MercadoLibre - Q4 2023

Transcript

Richard Cathcart (Investor Relations Officer)

Hello everyone and welcome to the MercadoLibre Earnings Conference Call for the quarter ended December 31, 2023. Thank you for joining us. I'm Richard Cathcart, MercadoLibre's Investor Relations Officer. Today we will share our quarterly highlights on video, after which we will begin our live Q&A session with our CEO, Marcos Galperin, Chief Financial Officer, Martín de los Santos, Fintech President, Osvaldo Giménez, and Commerce EVP, Ariel Szarfsztejn. Before we go on to discuss our results for the fourth quarter of 2023, I remind you that management may make or refer to, and this presentation may contain, forward-looking statements and non-GAAP measures. So please refer to the disclaimer on screen, which will also be available in our earnings materials on our Investor Relations website. With that, let's begin with a summary of our results.

Marcos Galperin (CEO)

Hello everyone. I'm delighted to share that MercadoLibre delivered solid results in Q4, marking a strong conclusion to an outstanding year. Overall, 2023 highlighted the strength of our financial model and its future potential, as well as the powerful impact of compounding of several years of investment in technology. For our commerce business, it was a year of accelerated growth and market share gains in most countries. We achieved this by continuing to make improvements in the value proposition to buyers and sellers in our marketplace. I would like to highlight three important initiatives that contributed to our success in commerce. We continue to invest in having the widest product assortment in order to offer the best buying experience to consumers. A key contributor to this was the acceleration of our first-party business, particularly in Brazil, where it grew by 81% in 2023.

We continue expanding our logistics network with record fulfillment penetration of almost 50%, which provided an improved user experience to our buyers. This resulted in faster shipping and fewer late deliveries, particularly around the Christmas season. Our ads business continues to deliver impressive results, growing revenues at an accelerated pace. During 2023, we onboarded almost 50,000 new advertisers who appreciate the value of promoting their products on our premier regional platform. On the fintech front, Mercado Pago maintained strong momentum as users and merchants continued to adopt our services. In acquiring business, we deliver solid TPV growth and gained market share in most countries where we operate, both in online as well as in-store payments. We made improvements in approval rates and deployed new features that enabled us to move up market, enhancing the value proposition to SMBs.

In fintech services, we have expanded our product offering and made improvements to user experience. The increased engagement with our products resulted in MercadoPago achieving the milestone of surpassing, for the first time, 50 million active users in a single quarter. The credit business continues to be an important piece of our fintech strategy, and it delivered another quarter of strong results with accelerated growth and solid spreads as we continue to cautiously manage risk. During Q4, Meli delivered strong financial results. Revenues grew by 42%, accelerating both in fintech as well as commerce due to the strong execution during the peak season and investments we made throughout the year. For the quarter, we delivered 13.4% EBIT margin, excluding one-off expenses from previous years, as explained in the letter to shareholders.

This represents margin improvement from Q4 of 2022, while we continue to invest in building our logistics infrastructure, supporting our Meli Buyers Loyalty Program, as well as expanding our credit card offering. Following our strong financial performance in 2023 is a good time to reflect on the journey over the past six years. During that time frame, we multiplied our revenues by 10x while achieving significant improvements in profitability, culminating in nearly $2 billion of operating income in 2023. In recent years, we have increased our investment in technology, which enabled us to launch multiple products and services and make significant improvements in user experience. We have grown our development team by more than 10,000 in the last three years alone and currently have 16,000 engineers who are constantly working to create the best experience for our users.

We remain committed to our technology-led strategy in order to continue delivering sustainable results for Meli. We enter 2024 with optimism about our growth opportunities and confidence in our capacity to continue to execute on our strategy. Now, back to Richard to share some product initiatives from 2023.

Richard Cathcart (Investor Relations Officer)

As a technology company with more than 15,000 developers, launching products and features is at the heart of our business as we continue to innovate. Innovation is about new products and businesses, but it's also about being attentive to and passionate about detail and solving multiple small customer pain points that compound into a great user experience. 2023 was no different. We've launched several new products and services such as the Meli Mais Loyalty Program, Meli Delivery Day, credit cards for consumers in Mexico and businesses in Brazil, among many other things. We've also vastly improved our core products with several new experiences that build onto our value proposition as we continue to strive to offer our users the best experience. Today, we want to share some of this year's highlights.

In commerce, we continue to look at the specific needs of each vertical to improve the user experience as we believe this will drive offline consumption online. In 2023, we considerably improved the navigation in fashion, apparel, and sports with standardized filters across brands and sellers. This enables consumers to find what they need more quickly. On the product pages, users can also see the "More Like This" section to find similar items to a product that the user has clicked on rather than simply going back to the search results. This feature is powered by artificial intelligence. AI-based features are already an integral part of the Meli experience, with many innovations launched in 2023, including a summary of customer reviews on the product pages that concentrates the main feedback from buyers of that product.

