MercadoLibre, Inc. (MELI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the MercadoLibre First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program Federico Sandler, Investor Relations Officer. Please go ahead.

Hello everyone and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2020. I am Federico Sandler, Investor Relations Officer for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Osvaldo Giménez, CEO of Mercado Pago will be available during today’s Q&A session. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe, that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons including those described in the forward-looking statements and risk factors sections of our 10-K for the year ended December 31, 2019, Item 1A Risk Factors in Part two of our Form 10-Q for the quarter ended March 31, 2020 and on any of MercadoLibre Inc.'s other applicable filings with the Securities and Exchange Commission, which are available on our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found on our first quarter 2020 earnings press release available on our Investor Relations website. Now, let me turn the call over to Pedro.

Thank you, Federico and hello everyone, and thank you for your interest in joining MercadoLibre's first quarter 2020 earnings conference call. So given the unique circumstances the world is facing due to the coronavirus outbreak, I'd like to first address recent trends and developments followed by our standard quarterly review. Starting in March, towards the back end of a successful first quarter in 2020, we began to observe near-term headwinds generated by the coronavirus outbreak. Although less affected than others our business did register this impact particularly in Brazil and Argentina and primarily during the first weeks of the imposed lockdowns with a rebound throughout April. From the onset, we have taken swift and decisive action to safeguard our employees and offer our platforms as solutions to the challenges being faced by our communities. We pride ourselves in being an agile and adaptable company, whose business people and community have played an role alongside many others in facing up to the COVID-19 crisis. Consequently, our focus has mainly been on three fronts. The wellbeing of our teams, the uninterrupted operation of our commerce and FinTech solutions which are uniquely suited to help society face the current pandemic and the coordination of our efforts with authorities in the countries we operate in to guarantee timely and well allocated resource allocation. As early as March 16, we determined that over 9,000 MercadoLibre employees in eight countries and across 20 offices which start working remotely to ensure and promote social distancing norms, while maintaining on-site only the operational staff that was required to continue providing our services without disruptions. Precautions were taken to safeguard the help and safety of those staff members on site, which are primarily members of our logistics network. Precautions were maximized to guarantee their health and safety. For those who had moved to remote work overnight, all the technological training and emotional support that was necessary to guarantee efficiency, productivity and well-being was also made available. With our remote and secure on-site work plans in place, we activated our second area of focus, committing to support consumers and merchants through multiple initiatives which promote preventive actions and financially support their businesses or households. To that effect, we've put forth 10 critical initiatives. We've leveraged our platform's broad reach to launch COVID-19 readiness campaign by temporarily changing our MercadoLibre and MercadoPago logos from an hand shake to an elbow-to-elbow logo. We used this elbow-to-elbow campaign to amplify official recommendations from leading health organizations on how to prevent and minimize the spread of the corona virus. Secondly, we launched our new branding campaign whose narrative is centered around stay-at-home, we are still delivering. We also deployed the necessary measures to ensure the continued operation of our logistics network and that our transportation partners for all product categories across all geographies could continue to operate. We tweaked our user interfaces to facilitate discovery of products of greatest demand and most reliable delivery times. We eliminated commissions on roughly 1,000 SKUs of essential products for nearly 100,000 merchants, understanding that purchases of these items will be essential for our buyers over the next few months. We redo listing fees for new sellers to facilitate their transition from off-line to omnichannel, while stimulating depth of assortment on our marketplaces. We extended a 30-day grace period to repay loans for more than 2 million consumers and eliminated late fees for more than 150,000 merchants to alleviate some of the financial burden our users are facing as they seek to stabilize their finances. We launched fundraising campaigns with the international Red Cross to deliver safety and hygiene kits to health workers and with regional NGOs to aid in the distribution of food to the most vulnerable. We launched a supermarket purchasing experience in Argentina and Brazil to facilitate access to consumer packaged goods purchasing in cost-effective cards and quantities. And lastly, to facilitate trade and mitigate economic hardship during periods of quarantine, governments throughout Latin America declared e-commerce and essential activity exempted from the lockdowns. To achieve this, we engaged and coordinated with governments in the region, to keep our logistics operations functioning, helping to ease the negative impact of shelter in place lockdowns. Our hearts go out to those individuals and families affected by COVID-19, and our gratitude and appreciation go out to all those brave individuals who are on the front lines working through this unprecedented global health crisis. At MercadoLibre, we will continue to leverage our platforms to support our communities during this important time, allowing continued access to commerce and financial services as our users try to get back on their feet. Let me now take just a few minutes before getting into our traditional quarterly review to update you on recent key performers indicators of the initiatives that I've just outlined. Regionally, we saw variation in how imposed total or partial lockdowns impacted merchants businesses with important improvements as time elapsed. Argentine merchants were initially more impacted than in Brazil, but they also rebounded more rapidly, whereas in Mexico, Colombia, Chile and Uruguay, merchants faced less disruption during March and nonetheless saw increased activity during April. Marketplace key performance indicators hit a low point during the week of the 18th to the 24th of March. Year-on-year growth rate for items sold during that week troughed at 3.3%, with FX-neutral GMV declining by 1.4%. From then onwards, we have seen a strong rebound with growth rates accelerating in April to 76% year-on-year in items sold and 73% FX-neutral year-on-year in GMV for that full month. More broadly, changes in demand trends have led to a mix shift in sales as consumers prioritize essential items, categories such as health, consumer packaged goods and toys and games showed strong volume growth, exceeding 100% year-on-year on an FX-neutral basis in some markets. Conversely, higher ticket, non-essential categories, such as auto parts and consumer electronics saw marked declines in growth rates. Moving on to recent trends in the FinTech business. In mid-March, we also observed a deceleration in number and volume of payments processed. Primarily as a result of lower foot traffic in bricks-and-mortar retail that use our MPOS and QR solutions. This negative impact was partially offset by strength in areas such as online payment merchant services; online wallet used cases and convenience store merchants. Just like in the commerce business, the magnitude of negative impact was greater in the initial weeks following government-mandated lockdowns with gradual improvements since then. Consolidated April growth rates are above pre-COVID levels, driven by Argentina, Chile, Colombia and Mexico, with Brazil still lagging somewhat. Consequently, off marketplace total payment volume growth during the second half of March was 95.4% year-on-year on an FX-neutral basis. And total payment in number was 87.3% year-on-year growth. And for April, these growth rates have been 155.6% and 119.8%, respectively. So summing up where we stand, we've seen three phases: a strong start to the first quarter that got derailed during the back half of March and rebounded by April. Given these recent trends, we remain optimistic that despite everything that has been occurring, we will still be able to make progress towards our annual objectives without having to delay or materially modify our investments or strategic initiatives. We recognize that in these times, the services rendered by both our commerce and payment platforms are essential for many people across the region, and we will do our best to not let them down. We also remain attentive to any change in demand or supply patterns that might again modify our capital allocation strategy. Now that I've covered COVID-19 key related trends and updates, let's move on to our progress report for the quarter, starting with the marketplace business. Consolidated marketplace GMV grew 34.2% year-on-year on an FX-neutral basis, reaching $3.4 billion, while items sold grew 27.6% year-on-year reaching $105.7 million, also on a consolidated basis. On a country-by-country basis, during the first quarter of 2020, Argentina, Brazil and Mexico GMV grew at 81.5%, 15% and 54.5% year-on-year on an FX-neutral basis, respectively. Late quarter mix shift towards lower ASP categories and temporary demand pullback negatively affected these results. Items growth accelerated in Brazil and Mexico to 25.9% year-on-year and 66.5% year-on-year, respectively, showing the positive impact of mix shift. In Argentina, items sold during the quarter decreased 2.4% from