Magazine Luiza SA

BOVESPA:MGLU3

Earnings Call Transcript

[Operator]

[Foreign Language] [Operator Instructions]

Good morning, everyone. Thank you for waiting. Welcome to Magalu's conference call to discuss our quarterly results.

This event is being recorded and will be made available at the company's IR website at ri.magazineluiza.com.br, where you will all find company's release and presentation, both in Portuguese and English. The English presentation link is available in the chat.

I now would like to give the floor to Fred Trajano, Magalu's CEO. Please, Fred, the floor is yours.

[Frederico Rodrigues, executive]

Good afternoon, everyone. Thank you -- actually, good morning. Thank you very much for being here with us in our earnings call for the third quarter of 2022. I believe that -- this is a result, and we are going to go into the details here in this call. It shows a significant evolution of our numbers, both absolute numbers as well as relative numbers.

Although the company and the e-commerce and retail and general industry are going through a challenging moment in the macro scenario and micro as well in Brazil and in the world. I think that to start the call, I would like to take a step back. And I focused on that in the second quarter, but we still see this phenomenon in this quarter.

This is a Brazilian and world scenario in which we see a generalized drop in the top line of the e-commerce and tech companies in the quarters that are being reported by Brazilian companies and also companies from abroad. And that is because in my understanding, the standardization growth process for e-commerce. And this is a growth that is becoming a standard. It's normalizing.

There was a drop this year, but we see that the levels at which this growth will stabilize and also the penetration rate. These are levels that are significantly higher than the pre-pandemic level. And when this normalization is concluded, and I believe that in the fourth quarter of this year, we will see a stabilization of this drop because of the very high growth in the COVID years. And after that, I believe we will see a normal trend. I think that the market cannot bet at that we'll have a more analog future and less digital one. That's not going to happen, I think.

So we have a snapshot here for 2022. I think we had boosted growth in 2021 because of the COVID years. And from now on, I believe, starting in the fourth quarter and especially next year, I believe we will have a standard growth e-commerce and digital means. We will continue growing more than the analog means, and we will see that as a normalized curve. So it's important to understand the market as a whole film, as a whole movie and not a picture, and I think these figures speak to my understanding.

We did have a drop in the e-commerce market in Brazil. It went down 10% in this third quarter. but Magalu has grown, and it has grown in all the channels, specifically in the online channels. We had a total growth of 2%. I think this is a figure that should be celebrated because most players in this segment, in this industry, had a hard time with lower losses, and we did have growth.

So if we look at that 3 years ago, we had double numbers that what we had in 3Q '19, BRL 14 billion. In 2019, BRL 6 billion, and this is a CAGR of 28% of these 3 years. That's an average annual growth. And this growth was allowed even with a significant increase in margin. We transferred freight prices. We transferred also merchandise prices increase, the gross margin we transfer take rate to sellers. We reduced the delivery frequency.

So a number of efficiency measures and margin increase measures and proving that we were able to serve that very well and move towards monetization and improving 50% our operating margin. In this quarter, we improved 50% when compared to the same adjusted margin of last year. And the accounting amount is over 100% of the improvement, but in the adjusted margin, which is the fair comparison was 50% better. The operating profit of the company posted growth, and we increased better results in all the channels, 1P brick-and-mortar stores and marketplace. So to post this type of growth in a dropping market with a significant margin gain which we had showed that, that shows that the company is walking the talk, working on the monetization side and very carefully to keep on gaining market share.

I would like to highlight the results for our brick-and-mortar stores. Initially, we expected that the World Cup effect would already have a positive effect in the third quarter. But because of the elections and a number of other issues, this World Cup effect was then concentrated in the fourth quarter, and we can talk more about that later on. We have seen that starting in October and November, we have a strong concentration of the World Cup effect, and that is going to favor our growth in our fourth quarter for brick-and-mortar stores.

But even without this World Cup effect, in the third quarter, we were able to grow 1%, and we had a significant gain of market share as well. So I think this is good news. We grew without the World Cup effect. And remember that the BRL 600 million relief was just paid after August. So usually, people pay their bills and then they start purchasing. So we already have the effects of August and September in this quarter. And for the fourth quarter on, we will have a full effect. So this is a very positive performance, considering that the World Cup is concentrating in the fourth quarter and most of this relief spending should be concentrating on the fourth quarter, and we are already at the 45 days in the fourth quarter, and they are very positive considering what we are already seeing and what we expect to happen by the end of the quarter. Fabricio and all the Executive Board are -- officers are here. And Fabricio can also take any questions that you might have on the Q&A on this.

And on the next slide, we have our e-commerce highlights. In the CAGR of 3 years, we were up 46%. We tripled our e-commerce from the pre-pandemic from 2019 up to now, even having an underperforming market, we grew 3%, and we had a significant market share gain in the Brazilian market. And again, even with everything that we considered, we had to review the total payment terms, charge freight and a number of changing -- changes, repricing. So even then, we were able to grow and that was thanks to all the companies in the group and the controlling company as well.

And I would like to show you that in order to Magalu -- to have Magalu growing, we had a challenge because in the last 3 years, we grew a lot above the market. And in the third quarter of '19, we grew 36% and the market grew 39%. In 2020, we grew 148%. The market, 82%. And last year, 15% against 22%. So our quarterly base is worth in the market. And even then we had 14 percentage points higher than the market. So that proves that Magalu has a better performance.

If we go back 8 years, we are gaining market share. And now we are going back to posting growth of operating margins. And that has always been Magalu results, except for the past year because of the adjustments that we already discussed in the last call, I really wanted to stress that. And I also would like to highlight the growth of our marketplace with the main highlight to the 3-year growth.

The marketplace, they had a base of comparison that was very significant. And it was from the prior year, it was much higher than the 1P. In our discussions with analysts and investors, we had already mentioned that we would have a very difficult comp for 3P because of the growth of over 67% that we had posted in the last year while 1P had already gone down in the third quarter of last year.

Even then, our CAGR is slightly higher than the average of other quarters, growing 61% vis-a-vis the pre-pandemic levels, increasing our sales and marketplace 4x and proving the assertiveness of our strategy. And then we'll break that down. You will see that the growth of the marketplace was heterogeneous. That means that smaller sellers and sellers of new categories grew significantly more than larger sellers and also sellers of nontraditional categories or -- sorry, of traditional categories.

So in the next slide, you see the average growth of marketplace in Magalu. You see that in 3P, we are growing more than the market consistently. So here, we do have a good perspective, and that is thanks to our share gain work. And we launched that 3 to 4 years ago, and we have a consistent work here of gaining market share.

Now talking about the heterogeneous growth. The performance for new categories was 40 percentage points better than the traditional categories. So what does that mean? Our 3P dropped in the traditional categories which were more than offset by the new categories, and that is the company's strategy of diversification. I'm not saying that it is good to have a drop in traditional categories, but this is seasonal.

