical stores. We have 67 years operating physical stores in terms of GMV and amount of orders. 3P has been contributing significantly to the company. And the trend is that this will continue looking forward. Still on 3P, we see some tailwind. We are improving a lot on level of service in our deliveries. in terms of percentage of 3P orders delivered in up to three days, increased from 43% in Q422 to 51% in Q423. I'd like to remind you that 80% of our deliveries go through Magalu entregas. we minimally rely on the postal service, around 10%. But after the four acquisitions, the head of logistics companies that are now under the umbrella of Magalén Trego, 80% of marketplace offers pass through our own logistics platform. 51% of deliveries are delivered in two days. And the trend is that this will improve because we are very positive and confident. next on the expansion of our fulfillment. We took a little longer to do fulfillment because we wanted to have a differentiated fulfillment operation in the market. We have a truly multi-channel fulfillment, unlike other proposals in the market. Sellers have their products exactly in the same distribution centers where we have 1P products. And since In our 1P operation, once in the DCs, the sellers' operations benefit from a multi-channel approach. The level of service, or the NPS of Magalu, is about 80%. The NPS of 3P is 30. The moment that more and more 3P orders go to 1P, we'll be able to significantly improve the level of service to our customers. At the same time, reducing our delivery costs and deadline of deliveries. We now have eight distribution centers enabled to receive products from sellers. Three of these DCs are incentivized. The same incentive I have for 1P We are passing through to the seller, and we're very optimistic, particularly with the more distant centers from Sao Paulo, because few companies today have the ability to provide these services to sellers in more distant locations. More than 2,800 sellers are using these services, and I believe that by year-end, these 15% of 3P orders will be closer to 30%. Sellers who have their products in our CDs have a 25% reduction of costs compared to the cost of traditional carriers and 25% increase in conversion rates. So as we improve in our fulfillment agenda, which is one of the main targets of my whole platform, the logistics team, We will undoubtedly improve level of service to clients, margins, conversion rates, and will grow sales. We're very excited and we are very confident in this expansion. I think that there are some opportunities which are not in the mind of any analyst that I would like to highlight. Some of them I would like to highlight, then Beto can complement. I'll speak about Magalu ads. We do believe that we have a great opportunity to monetize our 500 million monthly visits. I'd like to remind you that Magalu, among its properties, has an e-commerce platform. that is the most visited for sports net shoes the games e-commerce most visited kaboom and epoca the the most uh visited in makeup e-commerce so all companies are profitable and i'd like to stress that not just the controlling company but all of them are being profitable And also the Magalu channel. In total, considering the content channels, tech and Java Nerd, we have a huge opportunity to monetize these channels. And a good part of our efforts, and our Catholics as well, will be geared to develop a platform for advertisers. We've had a number of products delivered this year, and we have a consistent roadmap. We assure that Magalu ads will be contributing significantly to our EBITDA in the coming years. And we ensure that this is not included in market consensus and analysis. We're excited with that opportunity. Another opportunity is the FinTech, but I'll let Beto in the presentation and Mawad in the Q&A speak about this. And Magalu Cloud, the first Brazilian cloud platform of global scale. 30% of Magalu's operation is already on its own cloud platform. Now we have external clients experimenting our service. And Rafael is also here to answer questions about that. We have a number of important products for the cloud to be delivered along the year, and we'll give an option to Brazilian companies to be able to use the cloud with local low costs. it's not enough to have a cloud journey we have to have affordable competitive costs because for internet companies for technology companies it's not just about growing it's also about profitability and we see that having a local cloud service in brl not in dollars We see it as a great opportunity, not just for us, but for many SMEs, small and medium-sized enterprises in Brazil. That's also an opportunity which is not, you know, market analysis. This will contribute a lot to our results in the coming years. Now I'll turn the floor to Beto Belismo to speak about our short-term results, and then I'll come back for the Q&A.