the same period last year as we transitioned through the implementation of flat fee pricing last year during the second quarter. Chile and Colombia delivered robust rates of growth during the quarter, accelerating to 57% and 44.8% year-on-year, respectively, on an FX-neutral basis. In terms of supply, live listings offered on MercadoLibre's marketplaces reached $267.4 million during the quarter, registering a 29.8% year-on-year growth. This deceleration was mainly driven by Brazil and Argentina, where certain sellers were unable to operate under the current lockdown regimes. On average, seller paused roughly one-third of listings during late March. Cross-border trade has also been negatively impacted by COVID-19 as Chinese merchants listed around 40% fewer products in January and 15% fewer products in March. Moving on to logistics. Fulfillment penetration continued improving across the board, reaching 11.3% in Argentina, 14.1% in Brazil, and 43.1% in Mexico, yielding 19.9% fulfillment penetration on a consolidated basis. Meanwhile, cross-docking reached 51.1% in Argentina and 28.1% in Brazil, getting us to 23.4% adoption on a consolidated basis. All-in, we are rapidly approaching having half of our shipments already running on our own logistics network, quite a feat given where we were only a few quarters ago. These positive results are in large part a consequence of the continued expansion of our network. As we launched new hybrid cross-docking centers in Curitiba and Bell Horizonte in Brazil and added service center nodes and over 700 drop off points. Additionally, we also launched our Flex logistics solution in Chile and Colombia to complement our existing drop shipping offerings, enabling us to reduce reliance on any single carrier. Let me now take on a quarterly update for FinTech. Off-platform total payment volume decelerated during the quarter, growing 139.5% year-on-year on an FX-neutral basis, with Brazil growing 101.8%, Mexico 114.6%, and Argentina, 221.2%. Total payments in number grew 102% year-on-year for the quarter on a consolidated basis. The deceleration in number and volume of payments processed, as already mentioned earlier, was primarily driven by lower foot traffic in physical retail during March, which had a direct impact on lower mobile point-of-sale and QR total payment volume growth, partially offset by the relative strength in our merchant services business, where we process online, away from our marketplaces. Mobile point-of-sale business was still strong, driven by January and February momentum, growing total payment volume, 103.3% year-on-year on an FX-neutral basis for the full quarter. Brazil, Argentina and Mexico grew 82.7%, 173.6%, and 234.5% year-on-year on an FX-neutral basis, respectively. The pace of mPOS sales remained solid with over 900,000 devices sold during the quarter. In addition, we are encouraged by the launch of our new plus device, which is geared towards catering larger merchants and will allow us to continue driving higher average revenue per user within this business line. Our online payments, merchant services solutions grew 81.7% year-on-year on an FX-neutral basis. The greatest deceleration in this business was in Mexico, which grew at 62.4% year-on-year on an FX-neutral basis. This was partially offset by the growth in the other countries segment with 109.5% year-on-year growth, also on an FX-neutral basis. The deceleration in Mexico can mostly be explained by higher exposure to cross-border businesses, specifically our merchants in China that began to see the impact of COVID-19 early on in the quarter. During the first quarter, MercadoPago's mobile wallet delivered $1.3 billion in payment volume on a consolidated basis, growing 299% year-on-year on an FX-neutral basis. The slowdown in in-store QR payments and wallet transportation payments were due to seasonality plus obviously, the total or partial lockdowns that occurred by mid-March as well as the rationalization in marketing expenditures on our part. Monetization of QR payments in Brazil, where we started to charge 100 basis points merchant discount rate earlier in the year also slowed down growth. But perhaps, more importantly, lend increasing proof-of-concept to the QR network as we took this important step towards building a sustainable business model. Unique wallet payers reached a milestone, as during the quarter, we surpassed the $8 million mark, growing over 155% year-on-year on a consolidated basis. Mexico led growth with 252.8% growth and surpassed the 1 million mark in payers for a quarter for the first time. We're also pleased to announce that during the quarter, we launched Mercado Fondo in Mexico in partnership with Grupo Bursátil Mexicano, who has over 35 years of experience in the Mexican financial sector. The gradual rollout of asset management in Mexico began in mid-January and was finished by February 28. The first month of operations was in line with the results in Argentina and Brazil, in terms of user acquisition over a similar period of time since launch, capturing 5% of users with balances being transferred to asset management products. Mercado Crédito's total outstanding credit portfolio reached $177.6 million during the first quarter decreasing by 16.5% Q-on-Q as a result of the devaluation of the region's currencies. In local currency, Argentina's portfolio grew by 15.4% and was flat in Brazil and grew in Mexico by 13.1%. By the end of the quarter, the NPL ratios had not shown a deterioration due to the COVID-19 crisis. Nonetheless, to manage our exposure to merchant and consumer credits, amongst global pandemic, we slowed credit origination to both merchants and consumers significantly. As a consequence, as well as the devaluation impact of the country's currencies, we shrunk our merchant credit portfolio by 21.1%, our consumer credit portfolio by 5.2% and our mobile point-of-sale credit portfolio by 20.4% Q-on-Q in U.S. dollars. These defensive measures led to non-performing loans that were 30 days past due that represented 10.8% of total loans during the first quarter of 2020. We also recorded an $8.7 million increase in bad debt provisions versus Q4. This increase is explained for the most part due to a change in U.S. GAAP accounting norms effective January 1, where we adopted the model of current expected credit losses to account for our allowances for loan losses. Previously to the change, we accounted for loan losses using an incurred loss model, where we accounted for loan losses as we incurred them. Going forward, we will book loan loss provisions at the moment the credit is originated based on actuarial calculations and subsequently adjust those provisions as credits are repaid. With that, let me now move on to our financials for the quarter. Consolidated net revenues for the first quarter were $652.1 million, a year-on-year increase of 37.6% in U.S. dollars and 70.5% on an FX-neutral basis as we continue to optimize shipping subsidies and costs that minimize contra revenues from free shipping programs. Commerce now represents 58.4% of our total net revenues compared to 41.6% for FinTech. Gross profit was $312.8 million, with a margin of 48% compared to 50% in the first quarter of 2019. This 205 basis points margin compression was driven for the most part by warehousing costs from our fulfillment operations, partially offset by collection fee improvements and salary and wages leverage in our customer services operations. On a sequential basis, 224 basis points of margin improvement are mostly explained by declining MPOS sales costs. In the slides accompanying the presentation, we've included, as every quarter, a detailed breakdown of these, as well as the OpEx margin evolution that I'll cover quickly now. Operating expenses were $342.5 million, an increase of 51% year-on-year in U.S. dollars. As a percentage of revenues, operating expenses were 52.5% compared to 47.9% during the first quarter of 2019. These 251 basis points of margin compression are attributable primarily to increases in sales force related costs, bad debt provisions I just covered and increased marketing spend. Sequentially, there was $34.7 million of Q-on-Q improvement in operating leverage that was mostly driven by a decrease of $60.2 million in marketing expenditures, partially offset by the same bad debt charges. Loss from operations was $29.7 million compared to a loss of $68.9 million during the prior quarter. As a percentage of revenues, the loss from operations reached 4.6%, improving by 567 basis points sequentially. Moving down the P&L, the company incurred $23.6 million in financial expenses this quarter, mainly attributable to secured financial loans and interest expenses related to our payments business in Argentina. Interest income was $36.8 million, a 50.5% increase year-on-year as a result of the equity offering during March 2019, which generated more invested volume and interest gain and also a higher float in Argentina. In delivering these results, we've sought to maintain a sustainable balance between growth and investments, which for the quarter led to a net loss of $21.1 million. As I wrap up the prepared remarks, I don't want to loose sight of the extraordinary time we are living in. We thank everyone in our communities who are doing everything they can to get us through, whether it is by staying home to remain safe or by making it to work to keep our health systems and economies running. We remain committed to doing our part by empowering our merchants to continue operating, by securing deliveries of goods needed by households and by supporting the normal operation of payments and financial value chains. MercadoLibre will emerge from this situation stronger and with an even greater sense of purpose. We trust the dedication and commitment being demonstrated by our entire organization will allow us to continue executing our strategy with no significant interruptions. And in doing so, play our part in contributing to making things less difficult during these trying times. We look forward, as always, to keeping you updated on our progress next quarter, and we'd like to take your questions now.