On beauty product pages, a summary of product functions and characteristics is automatically created to facilitate buyers' choices. Push notifications about items left unpurchased in shopping carts are now highly personalized and remind users why they may have chosen to buy a particular product. We have also added an AI feature that helps sellers to respond to questions by preparing answers that sellers can send immediately or edit quickly. To deliver a better experience to our sellers, we launched a new version of the Seller Hub, where they can see all of the promotional campaigns available for them to participate in. A new pricing tool also enables sellers to easily compare prices with competitors and/or similar products and receive insights and recommendations on how to boost sales. In 2023, we also relaunched our Ads Tech Stack.

An automated buying platform was launched for Display Ads, accompanied by live reports and unique insights analysis. We enhanced our bidding algorithm for product ads and introduced new placements on search and product pages that give more visibility to sponsored products. Our Brand Ads solution was also launched as a mid-funnel campaign option to enhance consideration for brands. Our platform also now includes a feature for agencies to be able to manage different brands through the platform. Brands, sellers, and official stores can delegate certain products or even the whole assortment to a specific agency. The agencies are now available to manage all accounts delegated to them in one place. To expand the possibilities given to advertisers, a new tool of custom audiences was launched and later expanded, enabling advertisers to use filters to create an infinite combination of audiences for their campaigns.

Finally, in advertising, Meli Play was launched as an ad space streaming platform. Through a revenue share model with studios, we were able to offer free content to our users across the region, enabling us to explore a new revenue stream for ads. In logistics, most of the technological improvements were behind the scenes and were crucial in helping us to maintain costs broadly stable as a percentage of GMV while expanding fulfillment penetration. We optimized routes from first to last mile, fulfillment center processes, and demand prediction. On the UX front, buyers are now notified that their package is being delivered and can follow it through their app. And for sellers that adopt fulfillment, an enhanced tool to manage inventory brings more technology to the process, flagging products that need to be replenished, how many units should be sent to us, among other things.

At MercadoPago, we continue to innovate as we consolidate our position as one of the region's leading fintechs. In the acquiring business, the launch of the MercadoPago TAP brings a free POS option to merchants by turning their cell phones into a tool to receive payments via NFC technology. We also improved the pairing process of mobile POS devices with merchant cell phones and worked behind the scenes to reduce processing times, which had a positive impact on NPS and helped to improve the experience of merchants and buyers. With more personalization in the MercadoPago app, our seller home page now prioritizes the features that merchants most need on a day-to-day basis. In fintech services, we continue to search for ways to facilitate financial inclusion.

We expanded our credit card offer to Mexico and launched our collateralized credit card solution in Brazil, where the user receives a credit limit equivalent to the value of funds deposited into their account. These products enable consumers to start building a credit score and take advantage of the possibilities that a credit card brings, for many, for the first time ever. Innovations in credit enabled us to attract new users. For merchants, we now offer a business credit card using Open Finance to contribute to scoring. For consumers in our lower-risk cohorts, a new product enables them to offer larger, longer-duration loans in our app, personalizing the loan to their needs and expanding the use cases of our credit product. As our product stack expands, we have focused on facilitating and simplifying navigation around all of the different products available on MercadoPago.

Our digital account home page combines the most used features such as transfers, credit limits, investment positions, and insurance, adapting to the user's profile. We have seen increased traffic to all of our key digital account products as a result. Digital account users in Brazil can now see a summary of their monthly activity on a personalized report, an enhancement that brings more information to the user about their finances. The report also highlights new offerings that may be useful to the user, such as our certificates of deposit and investment funds alongside credit products and our remunerated account. All of the innovations offered by MercadoLibre and MercadoPago continue to have a deep intrinsic impact in Latin America by generating economic and financial inclusion for entrepreneurs and individuals.

A recent report in partnership with Euromonitor shows that MercadoLibre is the main source of income for 1.8 million families in the region and that for 54% of users in the region, MercadoPago was the first digital payment method available to them. This was just a snapshot of the innovations delivered by our teams in 2023. In 2024, our users can expect even more because, as always at MercadoLibre, the best is yet to come.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment for our first question. Our first question comes from the line of Andrew Ruben of Morgan Stanley. Your line is open.

Andrew Ruben (Equity Analyst)

Thanks very much for the detail and for the question. I'd like to dig in a bit on the logistics that work. We see that the net shipping fees and some of the shipping costs look like it was a bit more of a drag than in recent quarters. So I was wondering if you could help with what changed sequentially, whether it was more seasonality or if there's been, let's say, sequential changes in investment areas such as shipping campaigns or DC builds in the quarter. And then perhaps zooming out a bit on the logistics network, how do you think about the state of the network, where you are for shipping speeds, shipping fees, and how you think about the intensity of investment in those areas for the year ahead versus 2023? Any color there would be very helpful. Thank you.