These traditional categories went very well in the pandemic period, people wanted to buy durable goods in the pandemic years, so that was a very high base. A lot of them purchased ahead of time, and that ended up generating a difficult comparison base, but I see that in the future, the traditional categories penetration in Brazil, they are still how they will keep on growing, but the company's strategy is to increase the share of new categories in our business. And once again, we are here walking the talk. We are following our strategy. And I think that those 40 PP between these performances really proves that this is what we are implementing in our strategy.

Now to make things more tangible and Eduardo Galanternick can later on go into the details here on the Q&A. Our marketplace leaves from a base that is very strong. It's of larger sellers. Magalu is a leader for many sellers that sell directly Whirlpool, Electrolux and Nike. So a lot of Brazilian brands have and Magazine Luiza, one of the main sales channels with a significant market share in 3P for sellers.

And we are working for hyper local sellers, analog sellers with Parceiro Magalu that we launched in the pandemic. This is an amazing job that we are done -- we are doing. We have great numbers, promising numbers. But I want to make it clear that we also are working strongly on a great opportunity for market share gain for medium sellers. These are digital sellers. They are already selling in the market, and we have a great possibility here to gain market share with them, very much focused and harvesting the fruits of our work and our dedication in logistics.

And I would like to highlight our Magalu Entregas, the logistics arm with our fulfillment that we launched in our third quarter. We already have 500 sellers in the fulfillment. We have great indicators already. The area is available in all the DCs of the company. So I do believe that we will improve our delivery time and our logistics. We will have an opportunity to grow in the 3 sellers segments, maintaining leaders in the medium sellers and gaining share in the medium seller, maintaining our leadership with large sellers, also bringing in more in the hyperlocal mode.

Now we have once again significantly increased our seller space. In the last quarter, we reached 236,000 sellers with a lot of help from the stores ramping efforts, and we are attracting sellers that want to use our digital channels. And not only they sell Magalu, but they can also sell KaBuM!, Netshoes, they can sell throughout all our company assets, all our company's channels. And we had a significant growth in the number of ads, 81 million ads here in our platform. We are still growing today. It is impossible to look for something in Magalu and not find it.

We launched -- and I'll talk more about that. We launched a campaign that's called Look For It in Magalu, and that will provide us more visibility. We are sponsoring the World Cup, and we will focus our communication there, both for Black Friday to sell, but also to show everything that you can find in our platforms. You will not find here forfeited products or products that are not legally in the country, but everything else you will find here.

But now I want to talk about something else. What is special about Magalu is the human want. And we are bringing that to the marketplace. We are close to sellers. We are visiting sellers frequently. We have a corporate value here, which is just going face to face. And we developed the Caravan Magalu, we have visited a number of cities throughout Brazil and better understanding the different realities and challenges of local retailers in each one of these towns that we have visited.

We were in cities in the Southeast, and cities in the Northeast and our last caravan was in Recife. There was an event in which we had the participation of over 1,000 sellers. There is a lot of content, a lot of training involved. We're changing mindset, our focus is to switch these sellers from analog to digital analog. So we have 6 million sellers in Brazil, and only a minority of them sell online. So do not bet that Brazil's future is going to be analog. It's not going to be -- it's going to be digital, and Magalu will be there helping a lot of these companies in this digitization process.

And something else I would like to mention is that this strategy, which is that the base of the pyramid that I described is allowing us to bring in sellers from new geographies. Most geographies, most platforms that we see in Brazil today, 70% of them have sellers from the Southeast. But with our strategy, we are bringing in sellers from different regions. You can see here the onboarding by the stores and the onboarding by digital. You can see the concentration of sellers in Sao Paulo is much lower.

We have more sellers in the Northeast, 20% doubled than the digital onboarding. So we have sellers in the Midwest and in the North regions. So we are decentralizing that, and it does help us also in the carbon footprint. The less we have merchandising moving around. And most of the Northeast clients that buy online, they would end up receiving merchandise from the Southeast. So there's too much traveling of merchandise and generating an unneeded carbon footprint. It's not only cost.

And with Magalu Partner, Parceiro Magalu, we have an avenue of growth. I said that the nontraditional categories are growing 40 points more than traditional categories and also the smaller sellers are growing more than larger sellers. We are growing 70 percentage points higher in smaller sellers when compared to larger or bigger sellers showing the assertiveness of our platform.

These small sellers had a lot of help, a lot of subsidies this year. We still want to help them when we are moving them to -- from 1P to 3P in some cases, but our strategy is based on this pyramid and the base of the pyramid and the middle of the pyramid. And the numbers of the company are proving the strategy is right. So once again, we have to see these 3P numbers as a movie as something in movement because durables and major sellers do have an effect on the comparison basis for last year. But specifically analyzing these numbers, you can see that the company is moving forward with a very positive approach, as I have already said.

I would like to highlight the importance of stores as a crucial point for these smaller stores, over 519 stores are Magalu agencies. We have over 56,000 sellers using these Magalu agencies. They used to use the post office and now they use Magalu's ecosystem. We use the stores as agencies -- as branches rather than the post office branches. So this is a competitive advantage.

When sellers choose the store and not the post office, they are reducing 50% or significantly, they reduce the delivery time and also, they're reducing 50% the cost of freight. That's a better option using a network that's already supplying the stores. And we have 1,000 stores with 3P pickup with everything that you sell in Magalu and Magalu can go to the store, probably in 1P that's much higher. And I would like to highlight KaBuM!, we added pickup store in the store for KaBuM! 2 months ago, and 10% of everything that we sell, KaBuM! is already picked up. KaBuM! is showing the importance of this multichannel process.

Also, we have our fulfillment that deserves another highlight. We launched that in the last quarter, we went from 32 sellers in July to 500. We are significantly increasing the number of sellers and enable DCs, the idea is that all our DCs can have a fulfillment operation. And the beauty of our model, and I would like to stress it to you that the DCs are already there. The room is already there, the space and the operation and the sellers' inventory is fully shared with 1P.

So there is a synergy and a gain that are significant with a marginal cost because I'm already paying for the rent for the DC. We have the teams working at the DC. We have the trucks leaving the DCs and going out for delivery. So to run an integrated operation between 1P and 3P is a major competitive advantage for this company. And it will allow us not only to have better delivery time, 20% of orders that are in fulfillment are delivered in 1 day. That's going to help a lot our promise delivered times, and also at a much lower cost.

So once again, this operation for us helps us in and it has a marginal cost only because the fixed costs are already there. So this is a huge synergy. This was the differential of our 1P, and it will use the synergy with 3P. I have a quick video that I would like to show you not only about fulfillment, but of this logistic operation the Magalu -- Agency Magalu delivers, we acquired over 4 logistics companies. We integrated them in our Magalu delivery platform. And now we have logistics for 3P that is very broad and really it is bringing in sellers and consumers. So I would like you to watch this video very quickly, and we'll come back to our presentation.