[Operator Instructions] Our first question comes from the line of Stephen Ju from Credit Suisse. Your question please.

Okay. So, thank you. Hi, Pedro, I hope you and everybody else in management are doing well and staying safe through the crisis. So from a big picture perspective, the circumstances and reasons why acceleration is happening in April is tragic, but at the same time, this should catalyze a faster change in consumer behavior, both e-commerce and the payment side and all the regions where you operate. So talk about like what you may be doing to retain as much of the momentum as you can. I would have to think, MercadoLibre has always under-indexed for certain product categories historically. So shouldn't the conversations with brands and sellers in those other categories be getting easier? And second, the -- I think you disclosed the eight million users who are now using the mobile wallet. Should we think the tag [ph] on these users are effectively zero at this point? And are your existing MercadoLibre users whom you've -- are these existing MercadoLibre users whom you were able to convert? And I guess, consequently, is the diagram overlap still fairly large between your commerce and the FinTech platform? So are you starting to see a wider divergence in the user base? Thanks.

Great. So thanks, Stephen. I think, fortunately, we're all doing very well on this end, and we wish the same to everyone on the line. So look, I think that there is the potential we still need to wait and see a few more months that to a certain degree, what's happening around us will generate some sort of fast-forward in a shift from physical to digital. And so, I think we're very focused primarily on three levers here to see if we can hold that momentum going forward. And the first one is to deliver on the user experience and the promise. That's very closely tied to logistics, but it also means that we need to keep operating the entire machinery, which is being obviously strained, while continuing to deliver the service that's expected of us, because we don't want is to have new users or users onboard new categories and facing that negative user experience. So, we're tremendously proud of the work that's been done by the logistics team. Our MercadoLibre's operation has continued to operate and to deliver within the standard service levels. We are seeing considerable mix shift, same story as for other players similar to us globally. And so we're trying to very quickly accelerate plans that we already have in place for certain categories within consumer packaged goods and other areas. And related to that, and you did mention this also is, how do we continue to onboard more and more merchants, both for financial services and also for our commerce businesses because, obviously, there's increased desire to pursue digital channels, and we are a critical partner for any one trying to move into the digital world. So there is a re-ramping up of sales forces to be able to engage and to deliver those incremental conversations. So I would say the biggest focus is to make sure that we can deliver on the incremental volume that we're seeing so that users have a good first experience. In terms of TAC, just one comment. The $8 million was full quarter. We still had our marketing running during Q1, obviously, much more efficient than previous quarters, especially for wallet. We mentioned that in some of the prepared remarks, but we were still investing, and so those tax were not zero, but there is greater efficiency in the overall marketing spend behind driving those 8 million wallet users, which is a good sign. I would say, April is where given the enormous organic demand that's existing marketing spend has been low, and so have come down. Marketing spend has not been zero, and we also need to see what happens as the world normalizes and off-line offerings once again emerged, and what happens to tax at those points. But April, obviously, there's much less investment in marketing, just because there's so much organic demand, especially on the commerce side. And on the payment side, there's probably a lot less of an impetus to invest in a lot of the discounts because a big part of what it was in-store and foot traffic. Obviously, there isn't too much sense in investing behind that, but we have been to behind online used cases and other used cases that have picked up demand.