Ariel Szarfsztejn (EVP of Commerce)

Through. Compared to last year, lower delay rates, more fulfillment penetration, particularly in Brazil, and more free shipping coming from Meli Mais together with a network that has expanded over the year and particularly in Q3. So going to your specific question about margin compression or sequential margin compression, we also experienced some cost pressures during Q4 that you will see reverted in early Q1. And basically, those headwinds in Q4 come mainly for the following reasons. Number one, this is the first quarter in which Meli Mais has been fully operating, and that means that we have increased the level of free shipping offered in Brazil and Mexico. As I think we've discussed before, Meli Mais is a strategic and long-term investment that we think will continue increasing loyalty and driving incremental orders and GMV. So it's a conscious investment on our part.

Second, I think the growth of 1P in our business, whose GMV was 50% higher Q-over-Q in dollars, also acts as a headwind, basically because there are no sellers paying for shipping revenues, given that we are the sellers in the case of 1P. I think that going to point number three, in previous quarters, we flagged that some of the shipping gains in terms of save rates were due to the negotiated postponements of cost increases from our suppliers after already having passed through higher prices to sellers at the start of the year. Those costs are now hitting our P&L as we were expecting. On the fourth, I think Argentina also added some pressure as we decided not to fully pass inflation through to our prices on the spot in an environment with accelerated inflation and a lot of uncertainty in the market.

Of course, then you have peak season, which is the biggest component of the sequential compression of shipping costs. There is ramp-up in capacity as to be able to attend demand coming from our buyers. There is also an increase in unit costs coming from labor hours and vans and truck drivers, etc. And that is the biggest component of the sequential compression, which you will see probably reverted in early Q1 in 2024. Finally, and just to wrap up on this first part of the question, it's also important to note that we were expecting most of these increases in cost, and that is one of the reasons why we decided to increase our flat fees.

So the charge that we make to the sellers when they sell items below the free shipping threshold, if you recall, we increased that fee in Brazil approximately in July or August and with the same in late Q3 in Mexico. This is one of the levers we have used to manage our shipping P&L as well. It's a good example of how we manage the profit and loss of the company in a consolidated manner and not on a line-by-line basis. To your second part of the question, I think, as we've been saying many times, in the long run, there will be opportunities for us to continue monetizing our logistics network. We are not desperate for that. We think long-term, not only in monetization, but also in remaining competitive in terms of prices to our buyers and to our sellers.

We are conscious on how to execute around that opportunity.

Andrew Ruben (Equity Analyst)

Very helpful color. Thank you.

Operator (participant)

Thank you. One moment, please. Our next question comes from Irma Sgarz of Goldman Sachs. Your line is open.

Irma Sgarz (Managing Director)

Hi. I hope you can hear me well. Connectivity has been a bit patchy. I have two very quick questions. Firstly, on Mexico, sequentially, the margin was a little bit lower into the fourth quarter, which is obviously to be expected given the seasonality. But 1P, I think, plays less of a role here. So I was wondering if you could just elaborate on the drivers here. I imagine some of the logistics capacity ramp-up has to do with that. But is there anything else that we should be mindful of? And then on the commerce take rate, this builds a little bit on the earlier question, but we also noticed that there was a sequential decline quarter-over-quarter. And is this just basically sort of a reflection of and I'm excluding 1P here. But is that just mostly really a reflection of category mix and logistics?

Is there anything else at play that we should in the revenues and shipping revenue dynamics that you just described that we should be mindful of, especially as we look into 2024 and think about this line, whether there should be further compression coming into the commerce take rate? And maybe, sorry, if you can also add to that, the influence at lower funding cost of rates, that should be positive for the take rate. But I don't think we saw much of an effect, if I'm not mistaken. So if you could just also feed that in. Thank you.

Ariel Szarfsztejn (EVP of Commerce)

Hey, Irma. Ariel here again. So on Mexico sequential compression, I think you were spot on with some of your hypotheses, and it relates to what I was explaining before. So everything that I just described about operating in peak season with building capacity before the events and increase in unit costs is actually more complex in Mexico for two reasons. On the one hand, in Mexico, during Q4, we opened three fulfillment centers and one cross-docking station, big cross-docking station, as we've been pointing out over the last few quarters. We have a capacity constraint there that we need to fix. And of course, whenever you open new warehouses such as these ones, the ramp-up process is a bit tough, and that's part of what has happened over the quarter. Secondly, our existing warehouses were operating at maximum capacity.

That also puts an extra pressure in terms of productivity for our fulfillment operations. In the end, there's nothing that we were surprised about. We are managing the cost and the performance of the network. We think we are in good shape for the future. No comments on the second part of the question on some things that you should expect or that we should call out there.

Martín de los Santos (CFO)

Irma, it's Martín here. Regarding the funding costs being lower, it should benefit the credit business, of course, because it lowers the cost of funding for that operation. So that should improve NIMO. And it also should help us on both the commerce side as well as the fintech side because it lowers the cost of discounting coupons. So that should result in improvements in margins.

Osvaldo Giménez (Fintech President)

Probably. Let me build on that, Martín. Probably you will see more of an impact with regards to on the marketplace where the fee we charge for including installments is fixed on the fintech side of business, on the acquiring side of business. Many times when the funding cost is lower, we end up passing some of those savings to consumers, and there is not as straightforward in the marketplace.