[Presentation]

[Frederico Rodrigues, executive]

Well, I think this video is self-explanatory. It shows the case of small seller, a medium seller and a large seller and the different types of delivery that we have in our logistics. That's part of Magalu delivery menu. So we went from 28% of delivering D+2 to 41% and D+2 80% of 3P deliveries. Go through Magalu Entregas and I think we have a long way to go in here. The same figure for the 1% for 1P is 81% of orders delivered in up to 48 hours.

I think we can increase this number from 3P to get to figures similar to 1P. And I think this is going to be our rollout mission. The platform is developed. We are working on the DCs with fulfillment, and we are confident that we will have even better results. But we already have a significant suite here for sellers, which was basically developed this year -- last 1.5 years. So these are significant figures for 1.5 year of existence proving that we have reasons to be optimistic about the impact that this will have in the future. So we expect to have more growth, not necessarily investing in marketing. So this is a positive and healthy organic growth for the operation.

Now we can turn to the next slide. I would like to highlight one of the things. And I think Roberto will talk about that in his presentation as well. We have two additional monetization avenues. One of them is already happening, which is Magalu. As we have 1,500 sellers and this platform, we now have the self-hiring the self-contracting platform. So you have ads now in Magalu Search that increases the conversion to sell.

We are improving this platform for sellers. It's totally integrated in the seller portal. And also, the level of potential exposure of these ads in Magalu platform and the ads will be multi-platform. So you will be able to have ads in KaBuM! and Netshoes and all the other channels. This is what we are working on. We are very excited and Magalu is one of the top 10 overall in Brazil, not only e-commerce. I think we have 500 million sessions a month. It's very significant if we consider our media assets. And so this is one strength.

We have a robust platform, and this came from Inloco Media that we acquired in the past. It's already bearing fruits for the company, but it will help us monetize and improve the results of our marketplace from now on. And that's going to help our sellers to sell more as well.

So I think one good thing about the ads is that with the changes of the general protection data law, it's going to be difficult to have returns in the traditional media platforms. And I think the main growth of advertising in the digital world will be in the sales channels, in the e-commerce channel. So I do see this path as being a very -- a promising one, and I think we'll have great surprises here, both for sellers and investors.

I would like to highlight strongly the results of our acquired companies. I already talked about Inloco Media in advertisement and all the companies we acquired and logistics, but I would like to talk about the ones that are customer facing in our acquisitions. Netshoes in the quarter had a GMV of BRL 1 billion and had another quarter of net income, even with all the problems in the e-commerce, several e-commerce companies all over the world posted losses but Netshoes posted a positive result.

In our ecosystem, we have the fashion world as well with a 45% growth marketplace at Magalu, and 6% of that already has a participation in 3P. We have 1P. We have already our private label and Zattini. So we increased the 3P share in the category over 40,000 sellers for fashion. And also, Epoca Cosmetics deserves a significant highlight. We have over 1 million users on that app. Epoca is one of the leaders, if not the leader in the online market in Brazil this year, a growth of 52% in the marketplace. All our partners have their own channels, but 100% of the SKUs are available in the super app of Magalu. We keep the channel because it has a large organic access. Some people like to buy in the expert e-commerce, but 100% of their SKUs are also available in Magalu's SuperApp. We have a full integration of the catalog.

I also think KaBuM! deserves another highlight, BRL 1 billion of GMV in the third quarter, BRL 48 million of profit -- net profit, a company that is growing even. It is growing in an area that tends to grow even more. If we look ahead, we are in the beginning of the integration. I talked about KaBuM!'s integration. They already use Magalu deliveries. And now with stock pick up 10% of their orders are picked up at Magalu stores. These are customers that did not buy a Magalu before. This is positive.

And also, AiQFome, a great job there, BRL 1.4 billion of annualized GMV. This is already the second delivery app in Brazil. We improved our footprint in Brazilian cities. We are there in 820 Brazilian cities. So an interesting growth for this quarter. So all this ecosystem obviously is integrated and Magalu even AiQFome. All cities that have AiQFome are integrated in Magalu SuperApp. We now have a very positive perspective for the fourth quarter, more than a perspective. This is already a reality.

We have the sponsorship of the World Cup, and a lot of the media impact will come. Now we'll start to come this week with the beginning of the games in the next week, next week and not just the upcoming one. And we'll use all this exposure to talk about the new categories and to attract hits for categories where people do not have Magalu as their first choice. We want to show the 70% -- 77% of hits are not for core categories, but we want to increase that to increase conversion, and we have an additional campaign at Magalu that will be rolling out now for the World Cup.

Of course, also working with Black Friday, and we have the communication, the retail communication to deliver sales in November. We are running our Black Friday throughout the whole month, and we are using that. We are seizing that to develop our branding, our awareness in these categories so that we can bring in flow for the sellers that are coming into Magalu now.

Now I would like to turn to Beto for the financial highlights, and then we'll have our Q&A.

[Roberto Rodrigues, executive]

Good morning, everyone. Thank you very much for being with us in this conference call. I would like to start with the main financial highlights. Fred already talked about growth sales in all channels, our total sales in the year over BRL 14 billion total sales, gross margin of almost 28%, growing over 3 percentage points vis-a-vis last year.

EBITDA going to 6%, and also 50% when compared to the same quarter of last year and a negative adjusted net income affected by results that we will be commenting shortly in the next slide. We see the EBITDA quarterly performance, and it makes it clear the consistency in this performance starting the end of last year that every quarter, we are improving our EBITDA margin. In general, we gained almost 2 percentage points.

And with a highlight to gross margin. And the gross margin, we had pricing adjustments and interest rates adjustments that has helped in the merchandise margins. But the main highlight of the margin -- the gross margin is the increase of our services revenue and especially commissions and take rates on marketplace, which have contribution to gross margin of 100% because that is a pure revenue coming from services.

And it's important to highlight here that we were able to increase, to grow marketplace, increasing take rate and revenue, as we said since the beginning of the year, and thanks to our adjustments in our freight policy and receivables policy. All of that has contributed to the total take rate and also for the total profitability of the marketplace this year, especially in this quarter, which is much better than what was last year.

And in addition to the gross margin performance in this quarter, we also had our lower SG&A level in the year. Our total SG&A went back to 21%. We are at 21.8% in this quarter, also improving consistently in all our operating expenses, logistics, marketing, fixed expenses, headcount, leases and so on. So a consistent work aiming that improvement in the operating margin.

In the next slide, another important highlight in our results. Once again, we have generated operating cash that was very special, over BRL 300 million in operating cash generation and a total net cash position and investments and receivables of BRL 9 billion -- over BRL 9 billion, a net cash position of almost BRL 2 billion. So once again, a great consistency, and this is one of the best capital structures in our segment.

