ICYMI: Latin America's E-Commerce Empire

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2:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. Hey, listen, we have been really lucky in checking in on the C-suite this week. And a lot of it has to do because so many companies around, certainly across the United States, but around the globe also reporting their results. Shares of Mercado Libre, they are actually trading up about 2.8 percent in today's session. They were lower in the pre-market, but certainly in the regular session, investors coming in. This is after the e-commerce firm posted earnings that missed estimates as the company ramps up marketing spending to recruit more users.

2:42Now, a move to lower the threshold for free shipping in Brazil, also crimping profitability. We'll get into that in just a moment. We'll point out analysts see strategic value in these initiatives, saying they will help shore up long-term growth, even as they weigh on margins for the time being. So let's get into the business. Time for our CFO briefing. With us is Martin de los Santos. He's CEO of the e-commerce firm Mercado Libre. He joins us from Montevideo, Uruguay. And he will be featured, we should point out, in the upcoming edition of the Bloomberg CFO Briefing Newsletter, which you can sign up for at Bloomberg.com slash CFO Briefing.

3:16Also with us is Nina Trentman. She's Bloomberg News senior editor who writes the Bloomberg CFO briefing newsletter. She's here in studio. Martine, great to have you here with Nina, Matt and myself. Talk to us about the quarter, because it does seem that investors, analysts weighing in, that the biggest question is on investments and what you are doing, how they will provide some future growth. But welcome. Welcome. them. Thank you for having me. How are you? Yes, we had a great quarter really in terms of the results that we delivered. Revenue grew by 34 % year on year. We delivered operating income, a record operating income of$825 million.

3:55But more important than that, we continue to grow our user base, both on our commerce and fintech platform. Our buyers on the commerce platform grew by 25 % year on year, on fintechs grew by 30%, credit book doubled year on year, GMB, which is the volume to extract it on MercadoLibre, grew by 29%. In Brazil, 32 % in Mexico. In both cases, we continue to gain market share. So very good, very strong operating metrics. And like you said, this particular quarter was a quarter of investments. We opened two new fulfillment centers to add to the more than 30 fulfillment centers that we have, throughout the region.

4:35We also made a big change in terms of lowering the free shipping threshold in Brazil, which is a strategic move that we have been doing for many years and it's paying off very nicely. And also we continue to invest in the credit card. But very excited not only about the results, but more important than that, about the future and the opportunity that we have ahead of us, both in commerce as well as fintech. You mentioned the threshold for free shipping in Brazil as one of the contributors, I think, to you missing estimates for net profit as well as core earnings. I'm just wondering, as a CFO of a fast-growing business, how do you think about profitability and how do you manage the short versus long-term?

5:17That's it. I mean, we talked about this, Nina. I remember talking to you a few quarters ago. That's it. We try to balance, right? We try to balance short-term profitability with the growth opportunities that we have ahead of us. So we want to make sure that we do not miss those opportunities. When you look at commerce, penetration of e-commerce in Latin America is roughly, you know, mid-team, so 15 % compared to maybe 25%, 30 % or 40 % even in China or in the US. So there's plenty of room to continue growing. On the fintech side of the business, the same thing happened. Most people in Latin America have not been financially included by the financial system.

5:53So we see a large opportunity to expand our footprint on the fintech side of the business and Mercado Parvo. So at the same time, to capture that opportunity requires investments. Some of those investments might put some short-term pressure. And I think this is a good example. When we lower the free shipping threshold, it does put pressure in the short term. But we have proven over time, and we've been doing this since 2017 when we introduced free shipping in Brazil. At that time, the free shipping threshold was 120 reais. We brought it down to 80, and now we brought it down to 20. So we have proven all the time that by lowering the free shipping threshold, we eliminate the most frictional point in terms of buying things online for people.

6:40So we're eliminating that friction, really generates a lot more volume. And then eventually that translates into profit. So I think it's a strategy that has paid out to us. And the long-term investors of MercadoLibre understand it. And we're very comfortable with the investments that we're doing. You mentioned Brazil. it's of course an interesting market just in the current tariff debates that we're seeing with the Brazilian government so far holding out to Trump and basically not giving in on the Trump tariff suggestions for Brazil just wondering how far you're seeing that play out in terms of consumer confidence and consumer spending, are you seeing any impacts in countries like Brazil I know you're also doing business in Mexico and in other countries countries, all of which will face higher tariffs as part of the US renegotiation of tariffs around the world.

7:34Yes, Nina, this is something that we are monitoring closely. Obviously, we do not export into the US, so there's no direct impact on our business, but it can have secondary effects on the economy, as you mentioned. We have not seen that so far, as I mentioned earlier, we are growing by 29 % of GMB in Brazil. asset management, which is the amount of money invested, of our users invest in MercadoLibre, more than doubled in Brazil year on year. Our credit card book has grown by 118%. The profitability of the asset quality of our credit book continues to be very solid in Brazil. So we have not seen any, you know, any deterioration on macro or consumption, but obviously it's something that we are monitoring closely.