Thank you.

Thank you. Our next question comes from the line of Edward Yruma from KeyBanc. Your question please. Edward your phone might be on beyond mute.

Sorry about that. Again, my best thoughts for you and your teams, and their continued health. Interesting commentary on the pullback in credit, I guess, what proof points will you look for in terms of re-establishing accessibility to credit? And in the short-term, how do you expect this will impact the P&L?

Hi, Edward. [Indiscernible]. So in terms of credit, we have already -- we're starting and giving credit. We have two large segments. On the one hand, we have merchants to which we are learning working capital. And there, what we did was first slowed down the origination of credit until we saw how these were reacting on the marketplace. Even though, in general, the marketplace has accelerated, not all merchants are the same. Some of them are growing significantly faster than before, because of what they are selling, and there's a slowdown in another one. So we wanted to make sure, we got that right before starting giving loans to them again, but we are already doing that on a country-by-country basis. And then on the consumer side, what we never stopped originated loans. However, we did reduce the amount of loans we were given. What we did was maintaining -- offering new loans to people who already have paid us back. We wanted to try to avoid an adverse selection and having people who have problems with their current stock conditions, getting a loan from us and not being able to pay it back. But now as we gain more confident with the situation, we also plan to rescale it.

Great. And one follow-up, if I may. It sounds like the Brazilian business is maybe reramping a little bit slower than your other businesses. Is that a macro issue? Or are there other factors at play? Thank you very much.

So, I think if you look at the commerce business, the Brazilian business, even if you look at Q1 results, was growing somewhat slower than the other businesses and it began to accelerate in April. When we look at relative growth rates, April to pre-COVID, they look pretty good for Brazil. I'll let Osi give you some more color on payments, but I think for payments that's probably a fair assessment. Osvaldo Giménez: Thank you, Pedro. I'll add to that, that in the case of Brazil, on the online payment side of the business we did have a few large clients who were either related to the tourism industry or to entertainment, or even to cross border trade. And for those, the volumes are obviously significantly down. And then, in the mPOS business, I think on the case of Argentina, a larger proportion of those mPOS came from supermarkets and small mom and pop stores who sold food and these ones are thriving. However, in Brazil, this percentage is lower, and therefore, the recovery is taking a little bit longer than in the case of Argentina.

Thank you.

Thank you. Our next question comes from the line of Bob Ford from Bank of America. Your question, please.

Thank you. Hi, Pedro, Federico, Osvaldo. Thanks for taking my question. Can you talk a little bit about your decision to pull forward the consumables launches? How that's scaling, how you're thinking about the value proposition in terms of price, assortment, service levels and geographic availability? And how did that decision to pull the consumables forward impact and as well as this wave in the take rates, how did that impact profitability in the quarter?

Sure, Bob. So, first of all, just, I think, to set relative size. These categories, even in the most successful markets such as Mexico, where we were already a few steps ahead, are probably mid-single digits of GMV, and then the smaller countries are a bit behind that. So in terms of overall impact to profitability and whatnot, it's not that relevant. The greater focus right now is ramping up the user interfaces. We launched the supermarket interface we had in Mexico to both Brazil and Argentina and to, as quickly as we can, improving SKU selection. There's a strong timing to how we're trying to do consumer packaged goods to our own logistics network. And that's a combination fulfilled by us, but also to a certain degree, 1p, so there's a ramp-up in purchase orders and the ramp-up in trying to go direct-to-consumer packaged good companies and get them to either sell to us or fulfill through us. When we look at the value prop right now, clearly, there's still room for expansion in SKUs and selection. A lot of the very, very strong growth that we've seen in GMV is driven by the obvious high need products. And so, it's fairly easy to source that low number of SKUs quickly. The challenge, if we want to remain relevant in this category as things normalize, is to make sure that we have the right work -- we've done the right work in terms of incremental assortment. So I think the answer to your question is, we've done a lot in terms of rolling out the front ends for the supermarket experience. We've been agile to be able to source the inventory that we know is in high demand now, and we're diligently working in the background to be able to have the future SKU count and selection that will be necessary once things normalize a little bit. Impact on profitability is not something we're too concerned with right now, given that the volume is low. But we do trust that the more we do from our own fulfillment centers and the more volume we drive to those fulfillment centers, we're seeing unit costs come down in general. And so that should also apply to these consumer packaged growth categories. And so the final step will be just to make sure that we can increase average items per order, which is typically the other key driver between making these work.

And Pedro, if I understand correctly, quarters placed in the morning in São Paulo fulfilled the same-day afternoon, next day, next day in Rio. How are you thinking about making that value proposition more broadly available in Brazil?

Yes. So this doesn't apply just for consumer packaged goods. I think what you're highlighting is simply a reflection of the tremendous work that's being done by the logistics team in terms of being able to service large urban areas that are relatively close to our warehouses as we grow the footprint of our own network in what we consider to be best-in-class times. So it's certainly new. This is recent, and then really the improvements have been phenomenal. We're communicating it as we make sure that we can scale that efficiently. And we do think that will be a very strong part of the value prop, but not just for those categories, but rather across the board for all of our service offering.

Understood. Thank you very much.

Thank you. Our next question comes from the line of Andrew Ruben from Morgan Stanley. Your question please.