Well, good morning, everyone. Thank you for participating. Good morning. Once again, thank you for participating on an earnings conference call. First, I'll go through the big numbers, the financial highlights. Fred already mentioned already almost $18 billion in sales, 10% growth of the marketplace, 4% growth in brick-and-mortar stores, significant gains in market share in the traditional categories. We also talked about gross margin. Since the beginning of the year, we've been saying that our gross margin was evolving and changing level. And once again, we've reached more than 30% of gross margin, growing 2.5 percentage points compared to the previous year. with an EBITDA of 756 million BRLs, EBITDA margin of 7.2%, the highest EBITDA margin of the last three years, and net income of 100 million. We're very happy with this income, 1% growth on the margin, and this is in the concept of recurrency that we say. The next slide, we have the published net income. 212 million BRLs. In addition to the recurring net income of 101 million, we highlighted the extraordinary events, starting with the sales of the Luisa SEG that contributed more than 200 million BRLs per net income. Once again, here, in the financial results, the fair value of the liabilities of company acquisitions, the portion to be paid in shares as help in the financial results, but we excluded it from the adjusted financial results. We've also posted an IRCS credit deferred at Netshoes because Netshoes had annual losses in the past. And since it had losses, it didn't account for this credit. And as it started bringing in a profit in the recent years, we started to account for this. having a positive reflection on NET2's net income. In addition to all of these events, in a conservative way, we had the provision for the 2022 default in the amount of 370 million BRLs. This provision was done where we understand Based on the opinion of our legal advisors, there is a chance of loss that is higher than the chance for gains, although it is very important to highlight that the agreement for the Supreme Court's decision has not even been published yet, so we'll continue to contest and update you on this subject. It's a provision for the time being with no cash effect at the moment. noting that we have almost 1 billion BRLs in judicial deposits, referring to default of 2021 and 22 in our balance sheet. Moving on, we had other non-recurring expenses that were low amounts, 35 million BRL, which refer mainly to the expenses And right off, with the closing of stores that we had in the first quarter of that year, we closed 23 stores. And the closing of these stores will have no impact on the results of this first quarter. It was completely provisioned for at the end of last year, also including a change of a distribution center as well, the move. And interest income tax on all of these affects. getting to a total accounting net income of 112 million. The next slide, we have other good news. We presented these results in the third quarter. And at this time, the balance sheet was completely audited with no comments, no claims. And as we mentioned, in the third quarter, the audit service had not concluded its works. But once they completed the entire audit, we have here the results. There were no incorrect accounting entries identified in the recognition of the bonuses, so it was not necessary to resubmit balance sheets from previous periods, as we had estimated in the past. What we did was a revision of the estimates of the bonus balances to be received previously released. The amount of this adjustment was entirely disclosed in the results of the third quarter. And what we highlight here is the same value that we disclosed in the material fact of November and in the earnings of November. So the equity and balance sheets released in November September 30th, and all of the accounts had no changes. The adjusted recurring results of the third quarter was also not changed, and the only change was in the accounting results because, again, the values that we had posted retroactively now were posted fully in the results of the third quarter with no cash effect, as we had already explained. And it's also important to note that since the third quarter, We've been enhancing and improving, and in the fourth quarter, all of the campaigns were already registered in our new campaign management system, TradeLinks, and the earnings of the third quarter, the fourth quarter, already reflect all of these benefits of much better controls and much greater focus. Moving on, we see the evolution of EBITDA margin, not only of the last quarter, but throughout the year, very important evolution, and a special highlight here for the main drivers of this evolution. highlighting the growth of marketplace and service revenue that adds a lot to our results, the increase in gross margin of merchandise and the pass-through of default. Fred already talked about Black Friday, the expansion of fulfillment, the market share gains, as well as the resumption of profit at Luiza Credit. Next slide. We see that product margins we were not only able to conclude the pass-through of default that we had already concluded in the third quarter, but we were able to go beyond. In addition to paying all of default for that year, we also increased 1.1 percentage points in the margin of merchandise compared to the 2022. Service margin has also been helpful as well, again, 1.4 percentage points. And this growth margin grew a lot more in the evolution of operating expenses. Operating expenses remained pretty much stable, both in nominal terms and as a percentage of GMV, and was just a variation compared to net revenue due to the marketplace side. And equity again contributing. Next slide. We talked a little bit more about working capital. It's important to point here that this quarter we had an evolution of working capital as a whole of 500 million BRL. So it's another positive advancement of working capital. the highlight of the levels of inventory that we were able to reduce by 400 million, the inventory balance from September to December, and also to the balance of taxes to recover in the balance sheet, which we have monetized and offset 500 million. and that became cash, so it's a trend as well from now on. As we increase product margins and service revenue, we've been able to offset ICMS, PIS, and COFINS taxes, so there's a quality of the working capital has greatly improved. And the balance from suppliers, especially, specifically, this quarter did not grow It remained at the same value from September to December for a number of reasons. First, we purchased less because we reduced the inventories as well, but we also advanced the payment of certain suppliers. We made the payment in the fourth quarter so that we will not have to pay them in the first quarter. And the message here is, in the first quarter of this year, the variation in the supplier balance will be much smaller than on previous years. So we have the forecast here that remains very positive for cash generation this year, as well as the evolution of financial expenses that on the right side we show. Literally, it dropped from 7% in the beginning of the year to 6% to 