Ariel Szarfsztejn (EVP of Commerce)

Thank you, Irma.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Robert Ford of Bank of America. Your line is open.

Robert Ford (Managing Director)

Good evening, everybody, and congratulations on the quarter. I was curious, how should we think about service transfer pricing and the recurring tax impact on profitability? When it comes to advertising, how should we think about ad penetration rates in 2024 and the receptiveness of the product stack with larger display advertisers now that they've had time to really understand the product and maybe build their budgets coming into this year?

Martín de los Santos (CFO)

Hi, Bob. I think you're referring to the withholding, the incremental withholding tax that we started booking this quarter, as we explained on the shareholders' letter. I think if you obviously, it's a big charge, and this is the reason why we excluded from the results to explain results because it generated a big distortion in Q4 results. Just to put in perspective, the full charge of roughly $350 million, only 6% of that corresponds to this particular quarter. A way to look at that is by roughly, I would say, $20 million incremental cost per quarter will result for this incremental tax that we're going to be starting to provision from now on. Just to complement that, keep in mind that the $350 million one-off charge were fully funded because throughout the last 10 years, we're funding a judiciary account with those amounts.

So if in the event that we lose this case, we will continue disputing it. In the event that we lose it, it will not have a material cash impact on our results. So in summary, I think it's about $20 million per quarter, the impact going forward.

Robert Ford (Managing Director)

Thank you.

Ariel Szarfsztejn (EVP of Commerce)

Bob, this is Ariel. So going back to your question on advertising, I think to start by saying that we are extremely pleased with the ads results from the quarter. Our revenues grew 72% year-over-year on an FX-neutral basis. It's the seventh consecutive quarter going above 70%, and that's driven mainly by Brazil and Mexico. I think as we mentioned in our shareholder letter, we added 53,000 new advertisers this year, and this is a great achievement and shows how strong the level of interest in our product it is today, and we expect to build on that in the coming quarters. On sequential penetration, I think while ads continue to grow at a very fast pace, GMV accelerated at an even faster pace this quarter. And it is the case that ads revenue does not necessarily follow one-to-one the growth pattern of our GMV.

Particularly during Q4, our GMV accelerated from 59% growth in Q3 to 79% in Q4. It's worth maybe highlighting the case of Argentina, which represents 20% of our GMV but only around 10% of our ads revenue. That's the main offender for sequential penetration. In such a high inflation context, the lack of stocks in the seller hands disincentivized some of the ads' investments. Simultaneously, advertisers were not necessarily updating their investment amounts together with their item prices. For that, we did already deploy some features that automatically update ads' budgets whenever there is an inflationary context in items. As I was saying before, we remain extremely confident in our product stack, and we see ample opportunities for growth in the coming years.

Regarding display, it's been not so long for our current product format to be live, and we are going through the learning curve in terms of go-to-market strategies as well as the brands are still learning about branding possibilities in MercadoLibre. So we believe in the product that we have, in the value proposition we are offering with display ads as an awareness tool for one of the largest audiences in Latin America. But we need to be patient, and we think that we can continue building on the product we have as to gain even more traction and make a display an even bigger business for MercadoLibre and for our sellers.

Robert Ford (Managing Director)

Very helpful, Ariel. Thank you so much.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Kaio Prato of UBS. Your line is open. Pardon me. Kaio.

Robert Ford (Managing Director)

Hello everyone.

Operator (participant)

Thank you.

Robert Ford (Managing Director)

Hey. Good evening. Thanks for the opportunity. I have one question on the credit portfolio, please. I saw your origination was much higher this quarter, and you mentioned that your own credit card is one of the most used in your platform, I think among the five most used. I just would like to have a sense about how much of this origination is coming from the credit card and how are you seeing the contribution specifically of the credit card in your GMV today. In other words, what's the level of GMV penetration today versus one year ago? And finally, what makes you comfortable with the credit card origination today because we are already seeing some spike in short-term NPLs, which is attributed to this product? Thank you.

Osvaldo Giménez (Fintech President)

Hi, Kyle. Let me start by the end, and then I'll go back to the first questions. With regards to what makes us more comfortable, we first launched credit cards in Brazil 3 years ago, and we have been iterating the models we use to score credits. We have done many iterations every year. Each iteration we do, we get better results. We saw the credit situation overall in Brazil worsen 1.5 years ago, 2 years ago. So we were more cautious. Now, throughout last year, we started feeling more and more comfortable, and we have been increasing the amounts of origination in Brazil. Also, we launched a credit card in Mexico, and we've been, I would say, aggressive in rolling it up.

When we look at, as we say in the shareholder letters, when we look at total payment volume for our credit card year-over-year, it has grown well above 100%. So we have been aggressive with regards to that. In terms of portfolio, there has been higher origination. We have not disclosed the origination amount, but we have disclosed the total portfolio. And you can see how the chunk coming from the credit card is growing. It has reached $1.2 billion, which is over nearly 100% growth versus a year ago. And on top of that and on top of that, I would say that the credit card is growing in exactly the way we expected it to grow. We are expanding in the lower segments and also starting to have a little more traction in the higher segments.