Thanks for taking the question and very helpful call. So I was just hoping that you could talk through some of the drivers of TPV off marketplace. This seemed more resilient, really, particularly in April than we would have expected based on the physical exposure. So maybe just some puts and takes on MPOS and QR versus merchant services? And maybe color on the proportion of your MPOS base that's shuttered for the moment and would have went to zero, would be very helpful? Thank you. Osvaldo Giménez: Sure, Andrew. So we definitely saw a picture where different businesses have been evolved in different ways throughout April -- end of March and April. Let's start with online payments. In online payments, as I already mentioned, there are a few verticals where volume is down, such as tourism and entertainment and cost water trade, but beyond that we have seen in general, an acceleration because many business are trying to migrate online. And so particularly we see this with -- towards the long tail there are lots of small businesses that for the first time need to sell online, and there many of those are adopting. So we are seeing positive trends particularly in Argentina, but we are also seeing a revolving in Brazil and Mexico and very, very strong countries have been Chile and Colombia. In all of those, we are seeing strong trends. If we move towards MPOS, there the share by vertical various significantly from a country to country basis. If we work start with -- for us, Brazil is the largest market, and their volumes are still below roughly 25% below what they were before the start of the lockdown. And that is mostly because what we're seeing is many of the verticals, such as automobiles, closing outlets, transportation and so on have been significantly affected for us one of the larger proportions. Retail used to be 16% of MPOS service providers, 11% restaurants, 11%. And all of those have been significantly affected. And on the other hand, supermarkets, which have not been affected, we're only 2% of TPV. And that's why in Brazil, we are still seeing volumes that have declined comparing with the for -- the start of the lockdown. On the other hand, in Argentina supermarkets were very large already -- they already represented 38% of TPV and they have grown significantly and being shared, and they already had over 55% of TPV. And therefore, these were not only not affected, but growing very, very strongly. And so the net effect for Argentina is that volume is slightly -- basically flat. It's only 3% below what it was before COVID. Mexico, the trend is I would say, even the decline has been steeper than Brazil, but coming from a very small base compared with Brazil and Argentina, volume is down 35%. Again, it's mostly because not many of those merchants sold any of the essentials that have been relevant over the last few weeks, and supermarkets only represented a 3.5% of total volume. So in general, retail, particularly closing and services are significantly down. Supermarkets and essentials are up and in the one country where that was more relevant that it was Argentina, the volume has suffered less. Moving on to wallet. In wallet, we have both things happened at the same time. We have, on the one hand TPV, and then we have both, utilities and then P2P payments. Clearly, offline is one that is separated most. In the case of QR payments, we have -- we can split that between long tail, which is doing okay. But on the other hand, we have this large merchants, which are mostly either in the fast food industry or gas stations. And in general, fast food restaurants are closed so we are not seeing any volume there and gas stations are significantly down. On the other hand, when we move on to online users of the wallet, we have really spiked. For example, payments, utility payments or mobile top-ups are significantly high, mostly so in Argentina, but also in other markets. But mostly so in Argentina. And then we have revamped the P2P payment, and we are starting to see an acceleration in P2P payments.

Thank you very much. That was very helpful

Our next question comes from the line of Marcelo Santos from JPMorgan. Your question please.

Hi. Good evening. Thanks for taking my questions. I hope you're all doing well and remain doing well. The question would be on the cost side of the business. What are the main impacts that we should see in the coming months, given this change in the business, understanding lower marketing expenses, perhaps higher bad debt. Could you discuss a bit how the cost changes? Thank you.

Yes. Hi, Marcelo, thank you. Everyone is safe on your side as well. So look, again, I think we always want to stress that this is a very dynamic and early situation. So we're able to get into greater detail on the quarter when we announced it. I think in terms of trends and drivers, from a top line perspective, we are seeing primarily in commerce strength in volume. And even on the FinTech side, as Osvaldo just outlined, significant resilience in a relative basis to everything pretty around us. There has been an initial decrease in marketing spend and sales force related expenditures. Obviously, we're not visiting people to sign people on. We've kept sales forces at home or we've stopped using third-party sales forces, and demand has been primarily organic. So that's beneficial so from the spend side. We're seeing less discounting and couponing to drive usage, both on the FinTech, but to a lesser degree, also on the commerce side, but primarily on FinTech. And in general, you're seeing certain adjustments to expenses. This is offset, obviously, by -- to a certain degree, there will be COVID related costs to logistics. There is a mix shift, and I think this was alluded to in one of the previous questions to certain categories where margins are potentially a little bit tighter. And I think we also need to see what happens at a macro level in terms of demand as we roll into May, June and then the rest of the year. So when we look at April and the initial phase of this, obviously, marketing has been a big part of our spend, sales and marketing, that's down. Logistics costs on a per unit base are actually coming down compared to the drug ship network as we roll more and more volume over our network. So that's good for the long-term. Short-term, it doesn't mean that logistics costs as logistics has increased adoption are lower than dropship, where we didn't have to manage warehouses and whatnot, but they're kind of in line. And so there is the increase in bad debt that you mentioned on the credit side, but that seems to be fairly controlled as well unless the performing loans spike. So short-term, I think there's been fairly solid top line and some pullback on expenses. We're not going to stay within a defensive position. I think we see an enormous opportunity here with this fast forward of the movement online. And now that we feel fairly comfortable about how the business is performing, you will see us begin to pick up spend somewhat, but not necessarily to the levels we were at before.

Perfect. Thanks for this one. I have another one. Could you please comment, there were some news in the Brazilian media discussing the states potentially wanting the marketplaces to collect taxes. So there was some noise in the media. Could you discuss this if possible? Osvaldo Giménez: Yes. So last I had checked, we had not received any formal notification. Obviously, we're aware both of the media coverage. And that in general and especially with potential macro conditions going forward. There are conversations from different states and in some cases, with different states regarding state taxes. I think the way we're approaching this is through the federations and the trade associations. I think this is fairly early on in the conversation to try to drive any conclusions as to how this might potentially play out. Our understanding is that some of these initiatives won't be able to prosper. But again, following it closely, we haven't been officially notified, so that gives you an indication of how early on this is. And we'll have to see how all of this plays out.

Great. Thank you very much.