5% before, and this drop reflects the improvement in working capital, the increase of financial revenues, also including the financial revenues from advancement to suppliers, and also keeping up with the CDI and a stronger capital structure. On the next slide, we show you For the quarter, again, we increased total cash by 1 billion and increased net cash in 1 billion as well. So there was no change in the debt balance. And this 1 billion did not come from suppliers. Normally in the fourth quarter, the supplier balance rose, but it didn't grow 1 billion. If it had, we would end with more than 10 billion total cash. But that was still very positive because we had more revenues reduced financial expenses, and will continue to reduce these expenses in this first quarter as well. The trend for financial expenses is, again, of a significant drop throughout this current year. Out of this $1 billion, we can say that $100 million came from the recurring results, $400 million from inventories, $300 million from taxes, and $200 million from the sale of Louisa SAG, just to summarize. On the next slide, we'll show you our capital structure again, three times total cash over short-term debt, 9 billion compared to 3 billion. We've already paid almost 1 billion, including the debentures and debenture interest in January, and we'll reduce another 2 billion. And along the year, we will reduce our total debt from 7.4 billion to 4.4 billion, maintaining total cash at very robust levels, counting on the year's cash generation, as well as the capital increase that we are doing this month in the amount of 1.5 billion BRL. We now highlight, as Fred said, the subsidiaries that are all bringing in a lot of profits, NetShoe, turning a profit with marketplace growing very rapidly. Epoca as well, bringing in an and Caboom as well, turning a profit and growing, and also growing with the Caboom's Marketplace, iQIFONI. And on the next slide, we show our FinTech, LuisaCred, with $18 million net income. MagaluPay as well, very profitable on the payment side, and the advance of receivables. We'll soon launch the digital CDC, and we've been making a lot of progress in our digital accounts for sellers, which has reached more than 70,000 new accounts this quarter, and a total volume of more than 800 million BI apps. Moving on, on LuisaCred, we continue to grow, and TPV, credit card days of almost 7 million of active cards, getting to 15 million sales in the quarter, and 15 billion in the quarter and 58 billion in the year. So it's a portfolio of 20 billion BRLs. And the best thing about this portfolio, on the next slide, is that we see that default rate has been dropping significantly, as well, both in the short term and in the long term. The level of provision also dropping significantly. Cost of funding as well going down. So LuisaCred also turning the results around. So it's also a turning point, a turning quarter for LuisaCred, opening a new phase with $18 million net income in the quarter with very favorable perspectives with a reduction of the cost of funding and delinquency rates going down for the future. And finally, we see the performance of recent vintages as well with a highlight for the recent months. performance, both on CDT and card, being very low. For cards, the level of default rate is under 3%. In historical terms, this is low. To conclude, We have here a little bit more about our capital increase. We've announced an increase in private capital, 100% supported by the controlling shareholders and BTG, showing their confidence in the company and our strategy and business model. We talked about the use of resources to accelerate investments in technology, the expansion of Luisa Labs and all of the platforms here. that have high added value, high profitability margins, including ads, syntax, fulfillment, and cloud. Finally, we'd like to also thank all of our shareholders for their participation as they have contributed, participating in the capital increase. In a very impressive way, we had an adherence in the priority offer of already almost 86%. The controllers came in with 100% of their potential, and the minority shareholders participated with more than 70% of the total available volume, also requesting a great participation in the division of the shares. In the beginning of the month, we already paid at 1.70B, and we'll liquidate the remainder this week. totaling a capital increase of 250 million in the quarter. With that, I turn the floor to Fred, or rather we can go straight to the Q&A session. Thank you very much for your participation once again.

We will now begin the Q&A session. If you want to ask a question, click on the Q&A icon at the bottom of your screen. Write your name, company, and language of the question to get in line. When announced, you will be prompted to enable your microphone, and then you should do so. And proceed with your question. Our first question from Luiz Guanais with BTG. Luiz? Good morning, Vanessa, Fred, Beto. I have two questions. First, could you comment, Freddy, since we have Mawad here on the evolution of new services on the platform, so digital CDC, as you mentioned, fulfillment, ads, how could we think about this as a driver for growth and improved margins in the coming quarters? And my second question is, How can we expect the margin growth equation along the year? It's clear you want to have a more profitable operation and improved cash generation. But in terms of growth, could we think about additional investments to be made, also given the capital increase you've heard? How could this equation work during 2024? Thank you. Good morning, Guanais. Thank you for your question. Well, I'll start answering and then I'll turn the floor to Mawad. Well, in terms of margins, more specifically, contribution to the operating profit, I believe that there are three main lines or avenues to improve operating profit. Like I said, these are not included in the projections of most of the analysts, and they are the fintech. We have great monetization of financial products offline. It's low online. So digital CDC and a number of other initiatives that Mawad will explain have a great opportunity to contribute and to monetize our ecosystem. Advertising. I think I spoke a little about this in my initial remarks. There are a number of companies in the world that have a successful agenda of monetizing their business through advertising. I visited some of these companies recently in India and in Southeast Asia. Many of them, all of them are successful in monetizing their business through ads. We have one of the biggest online audiences in Brazil. I'll ask Edu to speak more about that. And cloud, Magalu Cloud. So FinTech, Magalu Ed, and Magalu Cloud, they're great opportunities for monetization. So we have, if you're curious to understand the cloud, you can ask about that. And fulfillment has to do with improved level of service and increased conversion rates. It's not an opportunity for monetization, but growth. 