Martin de los Santos: Hi, Maria. Thank you for your question. Yes, we have made significant progress in the 1P business throughout the year, and we feel that we are a much more sustainable footing today than we were 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-on-year in dollars and 85% in local currency, taking advantage of the obviously the peak season that we had 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. So one way to look at it is the more volume we have, the better we dilute the fixed cost of that business. So 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 area. 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: Ariel here, just to complement Martin. So 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. So we continue to be strategic in deciding which categories and products we serve with 1P while simultaneously optimizing our consolidated P&L. So 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. And the more confident we feel about that, the more confident, the more probability that we could scale in the future, and the bigger we get, the more benefits of scale we will capture, as Martin 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 big 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 relationships, and we’ll continue to work on that.
Maria Clara Infantozzi: Perfect. Very clear. Thank you.
Operator: Thank you. One moment, please. Our next question comes from the line of Trevor Young of Barclays. Your line is open.
Trevor Young: 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 GMB 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: 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 ad revenue penetration as percentage of GMB 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 GMB.
Martin de los Santos: Yes, and the successful item sold that you mentioned in Argentina is just like you said, we saw the first half of the year where items were flat year-on-year, mainly because of the recession that we faced in the first half of 2023. Then the second half was a government put more money in people’s pockets. We saw a pickup in volume, both in terms of GMB and item sold, which increased 12% in Q3 and accelerated to 21% in Q4. And that part of that is inflation, is like 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.
Trevor Young: Great. Thank you both.
Operator: Thank you. One moment, please. Our next question comes from the line of João Soares of Citi. Your line is open.
João Soares: Hi, thank you. Yes, just one more one question on my end. I just wanted to get, 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 rating 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 more on a year, we should see an increase in penetration of the 1P. So just want 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 increasing provisions. So I know it’s, 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.
Martin de los Santos: Thank you, João for your question. First of all, I will discuss a margin. Let me verify 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 those, 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 and we’ll 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, particularly behind the special events of Black Friday and Blue Wednesday. Furthermore, during Q4, we intensified certain investments, as Ari mentioned before, such as fulfillment, 1P, and free shipping. If you were to look at the sequential compressions of margins, we have roughly four and a half points of compressions in margins.
That compression comes mainly from 1P and shipping, which affects our cost of goods sold. In terms of our 1P business, two-thirds 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. And as you know, 1P has a different margin structure than 3P because almost 100% of the GMB is booked as revenues compared to just the take rate of the 3P business. So although there was pressure on the margin, the incremental negative impact on EBIT due to 1P was only $20 million during the Q [ph]. On the other hand, we generated more than $220 million incremental GMB from 1P, which resulted in market share gains of almost 10% of 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 seasons. It happened this quarter, and we expect this trend to revert back to normal the following quarters. And then finally, investments that we’re making, and we have been flagging over the last few quarters to the market, investments on a value proposition, which includes the launching of more fulfillment centers. We launched three. We implemented three new fulfillment centers this quarter. The increased adoption of Melimise, which resulted in higher levels of free shipping. We put all those together. That explains the compression that you see quarter-on-quarter.
Ariel Szarfsztejn: Let me add to that your question regarding credit portfolio and provisions. Throughout this year, we have been able to expand our credit portfolio and furthermore, gain share in credit cards. Despite that, we have been able to increase our net interest margin after losses and also decrease NPLs, which have pierced 30% for the first time in quite some time. Again, we don’t guide, but we are confident with how the credit business is evolving.
João Soares: Perfect. Thank you so much.
Operator: Thank you. One moment, please. Our next question comes from the line of Deepak Mathivanan of Wolfe Research. Your line is open.
Deepak Mathivanan: Hey, guys. Thanks for taking the questions. I apologize if this was asked already, but one big picture question and then one tactical one. 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 progress through the year? Then second one on competition, e-commerce players from China have cost pretty significant shifts and moved into the U.S. It is anticipated in several Latin 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: Hey, Deepak. How are you, it’s Ariel. In terms of logistics, I think we don’t guide and we don’t disclose future numbers in terms of performance, etcetera. But just to reiterate what I said and Martin 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 delivery. We will continue investing in slower delivery 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 processing 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.