In the next slide, we show this performance, we had BRL 9 billion in cash in June. We generated BRL 300 million of cash flow from operating activities. We invested almost BRL 200 million. We paid interest almost BRL 200 million. And we had that BRL 100 million in KaBuM! extending the capital structure of KaBuM!, reducing the financial costs, and then we got to the total cash of BRL 9 billion.

And the next slide, we have details on our financial expenses. The CDI went from 2% to almost 14% in these last quarters, our financial expenses went from 2% to the levels of 5% to 6% in the last quarters. But here, we have listed a number of actions that we are taking to reduce our financial expenses and despite of the SELIC rate increase first and very important, is the continuous improvement of our working capital with another quarter in which we improved the working capital in this quarter, specifically we increased the inventory levels to prepare for the World Cup.

So here, we have to take that into consideration. We are leaders in TV sales in Brazil. So we have great expectation in TV set sales. And as Fred said, it already started. We had inventories ready in September to sell now in this quarter. And at the same time, the World Cup is a special occasion, and we negotiated the purchases of the World Cup with a longer payment terms. And therefore, we were able to increase the average purchasing time in our suppliers' balance generating cash and therefore, also posting a balanced relation here with -- between inventory and suppliers balance. Now moving forward, we are in the better -- in the best quarter for sales and also the seasonality of our working capital.

And after Black Friday and the World Cup, we will go back to have lower level of inventories just like what we have been doing since the beginning of the year and improving our working capital up to the end of the year and generating cash from this working capital. In addition to the working capital, we also increased our PIX sales over the quarters, especially PIX and cash sales and reaching almost 30% in average for Magalu. And remember that KaBuM! is already selling over 40% via PIX and that is increasing in all the channels. And therefore, we also reduced the need of discounting receivables. We also reduced the average term of sales.

In the prior year, we had 16 months, and now we have less than 10 months for that type of sales that reduces the average cost of receivables prepayment. And we also increased the interest-bearing sales on the Luiza Card and third-party cards. Customers can buy in 24 installments, pay in low interest rates, extending payment and reducing the amount of the installment payments. So a number of actions to mitigate the SELIC rate level.

On the next slide, Luizacred. We now have over 7 million credit card accounts. Since the beginning of the year, we reduced the approval of new cards because of the increase in delinquency that we see in the market as a whole. Remember that last year, we went from 5 million to 7 million. So we increased our base. And this has been helping us the increase our revenue. You see the total TPV of our credit cards reached BRL 13.5 billion, growing 24%.

So this is thanks to new customers that are buying more increasing -- purchasing frequency and also become more loyal to our cards. And we include here also the Magalu Card, which was launched last year. We have BRL 20 billion in our portfolio. That's a record, one of the largest credit card operations in Brazil.

Now turning to the next slide. Before I talk about it, let me talk about delinquency. One of the best ways to reduce delinquency is to sell to best customers and to preapproved customers. And here, we have a recent delivery from our fintech, which is very nice. This is a new experience for Magalu cards customers. It's in the SuperApp for preapproved clients. So the approval rate here is 80% to 90%. And we are approaching these preapproved customers only while they are navigating the app.

So you can see a quick video of that experience. One, the customer is at the checkout or navigating in our app, we offer Magalu's card. The customer can request the card in a very fast and quick way just confirming by data and taking a selfie of himself or herself. And the credit card is approved right there, and they can already use this credit card for that first purchase and then they will receive the physical card in their homes. So this is a wonderful experience for preapproved clients, and we are growing our Magalu card sales for these preapproved clients.

On the next slide, we have the standardization of our delinquency rates. Remember that we have one of the lower delinquency levels in the market because we have all the database and Itau's experience. And also Magalu's customers is core to improve the approval rate. In addition to that, we also have efforts from stores in the collection process. The current level is at 9% of our NPL, is in line with both pandemic.

So last year, because of all the relief that we had during the pandemic, it was already expected this normalization, we are going back to an all-time level. So here, we have part of this normalization process. And also we have a little bit of the growth pains that we had last year.

And to the right, we have Luizacred results. Luizacred in the last 4 quarters has posted results that are very close to breakeven. We should mention that in this quarter, it reached for the first time -- if we add financial revenue and services revenue, it added up to over BRL 1 billion in revenue. So we are working to increase revenue to diversify revenue.

We launched several products this year and also deductible loan. So the Luizacred revenue growth this quarter was wonderful. It's not reflected though in the bottom line because of this normalization process of our delinquency. And also, a little bit because of the CDI because that affects the funding cost of Luizacred. And when all that get back to normal, we believe that Luizacred will go back to its normal levels of profitability also.

Then we talk about fintech. And here, we have the TPV in our platforms, over BRL 22 billion of TPV increasing 20% when compared to last year in all the channels and bank as a service and our digital account and Magalu Payments and also Luiza Card and Magalu Card.

And to conclude another slide, we show another very nice delivery from our fintech. In the past 2 months, we encouraged the migration of our sellers, and also, we encouraged them to open digital accounts in Magalu, totally free of charge, unlimited PIX and sellers will get 1% of cash back on all expenses where they use the card. So in a few months, we have 10,000 sellers receiving all their sales in our marketplace via our digital account, the digital account that we have in our platform. And with that account, they can run a number of payments.

We have loans. We have the credit card machine. We have the corporate credit card that we are also implementing. So a number of financial services for that seller that they can use and therefore, grow with us. These were the main messages that we have on the financial side. So now we will open the Q&A session. We will now start the first quarter.

[Operator]

[Foreign Language]

[Operator Instructions] Our first question is from Thiago Macruz, Itau BBA.

[Thiago Macruz, analyst]

And I would like to understand your commercial dynamics. And here, I'm talking more about brick-and-mortar stores and it looks like you have improved your dynamics. You have a straight -- you have improved also the relationship with suppliers, and this has been reflected in their cash flow. I would like to understand if that makes sense. If you can give us an update on that, I think it would be great for us.

[Frederico Rodrigues, executive]

Thiago, thank you very much for your question. I will turn to Fabricio. But I would like to comment on a few topics before. We have a historical relationship with suppliers that's very good and our philosophy at Magalu is win, win, win the supplier, the company and the customer, all of them have to win. And this is something nice and we are bringing that to sellers as well and that's how we work.

Of course, that when you are in the process to reduce inventory, this is always good when you are growing, increasing volume in a growth process. And that is what we are recovering right now. So it's much easier to be talking to them this year than it was in the same period of last year when we were in a process of reducing and rebalancing our inventory levels. But right now, we are at a very positive moment. And I will turn to Fabricio so that he can give you more color about this moment.