3P is here. We have better timeframes with a lower cost. We don't need to charge a freight tax if they have store pickup. But in and of itself, it is not a tool to increase profitability. I'll turn the floor to Mawad to speak about the fintech. Then Edu can speak about ads. And I'll come back to speak about growth of margins this year. Good morning, Guanais. Thank you for the question. In our roadmap of products, we're expecting to launch a digital CDC at the start of the second half. We are looking forward to have another payment method in our checkout, both for 1P and 3P. And given the expertise the company has in granting credit to consumers in our physical stores, we can see how this drives GMV and builds a contribution margin. So we're very confident of that, of course, taking the necessary careful measures because, you know, granting credit online is more overheated than in our footprint of brick-and-mortar stores. But we're confident we'll be able to ramp up the operation. When we look at the market as a whole, we understand that we can have a 5% share of checkout, particularly in digital CDC. Also, since we're building a digital product from scratch, in the second half, the stores tend to benefit from a new chassis of products so that we can offer more flexibility and provide a more risk-adjusted pricing and, of course, a more fluid journey in our store environment as well. So the second half of this year, has many promises regarding the deployment of new consumer finance products. I'll turn the floor to Edu. Hello, Luis. Good morning. Thank you for the question. Speaking a little about Magalu ads. I think last year was one of evolution of our product matrix. We have basically three products. One is the sponsored product. There's displays that pop up during searches. We are developing a video display feature. It needs some stages to be ready and we have the special content. from our content portals, Canaltech, and others. So this was a year to consolidate this product mix. And this year, we have a focus of having a good go-to-market. It starts by reinforcing our team. To lead the ads department of the company, we're bringing in somebody who's very competent. With a vast experience in this market, Celia Goldstein, she took over in January and she's leading this commercial team. We believe that this year, although we did post a good growth in advertisers and in revenues last year, we believe that there's a lot of room to grow. And we believe that this year will be one of accelerating, stepping on the gas for this initiative. Back to Freddie. Well, additionally, I think that a lot of these inputs will lead to even more relevant outputs next year, including cloud. We'll start reaping the fruit. We'll invest in inputs that will lead to mid- to long-term outputs. In the short term, Guanaz, it is important to say that we have margins in Q4 that we didn't have last year in Q1. In Q1 of last year, we had the impact of default with no price increase or price increase being passed through to customers. But with the physical stores, with increased sales and double-digit growth, that tends to benefit the results. and the results of brick-and-mortar stores. For 3B, we started passing through prices or price increases and fees to sellers in February, and it ended in June. So I think that in the first half of the year, we are in a good moment, regardless of all of these initiatives. I believe that they will create outputs more towards the end of the year and next year, but this first quarter or first half of the year will benefit from this momentum that we were able to capture in Q4. Now, relative to last year, it will grow more significantly. In the beginning of last year, we had to deal with increased default without the ability to pass through all that increase to our prices and without all of the changes made. But we have a good expectation for the first half with the initiatives started in Q4. And there's another point. I don't want to be too long in my answer, but I'll probably speak more about this in the next questions. But we're investing a lot in user experience this year. So we have a significant capex this year that will be geared to improve UX. We reduce complexity, but we have a lot of new categories and new services. We grew a lot this experience. In the last three years, our agenda was very much looking in-house, reducing expenses, increasing margins. The agenda this year will be focused on consumers and improving customer experience, UX. Of course, we can speak more about that in the next questions, but I believe that this will help increase conversion rates and increase the growth of 1P and 3P for this year. Excellent. Thank you. Thank you for the answers. Well, thank you for the question, Luis. Next question from Maria Clara. You may proceed. Thank you for the opportunity. On Itaú's side, I would like to explore the expectation of evolution of 1B and brick and mortar stores because we've seen an improvement in threaded KPIs. Our internal proprietary index suggests a gradual recovery in the consumption of durable goods. and electronics and home appliances. But what about 1P? I'd like to hear more about that. And I'd like to hear about the strategy for each one of the channels for this year, because this is potentially a turnaround year in terms of cycle and how this matches the expectations for cash flow and profitability. Thank you. Maria Clara, good morning. Thank you for your question. I'll start answering very briefly, and I'll turn the floor to Fabricio. Thank you. So, very briefly, I've spoken about physical stores. We are at a good level with excellent expectations. Fabrizio will detail that more. For 1P, we resumed profitability of 1P in Q4 last year. We took about three quarters to be able to fully pass through default to 1P. At the start of the year, we have a comparison base, a part of it without default pass-throughs, a part of it. And so we have this comparison base. But this is already better in terms of growth, considering Q4 growth. And I believe that gradually the comparison will be easier, will continue to grow 1P channel, always with a positive contribution margin. Fabricio? Good morning, everyone. Thank you, Maria Clara, for the question. This is Fabrizio Wolff. But we are performing better than in Q4. More importantly, we're able to perform maintaining our margin, which is at a whole new level. We are focusing on profitability. We want to go back to growing, and we are gaining market share this quarter. So I believe that in 1P, as of next quarter, we should post also increased sales, maintaining our profitability. That's a point we're working on hard here. and we're performing well in practically all categories. For brick-and-mortar stores, we did post a very good performance in Q4. In 2022, we had the World Cup, and the physical stores do benefit when there's a World Cup. That's when we saw growth and increased margin. And in Q1, we had a fantastic sale, which was very relevant for us. We grew our sales, and we were able to grow our margins. The sale was great in all three channels, 1P, 3P, and physical stores. And we are maintaining growth at the stores at a double digit this quarter. maintaining profitability. And this is going to be the tone for the whole year. Stores should be a highlight in terms of increased sales. That's what the scenario we're working with for brick and mortar stores. Perfect. Thank you very much.