8:18Martin Buendia, Matt Miller here in the studio with the ladies. I was really blown away by the growth at Mercado Credito. And I wonder if you're watching closely for signs of credit stress there, because I think you had like 90 % growth. That's correct. That's correct. Thank you for your question. Yeah, obviously, when we look at credit, we take it very seriously. We are very careful in the way we manage credit. By the way, I used to run the credit business before taking the position of CFO. So the first thing we look at is the health of our book. We saw that NPLs, and we disclosed this number, are the lowest record, lowest number since we've been disclosing the metric.

9:00The NIMAL, which is the measure of profitability, is also improving quarter on quarter. So we see very healthy signs in terms of our book and in terms of our profitability. So the reason why you're seeing 91 % growth in our credit book is because we are seeing of our models, predicting default rates, and the quality of our credit book continues to be very healthy. If we did see something different, we will slow down because we are very cautious with the way we manage our credit business. We are talking with Martin de los Santos. He's the CFO of Mercado Libre, joining us from Uruguay. We should also point out that this is the largest company, we should point, Latin America's most valuable company if you think about market cap.

9:47So really significant. We were talking about fintech and, you know, you were talking about kind of the health of that portfolio. But what can you tell us more, Martine, when it comes to the mix of customers that are in that portfolio? I think what we're seeing is we're seeing all the different type of customers within the economic segments of the populations. Keep in mind that we acquire most of our users, most of our credit users, from the marketplace and all types of people using our marketplace. So we have the advantage of having the distribution of MercadoLibre, but also the buying information that those people have on our marketplace.

10:28And we use that information through AI and machine learning models to score people. And we have models that are very accurate at predicting credit risk. So you will find people of all kinds of social levels within our ecosystems. Like half of the people that we offer credit to, we offer credit for the first time. They never had access to credit. But also the other half are people that are probably moving their fintech business to us because we offer a much better user experience than the traditional banks. Martin, one question in terms of earnings. I noted that you also pointed out the impact of the Argentine peso on your results.

11:08Of course, we've seen Javier Malay make various changes in Argentina in recent months, including making changes to the country's currency, which has resulted in basically the spread between the official and unofficial rate falling apart. Just wondering how that's impacting your business, and specifically also are you changing your hedging strategy for Argentina? Yeah, I think the headline for Argentina is that we continue to see a big recovery. I mean, unique buyers in Argentina grew by 30 % year on year. Our GMB grew by 75 % in local currency or 35 % in dollars. The items sold in the platform grew by 46%.

11:50So very strong recovery as we see inflation coming down, consumption improving. And also, as you mentioned, the FX market being normalized also helps our business. They opened the economy, so we're bringing more products from the US into Argentina as well. So most of the businesses are performing extremely well in Argentina, and we're very happy with the way things are going for our business there. You mentioned, Martin, you ran credit before at Mercado Libre. You ran also strategy at Intuit, and you were at Bain before that, so you know strategy up and down. I want to know about your strategy regarding ad revenue, because it was also surged.

12:30like up 38%. Is that a profit center for you, a future profit center? Or do you view that more as a tool to drive your core marketplace growth? Yeah, advertising business is roughly a$1 billion business. It's growing up 38%, as you mentioned. And it's a profit business for the company, but it has tremendous potential going forward. If you look at the number of people interacting with our ecosystem, last year we had more than 100 million people buying on MercadoLibre. We have 68 million monthly active users of our fintech platform. So in terms of the number of eyeballs within Latin America, we are the third largest pan-regional platform.

13:11And that gives us a great opportunity to continue distributing advertising. We also can leverage all the first-party information that we have on our users in order to target marketing campaigns. So we see a big, big, very large opportunity. I think there's more future than past in advertising business. We're just getting started. But as you mentioned, we have been growing very rapidly for the past several years. There's plenty of growth going forward. Martin, just got about 20 seconds. We always like to, when we've got lucky enough to have someone like yourself, a global CEO, how would you describe the global outlook?

13:45And just quickly. Yeah, I think, well, obviously we operate in Latin America. And, you know, depending on the country, some countries have some tough micro situations and some others might be in a better condition. We're talking about Argentina recovering. But at the end of the day, I think in our business in particular, the trend of people moving online is so much stronger than macro that we have plenty of opportunities ahead of us. And the same thing on fintech, right? Where we're operating in America where penetration of fintech products is very, very low. Right. We play a big role in terms of generating financial inclusion throughout the region.

14:22So we are very optimistic about macro at least on our region. So glad we could get some time with you. Martin De Los Santos, CEO of Mercado Libre, CFO, excuse me, of Mercado Libre. Gave him a little bit of a promotion. And Nina Tretman, thank you. When you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, risk can affect multiple parts of the organization at once, from property and liability to cyber and regulatory challenges. At that level, managing risk becomes an ongoing discipline. At the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive.

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