Thank you. Our next question comes from the line of Deepak Mathivanan from Barclays. Your question, please.

Great. Thanks for taking the question. Glad to know everybody is safe. Two questions from us. First, Pedro, can you help understand the impact of reduced commissions and listing fees for certain offline to online categories? And type of merchants in response to COVID-19 on the take rate side, we talked about it in the prepared remarks. Do these merchants represent a sizable portion of the volume at this time? And then second question, a little bit bigger picture question. You had a lot of long-term priorities like loyalty integration and then also a good build-out of the first-party business in various geographies. Obviously, now there are a lot more urgent pressing situations that you have to prioritize, how do we think about some of these things as we go into the back half and some of the initial shocks from COVID-19 sort of mitigates? Thanks. Osvaldo Giménez: Great. So, first of all, the discounts that we've been granting should not have a material impact on monetization. I think we've attempted to target limited number of us that we understand are the ones in most need and at highest and -- but we've also tried to be prudent around how we've done this. So I think what we're trying to say is, we shouldn't assume that all of the GMV growth linearly flows through to incremental profit. But thanks for asking the question. These should not be material discounts across the board nor on a significant number of SKUs nor to a significant number of merchants and not necessarily sustained over time. Second, I think, what we're trying to transmit to everyone, at least so far in this evolving situation, is that we feel that we really haven't had to derail too many of our strategic objectives. I think it's very -- we call it luck, call it, having seen it well. The fact that our logistics network was one of our priorities has really begun to pay off. But if anything, one of the areas that one would normally be doubling down on right now was already one of the key objectives for us this year, which was to continue to move more and more volume onto our own logistics network. First-party, as I mentioned is also something that fits very well with the COVID necessities that are emerging. We had always said that 1B would be critical for the consumer packaged good development. And so if anything, 1P is helping us as we accelerate CPG, granted a power is a category that's particularly hard hit. That also had a strong 1P component. But what we've done is, we've reprioritized within the 1P organization to different products and categories, which allows us to continue to build out simply by tweaking what kind of inventory we're focusing on. And then loyalty is something that, I don't necessarily characterize as something that's been derailed. Potentially within the larger scheme of things, there might be some move away efforts away from that. But by no means have we postponed any of our loyalty initiatives or developments or business development attempts. And we continue to think that building out our loyalty program will be critical for us. And so we remain pretty committed to continuing to roll out new loyalty benefits and features as the year events.

That’s very helpful. Thanks Pedro.

Thank you. Our next question comes from the line of Ravi Jain from HSBC. Your question please.

Hi Pedro, thanks for taking the time and responding our questions. I have 2 quick questions. The first one more on -- just a follow-up on the product categories, are you thinking -- are there initiatives for you to maybe grow your market share in electronics appliances, especially in Brazil? And on the consumer package goods, is there a plan in the future to maybe expand that to, I don't know, groceries and perishables? Is that kind of in plans to look at maybe partnerships, M&A, etcetera? And the second question is, there has been, obviously, an improvement in fulfillment. But when I look at the managed network on a sequential basis and the same thing with digital -- with the wallet users on a sequential basis, the growth was relatively flat in overall managed network and overall wallet users. Is there an impact of COVID-19 there? And maybe that's why there's a little bit more flattish growth sequentially how should we think about that? Thank you so much.

Okay. So let me take those in reverse order. So when you look at the managed network, the answer is yes and it's related to the category mix shift. When you look at some of these CPG categories, especially when COVID initially hit because those were not high priority categories, they were not necessarily on fulfillment by many or cross stocking. A lot of the gel, alcohol, face masks and whatnot were being sold and continue to be sold in large degree by merchants on drop ship network. So in some markets, we actually even saw a bit of a decline in fulfillment as a percentage of volume as a consequence of COVID driven mix shift in categories. Now obviously, we're working quickly on the background as we identify those merchants to bring them on board to fulfillment because as we mentioned earlier, that's what really guarantees the quickest delivery times, the most reliable delivery times and going forward, the lowest cost. But so on the fulfillment side, sequentially, yes, that is driven by COVID related mix shift. And wallet, I think, was also covered this, absolutely a big part of wallet volume and by strategic design were in-store purchases, a lot of that was in the restaurant category, which obviously is one of the most hit categories. So if we look at a lot of the high level business development deals we had with anchor clients, McDonald's, Burger King, Starbucks that I think exemplifies how imposed quarantine and shutdown of in-store traffic, obviously, affects the wallet business. In terms of consumer packaged goods and CE, I think we addressed this earlier a little bit, CPG. I think this will accelerate our plans to move into this category. Obviously, we're starting from the kind of things that our current fulfillment centers can handle. So it doesn't include fresh, and it doesn't include certain chilled temperatures or frozen check temperatures. I think we've began to do work in understanding the overall impact of that and how, if and when we should move into those spaces. But I wouldn't anticipate anything soon. I think the focus right now and there's plenty of us room for us to grow is on CPG that does not include groceries or chilled and frozen, that's probably a Phase II or a Phase III in the future. And then, consumer electronics, obviously, a category that demand has come down somewhat, although we're beginning to see signs of life again in April. And that's, I think, a plan that we had from before, which is continue to expand our 1p for consumer electronics, hopefully, this will accelerate, onboarding of certain OEMs through flagship stores, as they look more-and-more for digital solution. So we are ramping up our commercial efforts there and trying to close deal with consumer electronics, OEMs and brands. And then we continue to work on what we identified as the other area, which is how do we continue to improve pricing in consumer electronics, through our buy box, through discount central and rebates, and then obviously, category-specific pricing that we did roll out in Colombia. And that's worked well. And so we're thinking about rolling out category-specific pricing potentially to other markets, which hopefully allows us to in a well-managed revenue transition, lower take rates in categories where merchants have smaller margins, increased categories where merchants have better margins all in, become more competitive in terms of pricing, in those lower margin categories, by having a lower take rate for merchants. So that's something that had started pre-COVID. And we're not really sidetracking any of those efforts, despite the slowdown in demand. Q - That's helpful. Thank you, Pedro.

Thank you. Our next question comes from the line of Marvin Fong from BTIG. Your question, please.