Thank you for your question, Maria Clara. Our next question, Irma starts. Irma, you may go ahead. Hello, good morning. I just have a quick follow-up question to Maria Clara's question about 1P. Do you have any view on which categories, either in stores or online, will perform better this year, maybe even considering product cycles and so on of recent years? And the main question, Fred, or maybe Fatali, The question, I think, is a little bit about the opportunities of clouds. If you can talk a little bit about the main clients and the first lessons that you've been learning in this vertical. And, of course, the opportunities that you can give us more. Good morning, Irma. This is Fabricio. I'll answer the first part and then I'll turn to Fred. In categories, we have excellent performance in white goods, both in the 1B and stores, displays and screens as well performing well, portable appliances and furniture. These categories stand out. And the market that's struggling a little bit more is telephony. Throughout Brazil, we've been gaining share, but it's a category that is a little bit more difficult because of the cycle of product replacement, but it's offset by the growth in white goods especially. So I think in terms of categories, that's the scenario, both for brick-and-mortar stores and online. It's similar. I'll turn to Fatalia to talk about cloud. Good morning, Irma and everyone. Thank you for the question. Just to put it into context, On the cloud side, first, I'd like to say that the global market, the number of what's expected by 2025, it's 5 trillion BRLs, 1 trillion US dollars, and it's around 24% for 2025. When we look to the Brazilian market, In 2025, the market is of approximately 91 billion BRLs with a CAGR that would be around 42% from 2022 to 2025. So Brazil and Latin America in general have a gap in the adoption of cloud in all layers from SaaS to infrastructure. So there's a long road ahead for the digital transformation of companies. Within cloud, after we had made the public announcement in December, it has been quite interesting. The journey thus far and a few things made us very happy. For example, one week later, we already had 1,500 customers with leads generated by Magalu Cloud's website, and we started to work and understand their needs and start on the onboarding process for some of them. Remember that we announced cloud and said that we would still be doing a private preview for those customers, so it's something that is not open to the public to join and get the self-service onboarding process. We started making adjustments. Fred talked about 52, but we had an evolution, and there's already 74 customers that we already have on the cloud. We are creating a lot. We talked a lot about the focus on small and medium-sized customers, and we saw that the choice of products have been working great for them. But we've already been looked at. We had enterprise customers coming to us. Enterprise for us, we say they're select accounts with more than one million of cloud expenditure per year. So some of them we've already started to onboard. It depends on their needs, and it's also a way for us to – give a direction to our evolution roadmap. Now, in the coming month of April, we'll launch the first three products to make them available for everyone to hire those products on the portal that will happen in the Web Summit event in Rio de Janeiro. We'll demonstrate and have a lot of content about the cloud. And we have another nine products that will be launched by the end of the year. that will be available for the entire market. So what we expect to happen in this first product will start to grow greatly in the customer base. They're very specific in terms of use. But as soon as we evolve to the second half already releasing the team for VMs and database, that's when we believe we're going to see the highest number of customers onboarding into our clouds. And we expect to be at a maturity level considerably high from what we built at around the half of 2025 and beginning early 26 will be more mature and operating at a larger scale. Excellent. Thank you. Thank you, Irma. Next question, Eric Santander.

Good morning.

