Magazine Luiza SA

BOVESPA:MGLU3

Earnings Call Transcript

[Unidentified Company Representative]

Good morning, everyone. Thank you for waiting. Welcome to Magalu's quarterly results conference call. [Operator Instructions].

We inform that this event is being recorded and will be available at the company's IR website, ri.magazineluiza.com.br, where you can also find the release and the presentation both in Portuguese and English. [Operator Instructions].

Now I would like to turn the floor over to Fred Trajano, CEO of Magalu. Fred, please, you may begin.

[Fred Trajano, CEO]

Good afternoon, everybody. Thank you very much for participating in Magalu's Conference Call about the fourth quarter and the full year of 2022.

Undoubtedly, we have delivered the best quarter of the last 6 after the problems of the pandemic. And before talking about the results and for transparency reasons, I think it's fundamental for our company and our team to mention that yesterday, together with the results, we announced a material fact and we have an anonymous denounce about the ethics of the company and more specifically about the regularity on the part of distributors and suppliers. And it maintains nominally 3 distributors, which during 2022, represented approximately 3.5% of the total of the company's purchases. Just to give you the order of magnitude of the size of this example.

And due to this reason, the Board of Directors established that the compliance team will fully investigate this anonymous denounce and hired independent advisers regarding the legal and accounting problems. And it will be done independently according to the highest possible levels of governance. The compliance team has already started to investigate these facts, and we will be submitting at the end, the conclusion of this investigation.

So these are my opening remarks regarding this. This was anonymously sent and it happened a few days before the publication of our results. And of course, the market is very sensitive to this kind of issue at this time. And this is the reason why I decided to open this conference call mentioning this. And most of what we can say is already published. In the material information, we cannot disclose everything, and this is all we can say about it so far.

I would like to add that an anonymous thing should not take away the wonderful results of the company. We are showing a very relevant evolution in all the points that we have talked about. It was a year in which we made available or we were able to carry out many different actions in order to increase the company's profitability in a different economic situation, high interest rates and still the consequences of the post-pandemic, and we did a very hard work after the fourth quarter of last year. You can see very clear and concrete indicators that the company the walk to talk gave wonderful results during this period and still with a positive perspective looking ahead.

And before talking specifically about Magalu, I would like -- I have been saying in the last 3 or 4 calls, there is a slide that we show, which is the penetration of online commerce in Brazil. And you can see that Brazil in the future will no longer be analog, it will be digital. Many people saw the drop in e-commerce last year as a long-term trend. But in fact, it was just a fine-tuning because of the abnormal growth that we had in the 2 years of the pandemic.

If you look at the slide, I think it's on Page 5, we show that as of the last quarter, we believe that as of this year, we will see a resumption of penetration of e-commerce and it is still much lower than countries such as China or the U.S. So you can see that there is a slight decrease last year.

And from now on, e-commerce should ramp up. I'm talking about the market as a whole, and we are placing our bets there. Although we believe that there are specific opportunities for Magalu to grow in these channels.

On the next slide, I talk about the penetration of products in the Brazilian e-commerce. We see a higher-than-average penetration in home appliances, close to the market or international market, electronics, but there are many categories and where the penetration continues to be much lower than the world penetration, beauty and personal care, fashion, auto parts, automotive, and we still have a lot of room to grow, and we will be addressing this very much by means of the 3P opportunity.

Our view is very positive in relation to the opportunities of the Brazilian e-commerce. Also, from the microeconomic viewpoint. And I see that the market will be requiring from companies that work into digital universe that they must grow with profitability. And this will continue to be something very important for companies and for their executives. But even in online, it has to come with profitability, growth hand-in-hand and profitability.

And when we look at the Brazilian online market, 64% of the GMV is in categories over BRL300, but the profit pool of these categories is 84% of the online market. So this is something important that I have been repeatedly saying. Although we have a huge effort in terms of diversification of categories, we want to have an over share. We want to work. [indiscernible], which is the higher categories because we are known as a store where you buy good products at a good price and with good sellers. So we are doing all our efforts in order to work with higher ticket categories because these categories of a higher ticket, they also represent an opportunity of better economics.