[Fabrício Garcia, executive]

Thank you for your question. This is Fabricio. As Fred said, we spent the first half of the year adjusting inventory levels. And when you adjust that, you decrease volume and you stress the relationship, but we are the first one with all the players. So we always had a good relationship with them. We have a win-win relationship when we developed the plan for the second half of the year, very consistent, well-done planning. And I think that allows suppliers to be confident and improves our relationship even more.

In the last quarter, we are experimenting, and we are seeing a good sales volume. We know that in our business to have the product available at the right time is crucial and that is making a lot of difference right now. And we are working very well with all suppliers. We had a great planning and the positive is positive, not only for the World Cup in TV, but also in all categories.

[Operator]

Our next question is from Luiz Guanais from BTG.

[Luiz Guanais, analyst]

Fred, Beto and Fabricio. Two questions on our side. I think the first one, Fred, is that if you can comment on the performance of the average ticket, especially of Magalu Partner sellers. What can we expect for the next quarters as you increase the density in the regions that you mentioned? And the second question if you can comment if you have room to increase prices for 2023, how do you expect that relationship to work, especially in the second quarter with an economy that is probably going to be challenging?

[Frederico Rodrigues, executive]

Thank you. Luiz, thank you for your question, and good morning. I can still say good morning. I will start by your second question, and Edu will elaborate more on the average ticket question. I already added some information. We have -- we are growing. So second question is about price. I think when you talk about price, that always depends on what the market is doing, if I want to lower or increase prices by myself, okay, if I want to lower prices by myself, I can do it, but to increase prices, I cannot do it by myself.

What happened this year is that I think that we have seen a price balancing that was very reasonable. I don't see anything that might change even in the tax framework for next year, I don't see a real need to increase prices, but what we need is operating leverage by increasing sales volume. In the case of Magalu, we wanted to gain share, and you saw that we were able to increase prices gaining share. We were able to increase prices, gaining share because we have a service level that is above the average, and we have a brand that consumers like and respect a lot.

So I think this was very positive, and that's why I highlighted our growth in our market that is underperforming. I think this shows that the company does not need to sell at a lower price to grow or to really attract the clients. I do not see the need of having prices increase next year. And what I see -- what I expected for the fourth quarter, we are already seeing, which is to increase sales volume, to increase the daily level of sales in all the channels. I think this is the trend that we see. We are coming from a reduced consumption.

We have now 2 more months of the relief we are going to the third and fourth months. So probably it will be maintained. We have the World Cup in this quarter, which is very positive. It's concentrated now in the fourth quarter. As I said, I expected some of that in the third quarter, but it's all concentrated in the fourth quarter. We have positive trends and not everything needs to be addressed with price. And now about average ticket, it saw a mix, but we'll elaborate more on that.

[Eduardo Galanternick, executive]

Luiz, thank you for your question. So all our strategy for Magalu Partner is to bring in sellers that are not here yet. So this is very important. First, geography. So we are leaving the larger metro areas. And now we are going to smaller sellers. And for the first time, many of these sellers are selling via Internet. And also, assortment, most of the sellers in Magalu Partner on categories that are not our core categories. And that's why the average ticket is lower than the traditional categories.

And a lower ticket -- for a lower ticket, we need a partner so that we can have the profitability and that's the idea for the partner. And as Fred said, today, the Magalu Partner is already important for us on our side, we are even more important for them because that's the first time that they are selling online, and they are being the driver of our growth. As Fred mentioned, we have 70 points difference between the Magalu Partner and also, the traditional seller.

This is a strategy in which we trust a lot that we have a larger -- the large sellers already has a demand, a small one provides us a differential. And we have the middle one that will benefit from the fulfillment structure and the logistics structure. So we have today a platform that can cater to all types of sellers, each one with their own particular characteristic.

Just adding to that, something that I would like to stress is that we want to reduce the average ticket and to increase sales in new categories. But in these categories not really selling the bottom ticket of the category. So what do I mean by that? Magalu is a company in which consumers trust to buy brand products, products that have a higher ticket.

We have credit options, payment options. So the unit economics of these categories for larger categories is better. And what do I mean by that? Low ticket of BRL 20 to BRL 30 for the economics is not good. Even in the hyper local, it's not that easy to have profitability, good margin there. So we want to reduce our ticket but improving, expanding the penetration of all categories. But we want to have an over share of the average and higher tickets of all the other categories because then we believe that we will have in 1P, especially the 3P better unit economics. And I wanted just to highlight that to make it clear.

[Operator]

Our next question is from Ruben Couto, Santander.

[Ruben Couto, analyst]

Fred, you talked about events from the World Cup and sales coming in later than you expected in October and November. Is this happening in all channels, also brick-and-mortar stores? So the quarter starts in an acceleration pace as you were expecting? And is that happening in all channels? And to start seeing that acceleration, you had to be more promotional than expected? Or is that following your strategy, your plans? And you did not need investment and promotions and sales to encourage volume. Just to know what we can expect in terms of margin now in the fourth quarter as the sales acceleration starts to show now.

[Frederico Rodrigues, executive]

Ruben, thank you for your question. And yes, we are seeing now sales situation and a growth that is better in all the channels in this quarter especially because of the World Cup, but not only because of that. There's nothing being done an extraordinary way except what is already a promotion for a Black Friday period. The volume is coming in organically. We're not having to push anything. This is important to mention.

Fabricio would like to add?

[Fabrício Garcia, executive]

I think what is most important in this year-end is execution. We have a very good planning, and we are executing it wonderfully well. And we are able to sell in both channels online and offline according to our forecast. And following our promotional dynamics, we are not being more aggressive than what we had already planned to be. So sales are coming in thanks to our execution ability, which I think is very good.

[Operator]

Next question is from Joao Soares from Citibank.

[Joao Pedro Soares, analyst]

I would like to go back to the 3P discussion that was very interesting. It's about the ticket. Fred, here, I think the matter is that when you look at the reversal of the lower ticket of that seller or the profile of that seller thinking about the maturation curve of the seller from now on. What do you expect in terms of the 3P growth? I think this is important. You started the call talking about stabilization. The online will go back to the natural secular growth. So I would like to understand how 3P fits into this context? That's my first question.

My second question is that when I look at the coverage rate, it came down and it also matches the delinquency level. I would like to know if you are comfortable about this coverage level, and if you find with it from now on.

[Frederico Rodrigues, executive]

Well, first, thank you very much for your questions. I will answer the first part of the question, and then I'll turn the floor to Beto. Well, our understanding, our vision, if you look at the CAGR of the last year, you will see that 3P is growing significantly more than 1P and significantly more than brick-and-mortar stores. And for us, it's very clear, although 1P was greatly benefited from the 2 pandemic years and people were inside purchasing durable goods. And we did have a growth that was higher than normal for the period.