Good morning. Thank you for taking our questions. I think on our side, there are two. First, if you can talk a little bit about working capital. I mean, you talked about on the fourth quarter, you had a little bit more of an advancement with suppliers that will be beneficial for this first quarter. So, we can think that this is a new pattern for the working capital dynamic for you, thinking about the seasonal cycles. And also, if you can get into more details, where you see opportunities in the working capital line. The other point, looking at the focus for 2024, you talk about the enchantment. To understand how we can see that in practice, in terms of changes, maybe. I think you talked a little bit about equity. maybe to understand in practice what we can look at this year to keep track or to monitor the evolution of this initiative and what we can expect in terms of evolution, either in the sense of sales or conversion. It would be interesting to get an overview. Thank you. Good morning, Eric. Thank you for your questions. I will start talking about working capital. so first we highlighted the reduction of inventories in this quarter we reduced 400 million for the year we reduced 200 or 300 million in inventories we had already reduced inventories in 2022 So since 2021, we've reduced pretty much 1.5 billion, almost 2 billion in inventories. And it's an important point of this inventory reduction is that we've been able to do that by increasing the gross margin of goods as well in a very healthy manner, very sustainable. This year, we believe that we'll continue to improve inventory turnover We don't provide a guidance, but on average, we expect to improve inventory turnover in at least five days on the average for the year, maybe improving turnover even more. We look more at inventory turnover rather than the nominal balance of inventory because it depends on growth as well, and the best way to improve turnaround will be as sales accelerate and start to grow again. On the supplier side, last year, we had a significant increase in the average time of purchases, comparing 23 to 22, it was quite significant. And if we look at all the quarters, at the end of the year, in a tactical way, we decided to anticipate or to advance it for suppliers, so the accounting average term started, reduces a little bit. But if you look at the average term of the order, it was a lot greater than the end of the year, the beginning of, or the end of 22. And this decision to advance for suppliers was very positive for our own results for 2022. I mean, you saw that For 23, it went down. And financial expenses for the beginning of 24, we can see it at a very low level, much lower than the beginning of last year. And the trend for financial expenses this year is very positive to see it dropping. And that's closely related to the management of working capital. And related to the fact that in this first quarter, we will pay a lot less suppliers than we paid in the first quarter of last year. Remember, the first quarter of last year, we had to discount an additional $2 billion of receivables to pay $2 billion of suppliers more that were expiring in the first quarter. We will not have this effect in the first quarter of 2024. Okay. So we're seeing in working capital doing a lot better in the beginning of 24 and financial expenses and cash position a lot better as well in the beginning of 24. So this is all the result of some work that we've been doing together with the commercial department and throughout the whole year, improving the inventory turnover, average time of purchases, and an observation that I didn't mention earlier. For us, confirming is not that, but you know that. But some people consider But the confirming balance last year was $1.5 billion from $3.8 to $2.3 or something like that. So it dropped to $1.5. We reduced the confirming balance greatly, passing through some of the cost increase somehow repricing that product. And that also led to more financial revenues with suppliers that we account for. within the financial results. So in inventories and suppliers, just to highlight the tax account that I already mentioned in the last quarter, we offset more than 300 million net between generation accumulation and offsetting in compensation. That should be a very positive trend for 2024. Again, as the margins get higher, and services grow and so on, it becomes easier to offset taxes. So, this is an actual trend for 2024. So that, overall, we expect working capital to contribute very positively to cash generation for the year as a whole. Good morning. Thank you for your question. About the year for the customer, we had Simplifica Magalu, Monetiza Magalu, and this year is Encanta Magalu, Enchant Magalu. And we had an agenda the last two years, as I said in the beginning of the presentation, that was completely focused on results and comments. So a lot of internal work focused on efficiency. We had reduction of expenses, increase in margin, and we felt the need to resume this year the focus that is historically a part of the company in service level and what we call user experience. That's the art to enchant our consumers at each interaction. So this agenda... It's simple, but at the same time, it's very broad, as you say, to intent them at each interaction. We're talking about hundreds or even thousands of interactions that are possible with consumers. And in these journeys... We have a number of opportunities to improve from the password recovery to the return of their money once they cancel a purchase, reduction of cancellations, increased service level that's meeting the term of delivery within what was promised, service level, as we say, improvement of seaside at call centers. So we mapped here. more than 40 specific goals in terms of service level with our customers and conversion. And we're going to put a lot of focus for Fatala's teams and product teams, business teams in the improvement of service level. This period we entered with approximately 80% of NPS two years ago. At that time, almost all of the questions were answered for customers who made purchases on 1P and stores. We still have very high NPS on 1P and stores, but 3P's NPS historically is around 60. It didn't get worse, but since 3P's share in the company's total increased, the total NPS went down. So we have a huge challenge there to improve overall NPS. We want to resume our NPS of around 80, which is a worldwide benchmark. And for that, we'll need to improve on a lot of aspects related to searches, checkout, post sales, and all of those items that I mentioned during my answer. So it's a very broad agenda, but very pragmatic. We know exactly what we have to do. And I am very optimistic. that it will generate an improvement in our NVS, which is the main indicator to validate this, but it will also help in our conversion rate, and the increase of frequency of purchases that also end up reflecting in sustainable growth of results, irrespective of us giving a discount or not. So I think that's the agenda. I can't summarize it in one answer. It's a very complete agenda that is the focus for the whole entire company. All of Magalu's employees will be thinking about user experience with great focus, but not exclusively, in the improvement of our technology platform. Excellent. Thank you for the answers.