And I have a slide here showing that for unit economics below BRL60 because of the marketing cost and the higher the ticket, the higher also the cost of delivery and the cost of marketing. And the unit economics are usually negative when you have lower tickets. And for each unit sold you low a significant amount of contribution margin.

With the higher ticket, we can have a positive margin, and we already are here, and we have a very good contribution, and Beto will be talking about that into details. And we had the growth of marketplace and vis-a-vis the overall results of the company and also the take rate measures that we implemented over the period. Diversification is fundamental for the growth of Magalu in the future. And we want to have diversification in positive unit economics and the higher tickets are the ones that give us positive unit economics.

Next slide, please, Page 7. You can see that we have an over share in categories of over BRL1,000, and we have the possibility of heavy share of higher than the average from BRL300 to BRL1,000 and lower market share in categories over BRL300 and BRL100. And those under BRL100 are the least profitable ones, and we want to gain share, especially in the categories above BRL300 with a positive result and dominating the categories above BRL1,000. So we have a lot of room to grow, and we are focused on that. Our style is designed for that. Our credit policies are designed for that. And we have a major chance of many -- of gaining a lot of share in these ranges of tickets from now on and continuing to bring a positive contribution to our EBITDA margin.

And now talking about the quarter, we had the best growth in the year, 16% growth in the quarter, BRL18 billion GMV. And if we take the average for the year, including the pre-COVID since 2019, we had 26% a year. So you can see that even in a year with an increase in margin and transferring prices and reducing marketing costs. In spite of all that, we continue to maintain a positive growth in the year as a whole. We had , and we've reached BRL2 billion adjusted EBITDA, with total sales at BRL60.2 billion. So we are working a lot in order to achieve an expressive this figure.

In physical stores, the company grew about 15% in the quarter. For a long time, we have not grown in physical stores as much as that. So we did a very good job in this regard. And in the year as a whole, we sold practically BRL17 billion with a gain of share in the last quarter of 1.3. And physical stores are very important for us because they generate cash margin and contribution margin, and this is all very positive for the company.

On the next slide, I want to talk about e-commerce. This year or in these years of pandemic, we grew 44% since 2019, the average for 3 years. And in this quarter, we grew 16%, which is very high. And in the year as a whole, almost BRL44 billion in e-commerce GMV, a major gain of market share. And in spite of price increases, et cetera, the e-commerce market had dropped, and we gained 5.1% market share, and we continue to give good results and good indicators showing our performance in e-commerce. And in spite of a very good base last year, especially in the first half of last year, a very high comparison margin.

In the fourth quarter, especially the share gain was very big because there was a drop in the overall market of 6%, and we grew 16%. So this gain is very important.

And now talking about profitability, I would like to talk about what is going on. We do not give an exact figure, but just to give you an order of magnitude, the percentage of magnitude of logistics. We have a new freight policy in place. And over 20% of the marketplace sales are store pickup, in-store pick up. And we have been taking advantage of the Luiza grid and Magalu Entregas. We are already in a positive territory. It is contributing to our gross margin and our GMV as well.

And also, over the last 3 years in 3P specifically, we had this growth, as you can see here, 58% a year BRL15.4 billion in the year in 3P. So this is a very high figure, a very significant figure.

And in December, it was a little bit lower, but with a growth of 33% and it continues to grow in January, February and March in spite of the Carnival that had an impact. But in spite of that, we had a very positive growth in marketplace and make -- in spite of making some price changes for sellers over the year.

3P is the engine of diversification of Magalu. 51% of our GMV is already in new categories. In 3P today, we have an offer of platforms that cater to 3 groups. The big sellers that benefit from high-quality traffic and huge share. They usually have higher tickets. And we already have a very big penetration in these sellers. We do a great job also with smaller ones that are average or medium-sized. And on the base of the pyramid, we cater to these small sellers who benefit from our physical stores, and many of them are coming from the base of the pyramid.

For lower ticket, it's very important to be hyper local because then you have low logistics costs. For lower ticket and lower frequency, we have this situation. And the medium-sized sellers, we intend to be very focused. We have an opportunity to gain share here in the medium-sized sellers. They are generally digitalized. But they usually want to store these products somewhere else, and they do not have a big opportunity for distribution. And we have the opportunity to grow in the 3 categories.