Great thank you and thanks for taking my questions. And glad everyone is good. Pretty much everything has been asked. I'll just have 1 left. I was just curious if you could comment on, all of these new users that you're adding? Are you observing any differences in terms of the cohort that you're adding during the pandemic be it mix of urban versus outside cities, perhaps age or even income? Is it -- is there anything that you can say about the new users you're adding? And as a second follow-up, is this changing you're thought in terms of how much of, say, in Brazil, Argentina or Mexico, you think you can cover with your managed logistics network?

Yes. So there's -- there are two drivers behind the incremental demand. One is the one you've identified, which is, incremental new users. I think when we look at the clip at which the commerce business is adding new users it is up, even from pre-COVID, so absolutely. But also, and I think equally importantly, is the engagement of our existing users is also up, obviously, as they purchase more and more. There are differences in terms of category mix shift, but that's across the board. It's not that the newer cohorts are particularly more or less inclined to certain categories. I think that's happening across the board. And geographically, I'll have to get back to you. I don't know that one-off the top of my head. In terms of network design, look, the answer is our network design already is to be able to cover most of the geographies. So I don't think this has changed anything in terms of network design. Priority, as we mentioned earlier, continues to be to drive to a best-in-class service in large urban areas where many of the pockets of demand are, but we also -- if you look at where we're laying our footprint of service centers and last mile centers, you'll see that it's very expensive. We have service centers in Manaus, in the middle of the Amazon, in the Northeast of Brazil. So the idea really is as volume moves away from the drop ship network onto our network for us to be able to service all the states in some regions in the different markets as efficiently as the drop ship network did. So from the goal, I think our ambition there was to be very efficient on a nationwide level, and that doesn't necessarily change, even when you look at where we're planning incremental warehouses, the two that we've already announced for Brazil. And in Mexico, they do have as one of their primary objectives, quicker and lower cost delivery to the south and the North of Brazil, whereas today, most of our warehouses are in São Paulo.

Great. Thank you.

Thank you. Our next question comes from the line of Rodrigo Nistor from Itau. Your question, please.

Good evening. Thank you for taking my questions. So, during April, fulfillment penetration surge in Brazil and other markets. So, do you think that that acceleration could lead you to increase your managed penetration targets or maybe reduce the timeframe in which you were previously pretending to achieve those objectives? And also, if you perceive a shift in the way merchants view a fulfillment proposal due to the current context? Thank you.

I got stuck in, my apologies. I think the focus on fulfillment and the managed network has been with the increase in volume to make sure that's able to continue to take on that incremental demand and that incremental volume on short notice. And that's what we've been, I think, the most pleased with is that we have been able to manage that surge in demand without having to significantly erode our delivery promises or the quality of the delivery, not just for essential categories, but across the Board. And if you look at marketplaces globally, that hasn't necessarily been the case for everyone. So, I don't think we're changing objectives or getting more aggressive quite yet. The focus right now is to make sure that we can continue to deliver satisfactory and hopefully, best-in-class or close to best-in-class user experiences as demand continues to surge. I think potentially once we get through the next few months and we have a better sense, we can reset and see whether we get more aggressive or not. And then in terms of merchant adoption, I don't know if this is necessarily COVID-related. I think our plan all along was always to be able to show merchants that as our network gets cheaper and faster in terms of delivery that, that generates better conversion and more sales and so the ultimate sales pitch behind getting merchants to onboard fulfillment and the managed network is that. Now, obviously, if this accelerates that, then better for us, but I don't see that as a departure in what the vision had been on the long as a consequence of what's happening. So, the most important takeaway, and again, this is very dynamic and very fluid is we're extremely proud of how we've been able to take on the incremental volume across all product categories. And continue to offer service levels that are in line with what we had pre-COVID and in certain large metro areas, primarily in Brazil, actually improved delivery times and service levels. And we don't think that's a small at all. And that's what we're most focused on sustaining at least for the remainder of this quarter before we start resetting expectations going forward.

Thank you so much.

Thank you. Our next question comes from the line of John Coffey from Susquehanna. Your question please.

Great. Thank you very much for walking me in. From a macro point of view, is there any slowdown labor in the ports in your markets or any reduced import levels from Asia that could potentially put a bottleneck in supply of any of the verticals in the marketplace has strengthened? And just one another and then I can hop off. How do you rate the likelihood of a pullback on the co-hail service due to COVID? Is that a realistic scenario? Thank you.

Okay. We were going to get away without a question on supply chains and supply. So, thanks for asking. Look, we did some checks, I think we have seen, obviously, at the margins, certain merchants or certain product categories, where supply chains seem to have come under strain. We also are seeing the opposite certain categories where inventory stock has increased. And there could be potential there for liquidation or people more interested in adding digital channels. We haven't seen any significant disruptions in large parts by domains or very relevant SKUs in terms of the supply chain as of yet. So, that's also been positive. It has happened, but it's happened either at the margin or in certain obvious products that everyone is sort of straining the supply chain. I don't know mask is one example. Correios, I don't want to venture a guess here. I mean, the Brazilian situation in COVID right now is possibly the most fluid one. And so, we'll have to see. So far, I think we haven't seen any negative impact. And hopefully, that will continue to be the case. We had -- there were some drop off points in Correios at the beginning of COVID in certain states in Brazil that were either trading did not show up or whatnot. But I think that normalized relatively quickly. And so that, I think, gives a certain amount of comfort. MPOS supply, which is the third piece, I think, was all that can cover I think I was talking more about our own merchants. Osvaldo Giménez: Yes. So far, we have had no problems. With MPOS supply going forward is that we are aware of the part of the supply of -- but the majority of MPOS we sell in Brazil are manufactured in a factory in Manaus, in the north of Brazil, which is an area with many COVID cases so far, we have no problems, but that is one area where there is a risk that we are trying to keep covered.

Thank you.

Thank you. Our next question comes from the line of John Colantuoni from Jefferies. Your question please.

Thanks for squeezing me in. Can you talk about how you're going to be growth in April compares to other e-commerce players in your key markets? And second, have you started to develop a time line for when you'll start pulling back on the concessions you provided sellers during the pandemic? Thanks.