The penetration we see in the marketplace is growing in Brazil and in Mexico. Most importantly, when we look at the total penetration of credits in the marketplace, which adds our consumer loans and our credit card, it's growing significantly. It's not that we are cannibalizing consumer loans with a credit card, which has probably a lower profitability per transaction, but rather that we are adding to that number.

Robert Ford (Managing Director)

Okay. Thank you. Can you share the level of penetration nowadays in your platform?

Osvaldo Giménez (Fintech President)

I would say this is we have not disclosed the precise level, but we can disclose that this is the largest means of payment we have today in Mexico.

Robert Ford (Managing Director)

Okay. Thank you very much.

Osvaldo Giménez (Fintech President)

Credit. I mean, not total payments. Of all of the credit products available, our own credit and credit card is the largest one.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Maria Clara Infantozzi. Your line is open. Pardon me. Maria Clara Infantozzi, your line is open.

Maria Clara Infantozzi (Equity Research Analyst)

Hello, everyone. Good evening. Thanks for taking my question. I would like to explore the profitability of the 1P operations. In the release, you mentioned that you achieved better profitability trends despite the seasonality of the business in the fourth quarter. Can you please give us more granularity on how the contribution margin of the business has been evolving lately? Do you feel that the accelerated growth of the category has been allowing you to have better negotiation terms with suppliers? And how do you feel about the growth potential of the channel going forward? How far are we from reaching an optimum profitability level in the division? Thank you.

Martín de los Santos (CFO)

Hi, Maria. Thank you for your question. Yeah, we have made significant progress in the 1P business throughout the year, and we feel that we are in much more sustainable footing today than we were maybe a year ago. As you say, we made improvements on margins. We look at our product purchase margin has improved a few percentage points in 2023, and we expect to continue improving that. That gave us confidence to grow our business, and we did grow it in Q4 by 60% year-over-year in dollars and 85% in local currency, taking advantage of, obviously, the peak season that we had on 1P in Mexico as well as Black Friday. So we are making significant progress.

As I mentioned, one way of looking at the 1P business is obviously, we don't share the actual profitability of the business, but I can give you some guidance in terms of how we're doing. If you were to look at the 1P business now, it is profitable before considering fixed costs and including all variable costs, that is, shipping as well as financing. One way to look at it is the more volume we have, the better we dilute the fixed cost of that business. We are at a point where we feel that we can scale the business and should start to contribute to lower the deficits that we have in terms of EBIT. Finally, we think we have plenty of room to continue to attach more advertising into that business, and that creates a big opportunity to continue improving profitability of 1P.

Ariel Szarfsztejn (EVP of Commerce)

Ariel here, just to complement Martín. We continue to think that 1P is strategic in order for us to sustain our competitive position, to gain market share, and more importantly, to satisfy customer demands through better selection and price competitiveness. We continue to be strategic in deciding, sorry, which categories and products we serve with 1P while simultaneously optimizing our consolidated P&L. While we don't have a specific target regarding 1P penetration for the future, we are encouraged by the progress we've made in terms of profitability, in terms of supplier relationships, and operating processes. The more confident we feel about that, the more probable it is that we could scale in the future. The bigger we get, the more benefits of scale we will capture, as Martín was saying just before.

Having said that, there is seasonality in terms of category demand and the role that 1P plays in the different categories, particularly consumer electronics was a high-demand category during peak season, and it's one category where 1P plays an even more strategic role for us. So to wrap up, we have many initiatives in place to continue improving our retail business, both in terms of economics as well as in terms of selection, price management, and supplier relationship, and we'll continue to work on that.

Maria Clara Infantozzi (Equity Research Analyst)

Perfect. Very clear. Thank you.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Trevor Young of Barclays. Your line is open.

Robert Ford (Managing Director)

Great. Thanks. First one, just to build on the earlier question on advertising, can you remind us where we are in terms of penetration on a geographic basis? I think to your earlier comments, advertising may be remaining softer in Argentina and perhaps stronger in Mexico and Brazil. Just any numbers to help kind of frame the progression there, particularly as the GMV growth in Argentina is probably optically making that ad penetration look weaker. And then secondly, in Argentina, items growth accelerating for the second straight quarter up 22%, I think. How much of that is related to kind of the worsening inflation dynamic in that market and more of that pull forward of consumption versus maybe some improvement in consumer demand? And just appreciate that you don't give any guidance, but at a high level, do you think that degree of unit growth is durable? Thank you.

Ariel Szarfsztejn (EVP of Commerce)

Hey, Trevor. Ariel here. I think we don't disclose specific numbers in terms of penetration by country, but we have shared that while the overall revenue penetration as percentage of GMV was 1.6% in Q4, if you were to exclude Argentina from that equation, you would get something like 1.9%. So Argentina is definitely a big detractor in terms of measuring ad revenue as percentage of GMV.