Now looking ahead, the company is concentrated in the 3P growth in all sellers groups for all categories, but especially for average sellers and for small sellers and especially for non-core categories. But the focus, if you consider the figures for the next years, we have a great opportunity to grow, I believe that the online penetration in Brazil is still low when you compare that to the world and Magalu's share in 1P is high and 3P has a lot to grow.

So I see that we will gain, increasing the online share in Brazil and also, increasing Magalu's share in 3P, we gained share in this quarter, and we will continue gaining share when I look ahead, I am confident about that, especially by the 3P channels.

Now in the fourth quarter, we have a 3P that will post a better growth, better than the third quarter, and this is already happening. The base for last year was very strong. The base for 3P in the fourth quarter is lower, but we are going to have a better growth, and for next year's bases will be better. This was a year of adjustment of verification of pricing of 3P and investments, and it tends to grow.

But for the fourth quarter, 1P goes very well now because of the World Cup. So we have to take that into consideration because the World Cup will have a greater impact. And 3P will grow because it grows organically regardless the World Cup, but all 3 channels will post growth and -- and here, we have to see 1P in stores because of the World Cup product sales.

About the delinquency question, Beto will address it.

[Roberto Rodrigues, executive]

About delinquency, and thank you for your question as well. About delinquency first, our level is very conservative. Once again, customers are approved by Itau Unibanco and Luizacred follows all the credit collection provisioning, risks, policies from Itau Unibanco. And as you know, they are very conservative.

The total level of provisions increased in the past quarters. So we are with the provision level of around BRL 2.7 billion, almost 14% of our portfolio. And the coverage ratio as a whole is an assumption -- is -- comes from these figures. So last year, for instance, the NPL was artificially low and that usually ends up causing a high coverage level. But when the NPL is higher, this previous provision decreases, it's natural as a math.

But if we look at the excess of provision, it even has grown when compared to last year. So we have a robust provision level. We do not foresee any changes in the coverage ratio. And the provisions are made according to the IFRS considering risks of each customer, and that is done by Itau Unibanco. So we believe that the provisions are very robust, very conservative. And we have a coverage ratio that even at this level of 140, 150, we believe it is very high and very conservative.

[Operator]

Our next question is from Bob Ford from Bank of America Merrill Lynch.

[Robert Ford, analyst]

Fred, what is the current conversion rate in 3P? And how do you expect that to behave as the results improve. And what can we think about your margin and cost structures for next year? Can we expect the improvement in margins as you develop other areas such as ads or when other sellers grow in the mix?

[Frederico Rodrigues, executive]

Well, Bob. I will answer. We cannot disclosure the conversion rates, but I will try to answer it qualitatively so that you can follow the rationale. The conversion rate of 3P, I would say, it's still 1/3 of 1P more or less. So a little bit less maybe. So we have a conversion in 1P, and that is significantly higher than 3P. And we have a KPI that is shared by the business area marketing with the Lédio area from Fatala. So we are working on conversion improvement, and that involves a number of things, and one of them is delivery time.

I think there is a strong correlation of conversion and delivery time with the fulfillment and the expansion of Magalu deliveries, with the improvement of the routes of Magalu deliveries, we are improving that indicator. And I am sure we will also improve the conversion when we look ahead. It is already improving. Even with the free freight and reduction, and we were able to hold growth on a 3P base, and that is thanks to the improvements that we have implemented. And I believe that 3P conversion will grow significantly and get close to 1P's levels. And also, because we are working together to make it happen.

We are working with algorithms in the search process and the ranking of the products. Remember, we went from 6 million supplies to 81 million products in 2 years. So we have to train to calibrate the search algorithms. There is a lot of work involved there, and we are working on it, and I'm very optimistic about that.

Now in terms of margins, Bob, obviously, once again, we improved in 50%, our operating profit, we increased our margin in another quarter. We are working hard to improve all lines of our operating results. We will keep on working on that next year. We have already operated in levels over 6% of EBITDA margin in the past. Obviously, it was another model. We had a lower share of the marketplace, and the marketplace changes the reality a little bit.

But I believe that we can go back to historical margin levels, and we'll be working for that, we'll be dedicating ourselves to that. We are more focused now in balancing outgrowth and profitability. We are bringing that in, we are delivering that over the quarters, and that is what we continue to see in the process. We have many projects that have been implemented, so this is the idea to continue on that effort.

The same margin of 6% of EBITDA 3 years ago was BRL 250 million net profit in the bottom line because we had a different SELIC rate. I cannot expect that the SELIC rate will come down magically. So we have to keep on working to increase our EBITDA margin and also, to decrease our financial expenses that is attached to sales. And these involve what Beto has mentioned, the increase in PIX sales or launching new products such as the credit card in that credit and that available in the e-com and also, in the stores, and this is something special that we brought.

Then the financing is on the hands of the issuer, not the retailer. This is natural in other places in the world, and we are launching that here, and we believe that could have a positive impact to really increase operating margin and reduce financial expenses that is attached to sales. And this is the focus of the company when you look ahead. Not to consider a macro reduction of the interest rates. We have to work on our side, and that reduction in the interest rates that has to happen because I believe this is the highest level that we are seeing in the last 10 years. It's not sustainable over time. I'm sure it's going to come down, but we are working on our end reducing sales expenses related to sales.

[Operator]

Next question is from Joseph Giordano from JPMorgan.

[Joseph Giordano, analyst]

My question is about the competitive environment. We see the main players in the industry that are leveraged with cash generation pressed by SELIC rate. So I would like to hear from you, how do you see this performance in the competitive environment? I would believe that last year, things were more complicated than they are now. So second question is about stores. So we start hearing a little bit about extension of this emergency relief. I would like to hear from you if it makes sense, considering that to think about expanding these stores, I know that now you are with a balance sheet that is above the competition.

And now finally, analyzing the assets integration. You had a number of parts and you were -- and you posted this flywheel of the start-ups? And how is the integration level of all these start-ups?

[Frederico Rodrigues, executive]

Thank you for your question, Joseph. I will try to address all the questions. About the competitive environment, I don't think that we can only have bad news about economy, high interest rates, high inflation rate and hangover in the tech world. But I think this unfavorable environment has generated a rational aspect in the digital world in a way that I have never seen. I've been in the e-commerce for 22 years, and that's the first time that I see the players talking about profit, profitability, charging by services to grow in a rational way and Brazilian players, Chinese players.

So everyone is very much rational here and they are rational numbers, and this is the good news for this more difficult macro world. So I see that online in the marketplace and 1P and everyone wants to grow and make money. That's very good and that's not by chance that we were able to improve the gross margin, to improve the EBITDA margin and to increase sales and gain share. If the competition -- we're not following that it wouldn't happen. So Magalu knows how to work in this environment. Magalu has always been a profitable company, cash-generating company.