Sure. So first of all, market share data for April is not something that we've seen a lot of. I think it's fair to say that this is not necessarily exclusive issue. Obviously, I think commerce, in general is accelerating. So, what we're seeing is a more rapid shift from offline to online. And so again, we always stress this. We don't see this as a zero-sum game for a very long time. I don't know specific market share data the competitors will have to look at it, but I do believe that there is plenty of room for everyone to grow. And we also think that there are certain elements of our value proposition. We've talked a lot about the logistics piece that are important differentiators going forward. The second question, I don't remember it. What was it?

Just the -- have you started to develop a time line for to start pulling back on concession.

Yes. Thank you. So we already have started to pull back on concessions, I think, gradually. So there's two things going on as we move into April. There are certain elements of pre final value fees in certain categories that we began to pull back on. And I think we're going to try to do this in a more targeted way, so rather than simply take an entire category to zero commissions, trying to identify merchants that are -- have deep inventory and that are fulfilling through us and whatnot and try to work this in a way that we can continue to guarantee the supply of low-cost essential products to our consumers, but in a both financially more intelligent way and also a more targeted way. And the other thing is that to offset some of that, you're also going to begin to see us very gradually, very efficiently and very intelligently begin to once again open marketing spend in certain channels and in certain areas that had been closed during April. So, if in one extent, we might raise take rates again to our merchants back to normalcy. Hopefully, those incremental marketing spend also gives them a further boost in demand that offset some of that take rate compression. But that's already begun to happen.

Great. Thank you, so much.

Thank you. Our next question comes from the line of Irma Sgarz from Goldman Sachs. Your question please.

Yes, hi. Good morning. Thanks for taking my question. And thanks for the detail you've been providing on the prepared remarks. Just one question on comments that you made in the opening statement, where you mentioned that in Brazil and Argentina, you paused -- hotels caused about one-third of this uplifting due to operational limitations. What are you seeing as big sources of interruption there? And what can you do to mitigate the impact? And how quickly do you feel that portion of the listing or the sellers can recover from here? Thank you.

Yes. Hi, Irma, thank you. So look clearly, the biggest disruption were the quarantines that were imposed in the case of Argentina, very stringent and nationwide. In the case of Brazil, somewhat more state by state, but also very stringent and so merchants who do not fulfill through us because we were never -- our fulfillment centers have never stopped operating. But merchants that did not fulfill through us and because of restrictions on movement were unable to make it to their stores, to prepare packages and to deliver packages either to our milk runs or on dropship networks were the ones that primarily at first were most affected. We've worked fairly closely with regulators and authorities in the different countries to as March rolled into April, ensure that e-commerce activities were included within the exemptions for quarantine regimes. And so when we look at Argentina, for example, that's a big story that tells why there was a significant slowdown during two weeks in March, and then the business began to pick up again. So by this point, as we moved into May, our sense is that the overwhelming majority of those merchants that had face restrictions, and it had to limit inventory are up and running again, and that explains also the strength the business delivered during April.

And that last comment was related to Argentina, specifically in terms of the business picking up?

No. I think, again, with different levels, but I think the way we've tried to characterize this is almost there were three phases to this. There was an initial phase. Q1 was coming along fairly well. You can see that in the numbers. Very strong pullback, primarily in Argentina and Brazil during the back half of March, as we said. Mexico, Chile and Colombia, much less pronounced slowdown during March. And then overall, in most markets, a rebound in April. Now the rebound is, yes, stronger in Argentina, Mexico, Chile and Colombia, but it is pronounced in Brazil as well.

Great. Thank you.

Thank you. Our next question comes from the line of Richard Cathcart from Bradesco. Your question please.

Hi, guys. Good evening. Just a question on Brazil. So we've seen here that the number -- the penetration of fulfill are rising to, I think, around 14% for the quarter, 15% at the end of the quarter, and then I think you mentioned 20% in April. So my question about the April number there is, if you're seeing kind of a larger number of sellers moving into fulfillment, or if that's a result of some of the mix shift that we've seen as a result of the COVID-19?

No. It is merchant migration and greater adoption of the product. If anything, I think I had mentioned is that the COVID-19 mix shift initially was detrimental to fulfillment adoption. The -- so this is -- I would characterize this as true sustainable increase in usage of our fulfillment solution in these markets. March was already strong. So it's not on that specific metric. Obviously, the number of shipments that are being handled by our fulfillment centers has increased dramatically as GMV has increased and units even more than GMV. But when we look at penetration levels, I would say that it was already trending positively towards Q1 and April has been in some markets like Brazil in line with March, slightly up and across the board, up a little bit more. But it's a metric that I think is a consequence of the work that we've been carrying out over the last few quarters and not something that's necessarily COVID explained.

Okay. Great. Thanks very much. And just a follow-up, if I may. So you mentioned in the answer to Irma's question that Brazil is showing strong growth in April, but it is kind of lagging a little bit the other markets. GMV growth did show some slowdown quarter-on-quarter. What's your reading of those trends? Is it primarily just around COVID-19? Or are there some other things that perhaps are having an impact?

No. I think Brazil, even if you look at Q4 numbers, there were certain things that we were trying to address in our Brazilian market. I think we covered some of those in the previous quarter, and they were very much driven by certain categories. There were some questions on consumer electronics, where we had seen a slowdown that was more marked in that category than others. We had also identified that certain categories that were fast growers within the online world were categories that we were coming into from a smaller overall base. And I think that continued to explain what was happening in the first quarter. So I think the recipes to remedy that are the same ones we identified, which was accelerated category expansion, and move into first-party, and to a whole series of initiatives that we had for consumer electronics that I just covered a few questions ago to reignite the growth in that category. I think if anything, COVID has accelerated some of those and so that, to a certain degree, I think the better results in April are a consequence obviously, of incremental online demand. But also hopefully, are also the results of some of the initiatives that we have been working on since Q4 that are beginning to ideally impact and drive some of that acceleration.

Perfect. Great. Thanks guys. Thanks very much for the --

Thank you. This does conclude the question-and-answer session of today's program as well as the program. Thank you for your participation. You may now disconnect. Great day.