Martín de los Santos (CFO)

Yeah. And the successful items sold that you mentioned in Argentina, it's just like you said, we saw the first half of the year where items were flat year-over-year, mainly because of the recession that we faced in the first half of 2023. Then the second half was, as the government put more money on people's pockets, we saw a pickup in volume both in terms of GMV and items sold, which increased 12% in Q3 and accelerated to 21% in Q4. And part of that is inflation. It's advanced purchases ahead of expected devaluation towards the end of the year, which eventually happened in December with the new government. And towards the second half of December, we saw a slowdown of those volumes. But that's correct, your assumption about our consumption.

Robert Ford (Managing Director)

Great. Thank you both.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of João Soares at Citi. Your line is open.

João Soares (Senior Equity Research Analyst)

Hi. Thank you. Yeah, just one question on my end. I'm just trying to understand the different moving parts for the operating profit margin, thinking about 2024. I think you mentioned that we should see some reversion in terms of the logistics cost pressure already in the first quarter. And of course, we have structural growth, the 1P business, of course, affected by naturally, there's going to be seasonality, but on a year we should see an increase in penetration of the 1P. So I just wanted to try to understand different moving parts, also taking into consideration that you're growing, again, your credit portfolio within credit cards, which should come with an increase in provisions.

So I know I don't want to see a forward-looking statement, but just trying to understand what should we have in mind for different moving parts for your operating profit margin. Thank you.

Martín de los Santos (CFO)

Thank you, Joel, for your question. First of all, I will discuss margins. Let me clarify that all the numbers that we'll be discussing contemplate the adjustment for the $351 million of one-offs. Given the size of it, we felt that it was easier to explain and taking that one-off out and obviously including the appropriate cost corresponding to this particular quarter. I would say that if you look at margins on a year-on-year basis, excluding the one-off that I mentioned before, we improved margins by 270 basis points because of expanding the business and basically growing the business and diluting our fixed costs while at the same time, we continue to invest behind the many growth opportunities. One of them is credit cards, as you mentioned, but also fulfillment and several other things that we're doing at the company. This is something that we plan to continue.

We think that we run a business that should scale very nicely in the long term. I will continue to focus on managing costs very efficiently. And as we continue to grow the business, we should be able to continue scaling in the long term. Q4, in particular, is a quarter with seasonality in terms of lower margins because of investments that we make in commerce, in particular behind the special events of Black Friday and 1Pin. Furthermore, during Q4, we intensified certain investments, as Ari mentioned before, such as fulfillment, 1P, and free shipping. So if you were to look at the sequential compressions of margins, we had roughly 4.5 points of compressions in margin. That compression comes mainly from 1P and shipping, which affects our cost of goods sold. In terms of our 1P business, 2/3 of the compression comes from the 1P business.

As Ari mentioned, the revenues of 1P grew from 9% to 12% of total revenues. You can see that in our disclosures. As you know, 1P has a different margin structure as 3P because almost 100% of the GMV is booked as revenues compared to just the take rate of the 3P business. Although there was pressure on the margin, the incremental negative impact on EBIT due to 1P was only $20 million during the Q. On the other hand, we generated more than $220 million incremental GMV from 1P, which resulted in market share gains of almost 10 percentage points on consumer electronics category, as Ari was mentioning before. The other part of the compression comes from shipping. As Ari mentioned, there is a seasonality factor in shipping during Q4, which comes with higher costs associated with peak season.

This happened this quarter, and we expect this trend to revert back to normal the following quarters. Finally, investments that we're making and we have been flagging over the last few quarters to the market, investments on our value proposition, which includes the launching of more fulfillment centers. We implemented 3 new fulfillment centers this quarter, the increased adoption of Meli Mais, which resulted in higher levels of free shipping. When you put all those together, that explains the compression that you see quarter-over-quarter.

João Soares (Senior Equity Research Analyst)

So let me add to that your question regarding the credit portfolio and provisions. Throughout this year, we have been able to expand our credit portfolio and furthermore gain share in credit cards. And despite that, we have been able to increase our net interest margin after losses and also decrease NPLs, which appears 30% for the first time in quite some time. So again, we don't guide, but we are confident with how the credit business is evolving. Perfect. Thank you so much.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Deepak Mathivanan of Wolfe Research. Your line is open.

Robert Ford (Managing Director)

Hey, guys. Thanks for taking the question. I apologize if this was asked already, but one big picture question and then kind of one tactical one. So if you think about logistics, what are the big initiatives for 2024, maybe with respect to expanding the fulfillment centers or the middle-mile and last-mile operations? How should we think about the CapEx levels as we kind of progress through the year? Then second one, on competition, e-commerce players from China have caused pretty significant shifts and moved into the U.S. And it is anticipated in several LatAm markets. Can you share any color on your thoughts and how you're positioning the business for any sort of potential competitive intensity growing? Thanks so much.