Our e-commerce always posted results except for this past year, which was a year of adjustment. And I'm sure that this is an environment in which we can know how to play very well. It took over the company, and we have posting good results since then. We had an adjustment period, a monetization period, and let's go back to track.

So and we learn, I think some tech companies will try to take their first steps. And we acquired Netshoes that was posting negative results, and now they are posting positive results. Epoca was also a company posting negative results, and now they are posting positive results, even food delivery is posting results to Magalu, and this is a company that has the profile and the characteristics of operating there. So this is a favorable environmental -- a favorable environment.

And now for brick-and-mortar stores, we have a possibility to gain share. But about expansion plans, we have to analyze what's going to happen, what is the scenario and the macroeconomic side, we'll have to read the environment and to define if we are going to expedite that or not. And so far, we are not comfortable in accelerating anything. So we are still cautious. But as soon as we find it and we see it and we tend to be optimistic and we have a capital structure that supports our plan, and then we will go back and we will go back very quick. We know how to open stores and how to open DCs. But for now, we are waiting a little bit, and we are sitting on our cash.

Now your -- what was your other question again?, oh, about the integration. Okay. I think I described a lot that we have done, Magalu deliveries and it came, thanks to the integration of 4 companies that we acquired, Logbee, so the GFL, SincLog -- 5 companies, actually. So all of them are in Magalu Entregas or Magalu Deliveries platform, and they have 80% of 3P deliveries and also, 1P in Netshoes, KaBuM! deliveries, all of them are using our branch, Magalu deliveries is fully integrated and logistics. These acquisitions were the right ones, and they allowed us to improve 40% of the deliveries in 2 days and that is thanks to the acquisitions.

Everything that you have seen in that video that those are the -- the companies are integrated in Magalu deliveries. We also see the digital account that we brought to you and all our efforts here. The digital account is a Hub's product, something that we acquired and integrated, and sellers now will receive the amount of their sales by having that integrated accounts, that's very good for them. And you also saw ads, which was Inloco.

We acquired the base platform, we developed that platform, we have that platform with the Inloco team that we acquired, we have seen KaBuM!'s results at the time, all of them generating good results and Netshoes as well a good level of sales, and they are 100% integrated in Magalu's catalog using Magalu delivery, some of them already using Magalu payments.

So I think we are growing and we are evolving in a very positive way in all these processes, the acquisitions are not fully integrated in a year. And I don't like to say integrate, I'd like to say connect, to connect ITs, to connect systems, and we are doing that in a very positive way, and I think that's a very nice way. AiQFome is also integrated in the cities where AiQFome is present, it's already integrated in the SuperApp. Graciela, you want to comment anything else. She is our Integration Officer.

[Graciela Tanaka, executive]

Joseph, just adding to what Ed has already said, we are focusing in connecting and generating value in the ecosystem by using our services. So as an example, AiQFome, even VIP commerce, which is a market integrators, they are already connected into the SuperApp. So we do not want to connect or integrating back-office systems, but rather we are connecting businesses so that we can generate value both for our customers as well as for our sellers.

[Operator]

Our next question is from Irma Sgarz from Goldman Sachs.

[Irma Sgarz, analyst]

I think some of my questions have already been answered, and I would like to go back to Luizacred. I would like to understand how you see the risk appetite for this fourth quarter. I think the portfolio is more stable now from the second to the third quarter. And I think it's even lower when we compare quarter-on-quarter, and that makes sense with the macro scenario with delinquency a little bit higher.

But for the fourth quarter, I would imagine that this is very important commercially. So I would like to know if you already believe that you can recover growth there. And I also want to understand how you see Luizacred's growth going towards that normalization and also, of that net profit in a positive level.

And another question related to that. I don't know if it's possible to measure it. But by this conversion rate, have you seen a more conservative approach and the credit assignment, has that affected sales of the third quarter somehow?

[Roberto Rodrigues, executive]

May I start?

[Frederico Rodrigues, executive]

Yes, and I'll add later.

[Roberto Rodrigues, executive]

Now starting by the appetite, we are maintaining basically the same approval rates. And we are also taking a number of actions and efforts to improve conversion, whether in the store or on the online. And the online, we can highlight the experience of the preapproved card, it's called [indiscernible] surprised. So we are improving the sales quality. It's also important to say that the delivery indicators -- or the delinquency indicators, I'm sorry, of this past year, these months, especially the digital, they are very good, they are compliant to our history of delinquency. So this is a very healthy credit assignment.

In the third quarter, we talked about the share of our payment needs, and that has decreased a little bit when compared to last year, but it was not too relevant, it was around BRL 100 million. And we offset that share exactly in cash sales and PIX sales. So when you compare that in the mix, the increase of 6 points in the PIX offset a little bit our approval reduction in Magalu Card and Luiza Card, and also, allowed us to decrease the third-party cards.

So we are using other strategies. We are improving experience. We also have campaigns using PIX, we have 7 million clients with preapproved credit. This is a BRL 20 billion portfolio, and we have practically -- BRL 20 billion more of limit and the average limit of our customers of this limit, it goes around 50% to 60% of the limit amount. So we do not need to sell a lot to new clients to keep on growing and fostering sales. We have a lot of buyback actions that are towards increasing the loyalty of our clients that already have the preapproved credit.

And finally, talking about profitability of Luizacred. I mentioned that we reached the record sales over BRL 1 billion in the quarter for the first time. We have had a high growth in all revenues, financial revenues and service revenues, we have room for revenue on the portfolio that is higher than the current one. We reviewed some services and fees that we offer to clients also to improve Luizacred's profitability. And we are sure that this funding increase that should increase with the CDI reduction and that should become normal, it should normalize.

We then believe that the other customers are still very profitable and Luizacred has an efficiency rate that is a benchmark rate. So we continue looking for opportunities to improve efficiency, but we are sure that we are on the right track. The prior clients, the earlier times were very profitable, and that's just a matter of time to going back to those levels of profitability or even higher. And we will still be looking for greater efficiency at Luizacred as well.

[Frederico Rodrigues, executive]

Just adding to that, I think that today, the whole universe of opportunities and making money with credit, it goes beyond Luizacred. We talk a lot about Luizacred, but all the fintech universe or the corporate accounts, all of that are not in the scope right now. So we have a great opportunity right now.

The account, the account float , so prepayment -- receivables, prepayments for sellers, Magalu Payments, and we still have room to increase penetration in the online world because it has almost 50%, penetration in the online less than 10 in the online. So I believe that this is something that Beto already mentioned, and we are working on the preapproved clients, it's not open sea. That shows that we have an origination with a great credit quality.

So we have a horizon to monetize Magalu's GMV with financial products that we still -- and we still have a lot of room there. And Luizacred's business it's cyclical. And in the last years, some -- we did have a better provisioning, lower results. But for most of the years, we had great results, and I am sure that we'll go back to them. And we have BRL 600 for more months, not only up to December, but probably for next year as well, the increase of the minimum wage. And I think all of that will affect the Luizacred's customers, especially the low-income ones.