Thank you for the questions. Next question from Gustavo with XP Investimentos. Gustavo, go ahead. Good morning. Thank you for the opportunity to ask questions. My first one is about cloud. You said that 30% of Magalus digital operation is in your proprietary area cloud and that this should continue to increase. I just want to understand if there is any level of savings or reduced costs through this expansion. It will reduce your reliance on external providers. So is there any savings expected in this avenue? And my other questions are kind of short-term. First, regarding closing of stores. In Q1, you closed 23 stores. Should we expect more stores being closed along the year? And my second point, I understand that default was totally passed through. But we see some states increasing their ICMS tax rate. Has this an impact? Has this been passed on to prices? Gustavo, thank you. This is Fatala. I'll speak about cloud. Yes, there will be considerable savings with this migration that is underway. On average, we are able to reduce what we pay. We have a reduction of 30% to 35%, depending on the workload. The idea is that we'll continue to migrate. We'll get close to 50% by next year, and with that, the OPEX will turn into CAPEX. Thank you. Thank you for the question. Speaking about the CMS of the states, this was being passed on. We were anticipating the effects of the tax reform. We're okay about this. We can see the contribution margin by state and practically all of the states. This has been passed on, so there are no risks. We do pricing state by state, store by store in 1P, and brick and mortar stores. So we have a lot of granularity here. We focus for two years in the contribution margin, so we have a granular view of our results. We invested a lot in these systems and in this monitoring model. As regards to stores, it is possible we'll close some stores. If the store has a negative contribution margin with no expectation of improved results, normally stores that are physically close to others or with rent that we were not able to negotiate with the property owners, if needed, we'll close them. But this is not going to be material considering the total installed park for stores. Our expectation is a lot more positive of profitability resumption, as I have said. But if there is a one-time-off need to close the store here or there, We'll do it because we want our units to contribute positively to our results, particularly with a positive contribution margin. This possibility exists, but I don't think it's going to be significant. And the expectation for the stores is a lot more positive than negative. At this point, it is the channel with the most positive expectation, which is already materializing in January and February. Perfect. Thank you very much. Thank you, Gustavo. Next question from Nicholas with JP Morgan. Nicholas, go ahead. Thank you, Vanessa, Fred, Beto, and the whole team. I have two questions. One, building on what you've just said about the stores, Fred, I want to understand how do you see the competitive environment in brick and mortar? If it makes sense to open some stores in some locations to perhaps gain an available market share considering the financial situation of some competitors. So are you thinking about opening stores this year? Thank you. Hi, Nicolas. This is Fabrice speaking. You are correct regarding the competitive landscape. We are living a very favorable moment for Magalu. We are a lot better prepared than our competitors in all senses, products, pricing. But I don't think it makes sense to open new stores now because we recently opened new stores in many different regions. Also, when we face fierce competition, a large market Markets like Rio and Brasilia. We are working a lot in these regions where market share is a lot lower. So we have a lot of opportunity to capture market share in these new locations. And where we established already, we're gaining even more market share. We agree we have to gain market share, but we think we can do it with the existing stores. We are not planning to expand the store park too much. Okay. Thank you very much. Thank you, Nicolas. Next question from Vinicius Trano with UBS. Vinicius, go ahead.

Hello. Good morning, everyone.

Good morning. Thank you for taking my question. I have just one question regarding taxation. If you could comment on the company's positioning regarding a potential taxation. You're talking about grants for investments, Do you see any opportunity to pass on price increases? And a second question, if you could talk about LuisaCred. We saw an improvement in results. Perhaps you could give us more color regarding what you're seeing in the credit environment in terms of demand and your take as a whole regarding LuisaCred. Thank you. I'll start. This is Beto. Thank you for the question. Let me start talking about grants. What we say is that both Magalu and And our main companies, Epoca, Netshoes, Kaboom, all of them have incentives that are eligible for investment grants. And they will continue to have the deductibility in terms of income tax and social contribution. Last year, we accounted the effect of the governmental grants of about 160 million BRLs. 40 million per quarter, give or take. We can say that 40 to 50% of this is eligible as investment. And that should continue. The other part most likely will stop existing because of that was extending this grant to other types of benefits. And according to the latest decision of STJ, they are not eligible anymore. But I should say 40% to 50% of these grants to investments should continue. with a benefit for income tax and social contribution. We had some deferred IR and social contribution, so we don't expect any material impact on our results as well as on our cash. We'll continue to focus on improving profitability, like we've been saying until now. including all of the tax effects. And as Fred mentioned, the biggest impact in terms of passing on price increases, the biggest impact was a default, and we proved our ability to pass through more than $1 billion. in one single year passing through to the end price. So we don't expect any passing through of grants to the end price. I'll turn the floor to Mawad to speak about LuisaCred.