Ariel Szarfsztejn (EVP of Commerce)

Hey, Deepak. How are you? This is Ariel. So in terms of logistics, I think I mean, we don't guide, and we don't disclose future numbers in terms of performance, etc. But just to reiterate what I said and Martín tried to explain, so most of the sequential compression on logistics was coming from peak season cost, which has been reverting during early Q1. So that's important. Having said that, we have many, many projects on hand to execute during 2024, none of which we think should drastically change the way we manage our P&L. We will invest in faster deliveries. We will continue investing in slower deliveries simultaneously. We will continue testing more automation and robotics as we have been doing so over the last few years. We will continue working with our technology team.

We have thousands of developers fully dedicated to improving the processes and the experience of our customers with logistics and the way we operate inside our warehouses and cross-docking stations. So all in all, we will focus in becoming more efficient, in serving our customers better, in improving our delivery promises and execution, and to support the business of the marketplace with more categories and better services. Regarding the Asian competition, I'd say we've seen Temu in particular more present in Mexico over the last few months. But still, as you can see from our results, we grew 32% year-over-year in items sold in Mexico. So we are extremely pleased with how we are executing in the countries. All categories in Mexico are showing good year-over-year GMV growth.

While we see some of the Asian players focused on Apparel and Home and mostly focused on low ASP items, we see our growth in those segments extremely healthy. So in the end, we are confident that our competitive advantages, particularly in logistics and payments, remain strong. We have a unique logistics network. We have a unique buy now, pay later and credit card offering in Brazil, in Mexico, etc., which we think will continue helping us drive our business and our market share gains in those markets. So to wrap up, in the past several years, we have been successful in competing against Asian players who were executing strategies similar to the ones that current players are executing. So we expect to continue doing so in the future, building on our strengths and successfully competing against whoever is operating in each of the markets where we are.

Martín de los Santos (CFO)

Just on your question on CapEx, obviously, we don't guide future expenditures, but this year, 2023, was roughly $500 million invested on CapEx, which was fully funded with our own cash flow generation.

Robert Ford (Managing Director)

Okay. Thank you so much.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Marcelo Santos of J.P. Morgan. Your line is open. Pardon, Marcelo Santos. Your line is open.

Osvaldo Giménez (Fintech President)

Hi. Thank you. Sorry, I had a deadline. Thanks for taking my questions. My first question is about Meli+. Is Meli+ a net negative in terms of P&L? I understand it has recurring benefits and has a lot of loyalty benefits. But when you think about the P&L impact, is this negative now, and should it remain negative in the future? That's the first question. And the second question is, did you also see this seasonal, this peak costs last year, or was something that you had stronger this year because you're running at fuller capacity? Thank you.

Operator (participant)

Thank you. One moment, please.

Martín de los Santos (CFO)

Hi. Hi. Thank you for your question. The first part of the question was related to Meli Mais. Okay. Sorry. Yeah, Meli Mais, we don't look at Meli Mais as an individual P&L. We look at this as a way to generate incrementality in our marketplace. So you break it down between content. Content is basically cost-neutral because we pass on the benefits that we get. Basically, the cost that we pay for the content, we pass it on to our consumers. And then the shipping, obviously, we provide more free shipping, but that generates incremental volume that then, in turn, should finance that operation. In the short term, we are investing behind this initiative because we're also investing in advertising. But it shouldn't be looked at as an individual P&L and more so as part of the critical part of our strategy for commerce.

Then regarding the peak season, if we saw a particular peak, special peak in terms of costs, yeah, probably this quarter, the incrementality of costs due to peak season was a little bit higher than we saw last year. But again, as Ari mentioned, this is something that will revert in the following quarters. It was expected to have a peak incremental cost during peak season.

Osvaldo Giménez (Fintech President)

Thank you very much.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Sumit Datta of New Street Research. Your line is open.

Maria Clara Infantozzi (Equity Research Analyst)

Hi there. Yeah, thanks very much for taking the question. Just one at this stage, please. On Argentina and the fintech business, as we kind of contemplate entering a recessionary environment in Argentina, how should we think about the fintech business? I mean, the e-commerce business is a bit more kind of logical to me in that sort of environment in terms of thinking about consumer demand, etc., units sold. But just on the fintech side, it's not clear to me kind of what the drivers will be exactly under that scenario. So if you could kind of help me with that, that would be great. Thanks.

Martín de los Santos (CFO)

I would say, let me try to split the question between the different businesses we have. With regards to acquiring, I would say it's a business that also is very much independent of there being a recession or no. Obviously, the volumes are impacted, but we are growing so much by gaining share, and the impact tends to be could be smaller. Let us not get into what could happen in the future, but it's a business that people still continue to sell and process payments. So what can vary a little bit is basically the growth rate, but no more than that. Where we've been more cautious is on the fintech services side of the business, on issuing credit.

We don't have yet a credit card in Argentina, and we have been more cautious throughout the fourth quarter, even before the elections, knowing that there could be an evaluation and there could be increased NPLs. That's why we were already more cautious towards the end of last year. Most of the volume growth you saw is coming from Mexico and Brazil and not from Argentina. Then we'll see what happens with the other fintech service products. What we're seeing today is an inflation that in Q4 and even today has peaked and is higher than it was. That is a further incentive. We have seen that for people to bring money from their bank into the MercadoPago account, which is currently remunerating 80% year-on-year, and it's a huge advantage versus 0% at most banks.