[Operator]

Our next question is from Danniela Eiger from XP.

[Danniela Eiger, analyst]

And I think all my questions were already addressed. I have a quick one. It's just about the dynamic of durable versus long tail. We see this as very strong, long tail is gaining room because of macro. But how do you expect to see that in 2023? We are still talking about a high interest rate scenario. This is important for the category of higher tickets. And I would like to understand how do you see this balance for 2023? And if you can give us more color about the fulfillment. I understand that it's still a very early movement, but how the impact is and the sellers' economics that are using the service and also, in the rollout for more stores. What do you expect to see that in terms of timing?

[Frederico Rodrigues, executive]

Thank you for your question. I think I have already answered it, but I would like to stress it. Certainly, we should look at in the next few years, a growth that is higher than 3P when compared to 1P in stores and e-commerce, and I think that is the natural trend regardless the macro scenario because this is a company's strategy. We started before. We started not long ago. So it is normal that although 3P is already the same size of store's GMV.

So in 3 years, we were able to reach the same level of stores in 3P, but we are able to grow more because you add sellers to the base, you have new categories and everything that we have described here as a fulfillment and that's going to help conversion and growth, sustainable growth of this 3P in the future. Since 3P and our strategy is very much in the tail as a base and the mid-ones. And usually, these sellers are not electro-electronic product sellers.

We believe we are going to have a decentralization of categories. And remember, we have the channels that will keep on growing. Fashion will keep on growing, sports will keep on growing. These channels have been lower online penetration than the electro-electronic. Those have a penetration in Brazil that is much higher than the other channels and the gap between what is Brazil and the world. For these other categories, this is greater. So the trend is to see these categories growing more and we are very well prepared to gain share and to seize the growth of these categories as well. I think this is going to happen.

The only thing that I usually say is that I don't like to grow one thing and not the other. The good example here is when we grew durables, we did not decrease the number of brick-and-mortar stores. Even with the pandemic, the sales volume of brick-and-mortar stores is the same as the pre-pandemic level. So all growth that we have in one line -- 1P for durables was not from brick-and-mortar stores, we'd like to add. We don't like to subtract.

And that is what we want the sellers of new categories to grow, but if we can gain share in durables, we will do it because we can operate, and this is a category in which we work for 60 years. This is a cycle category. We have 5 good years and 1.5 years, that's not that good. 4 years, they're very, very good and so on. So it's cyclical. But when it comes back, it's really strong and everyone wants to sell, everyone is out in the market. So the process is there. But trend is a trend in the long term for new categories, gaining more share, gaining more room, but not because we are going to sell less durable, but we want to grow proportionally.

[Eduardo Galanternick, executive]

Now this is Eduardo here. About the fulfillment, we are operating with that for a few months. We are operating very well. The sellers that are in the platform are providing us a great feedback. And our focus now is to scale to try to speed that up and to increase the number of sellers that are operating in our fulfillment. We have 3 DCs that are taking sellers' products. We will be working more on that next year. And what we have seen clearly is that the sellers that are in the fulfillment, they have a conversion that's 50% higher than the conversion that we have in the Magalu deliveries.

If we -- if it is the seller that does not use Magalu delivery, they double the conversion. So this is an avenue of growth. The cost is installed. There's no additional cost in the company for that expansion. So our priority right now is to bring in more sellers for that platform.

[Operator]

Next question is from Vinicius from UBS.

[Vinicius Strano, analyst]

How the economics of the marketplace is evolving in the past few months considering these adjustments in the pricing of 3P? And also, here in marketing, do you already see a slowing down in that area and what is the performance between the organic and paid traffic? And a second question, you talk about 1P products turning to 3P sellers, Fred. Can you go into the details which are these categories that would be great as well?

[Frederico Rodrigues, executive]

I think that allows us to have an additional comment. The 3P economics has evolved significantly. This was a very significant performance as I haven't seen before. So obviously, we were investing in 3P. We needed to reach a minimum scale. We had volume of 3P, of brick-and-mortar stores that shows that this is already consolidated significantly, and that is very important for all the sellers that we have. Usually not all sellers -- not for all sellers, we are the first options, but for some, we are. And for some, we are second or third. So we are very relevant for everyone.

And I think this is very important. We have evolved a lot. Marketplace today is positive. We have a contribution margin that is very positive to the company. It has very low expenses, basically has no fixed expenses, and we do not have working capital in the marketplace. We do not have inventory there. Their ROIC is higher. And so it's easier to manage it. So it is going well. And the more we sell, the best will be the results for the company.

So what is nice is that even in the investment area of marketplace, we are already using an installed base from GFL, the routes of our trucks, stores and the DCs themselves. We have 1 million square meters available that will be available to 3Ps. This is already there. We reduced the 1P inventory levels, and we are now having this area that will have no additional cost to the company. So we'll be using this area to increase the marketplace fulfillment.

And then it tends to be very positive when we look ahead. That's going to be great for our economics. We have nice take rates now. We still are more affordable than the leading company in terms of total cost. And I'm not talking about take rate only, but take rate and delivery rate. If we combine both of them, we are 3 percentage points up to 5 percentage points lower than some marketplaces in the market. We still have room to improve, but this is already contributing positively to the company we tend to grow.

We developed a platform, for instance, the fulfillment. The fulfillment is also for heavy products. We developed fulfillment. This is a new product that we do not have in the market because usually, these are for smaller items, and we can operate furniture and appliances and some electro-electronic items with our fulfillment and the products that didn't make sense to add to our working capital because they have a low turnover or a low margin.

The industry will operate directly when we are going to offer the industry this fulfillment service, we'll be very disciplined, and we will have in our stocks, whatever pace our margins and whatever is not there, we are going to operate in the 3P. We want to be a digital platform with brick-and-mortar stores and warm service. And we want to turn the key and that's going to be very easy and very quick.

[Operator]

We now end our Q&A session. I would like to turn the floor to Frederico Trajano for his final remarks. Please, Fred?

[Frederico Rodrigues, executive]

I would like to thank you all very much for being here with us in this call, 1 hour and 40 minutes, a very broadening call. I would like to stress the work of Magalu's team in rolling out a number of improvements in the company, a significant increase in operating margin, and we were also able to gain market share.

I would like to say that I have a positive outlook for the next quarter, the fourth quarter with the Black Friday, World Cup, full emergency relief in the next 3 months, we are prepared to tap into this opportunity. So thank you all very much. Thank you, especially to our team here, and I would like to stress that I have a very positive feeling for this year-end. Thank you very much.

[Operator]

The conference call for Magalu has ended. The IR team is available to take any other questions you might have. Thank you very much for your participation, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]