Hello, Vinicius. Thank you for your question. We're very excited with what we've been seeing in the last six months at LuisaCred. When we look at From a higher distance, when we look at the indicators in terms of performance by harvest, it's been improving for a long time, but they're not high enough to improve the company's profitability. But once we were able to see the improvement of performances in the portfolio indicators that influence NPL and short-term results more directly, we started to see this switch and becoming net income in the fourth quarter. In the first two months of the year here, We saw a positive balance in our operation funding for financing for consumption, even though it's a second quarter that seasonally is worse in terms of credit. When we talk about the return of credit results within the year, the first quarter tends to be the worst quarter, and it tends to improve throughout the year. So the fact that we're actually in the blue, seeing a consistent improvement in terms of portfolio and more recent vintages, as we showed here earlier, we are very confident that this year will be a year where LuisaCred will be able to not only help with the results, with the earnings, but also, of course, to help build more GMV, both in the digital and brick-and-mortar stores. I hope I've answered your question. Thank you. Perfect. Thank you. Thank you, Vinicius. Next question, João. Ask your question, please. Thank you, Vanessa. Two questions here. I think we've talked a lot about growth and brick-and-mortar stores seem to be doing well, so I'd like to explore, and I apologize, Mawad, just a quick follow-up about this credit question. To understand when we should see a cost of the of the credit printing accelerating and driving GMV. So I think the question is a little bit broader in the timeline where we see this switch on the trend, either for whatever factor, whatever you have in your expectations. I just wanted to understand the timeline to see this growth coming in a more relevant way, considering that expenses has been greatly addressed in 2023. So I'm guessing that in the second half, maybe we'll see faster growth. And also, about 3P, we'd like to understand a little bit more of the dynamics of the seller base. You were speaking of a very specific seller profile. On boarding, I saw people like store managers and so on. So, I'd like to understand more about the strategy, how we should see the growth of, say, a seller base, and how the maturing of the existing base drives up 3P. Thank you. I'll start here, João. Thank you for your question. This is my wife. What should we see in terms of growth here? We should see our credit card structure that is more sensitive even to the environments that we have now growing in line with the market, and we should see high-yielding products such as CDC accelerating more. So when we talk about the brick-and-mortar store environment, the CTC is being seen very strong acceleration in the second half of 2023. And we expect to see this continuity in terms of growth, especially with the entry of the digital side. That's 100% new volume. It's a new tool for us to improve our conversion of checkout and the profitability of the business. Going back quickly to credit cards, the economics of credit cards are more challenged after the pandemic. It's a very broad portfolio that we have, and we don't want to run any sort of risk in terms of turning the results around again. So we're going to take one step after the other. We're revisiting the value proposition, revisiting the acquisition channels. We looked at pricing, the funding cycle for the customer. We changed a lot of things in the operation to make the adjustments to the current scenario, both in the macro point of view and in terms of product. So it will continue to be a very powerful tool to drive GMV, but the most significant growth should come from high-yielding products that are easier to maneuver when you have a certain level of uncertainty still on your radar. I hope I've answered your question, João. Yes, you did.

Thank you.

Hello, João. This is Fred. Good morning. I'll answer this last question about the cellar bays. Of course, we'll continue to grow our cellar bays. We have some differentials in our seller base. We have a lot of sellers from the top of the pyramid, which are brands that have Magalu as a reliable platform for them to sell products, and they're not competing with a white label advertised product. So the major brands and Magalu is a priority channel. And at the base of the pyramid, we have sellers who are brick-and-mortar stores that we introduced as Magalu partners, who also have I mean, they're the ones that the stores bring to our bays, and they had a very good year in terms of cash margin and profitability. The contribution margin of sellers has improved greatly, and we continue to have a good offer for sellers at the top of the pyramid and the middle of the pyramid, which was the integrator of e-commerce platforms. So I think we have the opportunity to continue to increase our base. But the focus for us this year is not only to grow seller base, but grow the quality of the offer of our sellers and the service level of these sellers in that year of the consumer context. One of the most important agendas for the user team is to make sure we're bringing sellers in that have a good service level, that bring good NPS to our platform, low cancellation rates, high service level in terms of their deliveries, and especially bringing the best offers. Because in the same SKU, the same code, you can have 10, 30, 40 offers. And we want to make sure that we have a lot of offers that are competitive with low prices, low shipping, and good service level. So we're going to be qualifying the growth of seller base, focusing a lot on the quality of the offer and their service level. That's clear, Fred. Thank you. Thank you for your question, João. We now conclude the questions and answers session. I would like to turn the floor to Frederico Trajano for his final remarks. Please, Fred, you may go ahead. exceptionally this call, I would like to pay tribute to our founder, Luisa Trajano. I think the best way to pay tribute to her was to preserve her legacy. There's a reason why we chose the year 2024 to make it the year of our customers. She was a person who introduced into our culture the focus of customer first. So... We would like to end this call. I apologize. I'm getting emotional with her picture here in our presentation and with our strong work throughout the whole year to enhance our customers as she always has when she was here with us at Magalu. So thank you. Have a great week. Magalu's conference call is concluded. The investor relations team is available to answer any other questions and doubts. Thank you all for your participation. Have a great day.