So we saw throughout the fourth quarter an increase in assets under management. You don't see that in total numbers because of the devaluation at the end of the year, but in local currency, we grew assets in our account by 6x year-over-year. So I would say that I'm comfortable with the impact we saw towards the end of last year. We cannot predict what we don't forecast what will happen in the future. And if I may complement, the credit business in Argentina continues to have the lowest NPL compared to all other markets, and it continues to be extremely profitable in terms of NIMAL, so.

Osvaldo Giménez (Fintech President)

Great. Thank you.

Operator (participant)

Thank you. One moment, please. Our next question comes on the line of Neha Agarwala of HSBC. Your line is open.

Neha Agarwala (Equity Analyst)

Hi. Thank you for taking my question. A quick one. I noticed that the ticket size for your credit card loans across the segments has been coming off. Is this a conscious decision, or is this just a trend based on the demand that you're seeing from your clients? And any color on the credit uptake in Mexico? What kind of products are working in Mexico? How is the response on the credit card? That would be very helpful. Thank you so much.

Martín de los Santos (CFO)

Let me start with the first part of the question and then take on the second one. The first one, I would say, with regards to the credit card loans, they have been falling. It has totally been a conscious decision. What we have been doing is reaching out to more consumers who did not have a credit card in the past with micro lines, what we say that it's typically 100 or 200 BRL lines, so it's really small lines. And also with what we call warranted cards, where we ask people to deposit 100 or 200 or 300 BRL in their account and offer a card that is warranted by that amount. So definitely, that has been part of our strategy in order to be, for many of these people, the first time they get a credit card. And with regards to you mentioned credit uptake in Mexico.

I would say that basically, we have been growing a lot. First, the credit card, which is the latest product we launched, and it has been a quite successful launch. And when you look at the combined volume we are loaning to consumers, adding the consumer loans to the credit cards, that business has also been growing nicely.

Neha Agarwala (Equity Analyst)

Just in terms of the asset quality trends that you are seeing in Mexico.

Martín de los Santos (CFO)

Sorry. Could you repeat the question, please?

Neha Agarwala (Equity Analyst)

Asset quality trends for both the consumer lending and the credit card book in Mexico. Is it better than Brazil? Has it been improving, or are you cautious there? Thank you.

Martín de los Santos (CFO)

No. It has remained fairly stable. The profitability has continued to be good.

Neha Agarwala (Equity Analyst)

Thank you so much.

Operator (participant)

Thank you. One moment, please. Our next question comes on the line of Marvin Fong of BTIG. Your line is open.

Marvin Fong (Director)

Excuse me. Did you say Marvin Fong? You cut out there. But thanks for taking my question. Too, if I may. So first, I think maybe touched on this earlier, but the fintech take rate, I think there was some compression there, part of which was related to financing costs. And I think in prior quarters, we had thought that perhaps the take rate would fall kind of in step with your funding costs. So are you seeing some spread compression there, and any thought about how you should think about that going forward? And then second question, just to touch again on the credit portfolio, the consumer loan balance fell a little bit quarter-over-quarter. So was that a function of what you were saying about Argentina and pausing there, or were there some currency issues or any kind of highlight there?

Is it sort of you're focusing more on credit card, and maybe the consumer book won't have as much growth for the time being? Thanks.

Martín de los Santos (CFO)

I would say on the fintech take rate, part of the impact is larger portion of our credit book coming from credit cards, which have the portion of those loans that are interest-bearing are lower than in the other kind of loans. That has some impact to that. Also, on the other part of the fintech business, when you look at our acquiring business, as we move into SMBs, they typically have a slightly lower take rate albeit with significantly larger volume. I would say those are two impacts that have had some impact on the overall take rate. And the second one you mentioned, if I got it right, was if there was an impact in the credit portfolio because of the Argentina devaluation, right? If that is the.

Marvin Fong (Director)

It's sort of a part of the question. I was just noticing the consumer loans kind of fell very slightly quarter-over-quarter. I was hypothesizing that perhaps there might be some currency impact, but just or was there something else behind that?

Martín de los Santos (CFO)

Yeah. There was some impact for two reasons. The first one is in the fourth quarter before the elections, we were more conservative in issuing credit in Argentina. The second one is more direct, which is the currency devaluation. Since we take the portfolios at the end of the quarter, the devaluation happened throughout December, and therefore, the loans portfolio we're showing in Argentina is devalued already.

Marvin Fong (Director)

Okay. Understood. Thanks so much.

Operator (participant)

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Martín de los Santos, CFO, for any closing remarks.

Martín de los Santos (CFO)

Well, thank you, everybody. As we mentioned, we are super excited with the result of the quarter, and we're closing a great 2023. We look forward to seeing you when we present results of Q1 of 2024. Thank you very much.

Operator (participant)

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.