As I said before, you can see the number of sellers. We have 24,000 new sellers coming on board. In the fourth quarter of '22, we reached 260,000 sellers. And we are being able to attract these sellers in large numbers in these noncore categories as well.

I would like to go to Slide 18 already talking about our multichannel approach. For the profitability of Magalu to continue growing, we have to tap into our multichannel approach.

So to the sellers. We offer Agency Magalu 517 Agency Magalu for drop-off and that are enabled for our sellers to have the drop-off of their products. We already have 61,000 sellers using our stores, our agencies. And instead of posting their goods through the normal postal agencies, they use our agencies. 20% of the marketplace revenues have to do with that, and we are going to grow this number consistently.

Magalu fulfillment, already 1,000 sellers in fulfillment and 21% of the total orders already reached the client in up to 24 hours. And the major advantage is to reduce -- and our major challenge is this. We believe that fulfillment will help us do that and the secret is to do this very efficiency.

So it's very important to use the same network as 1P, , Guarulhos, Extrema, Contagem, we have 5 DCs and also in [indiscernible] with a very good feedback so far from our sellers and the fastest delivered for the lowest costs. And we are very encouraged with the possibility of going here because of the increase in fulfillment and the conversion as well.

We are delivering 43% of our orders in Magalu Entregas and up to 48 hours with a very fast growth but we still have a major opportunity to increase our fast deliveries. 80% of our orders of 3P go through Magalu Entregas, which is Magalu deliveries, and we have been evolving very fast, and we still have a lot of opportunity there.

About our subsidiaries, all delivering very good results during the year. BRL4 billion GMV Netshoes, BRL56 million net income. You remember that before Magalu, they were in the red, and now they're always positive and again, delivering a very good figure. Fashion growing 25% marketplace Magalu, 65% of what we do in fashion is in the -- 65% fashion sales came from marketplace in the beauty, BRL76 million income KaBuM! with a very good year BRL4 billion GMV, BRL179 million net income and store pickup in over 600 stores, Magalu stores. So the logistic platform of Magalu is the one that does that.

And also the AiQFome, the food delivery with a very good year, BRL1.4 billion GMV in 2022, 30,000 requests and 1/3 of the payments processed by the AiQFome platform. And Magalu ends with a very good year.

Besides the fintech, a major opportunity to increase our margin is in MagaluAds and Fred is going to -- Beto is going to talk about that and 500 million hits monthly. A huge audience and ad platform is being used to deliver inventory of all our assets, Época, Canaltech, Jovem Nerd, and all the others. Steal the Look, one of the biggest audiences of Brazilian Internet, not only e-commerce, but in general. And 100% of Magalu's assortment has been enabled for sponsored search ads. This industry is sponsored and we use this system and over 6,000 campaigns created in 4Q '22, 2,500 sellers use MagaluAds to promote their product. And there is a lot of opportunity for additional gains here to go to 3.5% of GMV in 3 years, and ad has a very high contribution margin. So it's really wonderful.

Roberto is going to talk about the financial highlights now.

[Roberto Bellissimo, CFO]

Thank you, Frederico. Good morning, everyone. Now I'll briefly touch upon the financial highlights. Let us start with Q4. This is where we posted growth around 2 digits in all channels, BRL18 billion sales. We greatly evolved in our gross margin and EBITDA margin. And the bottom line close to balance, close to their breakeven point.

On the next slide, this, we share the full year more than sales for the first time, also increasing in all channels, evolving the gross margin and EBITDA margin as well and net income of 1% negative.

On the next slide, we share the consistent evolution in our EBITDA margin. The highlight has to do with last year. Growth in service revenue, 44% growing in the service revenue. Like Fred said, this is very much related to growth in marketplace and adjustment in commissions, take rate and shipping fees that we implemented last year, and we also started deploying this year as well. Service is over BRL1 billion as revenue this year. So this greatly improves our gross profitability.

And then in SG&A, we also had our best quarter, the most efficient quarter SG&A around 21%. It all leading to improve our EBITDA 2.6% last year to 6% this year. We spoke a lot about all the efforts to lower our expenses.

So on the next slide, we show our cash position. Total cash of BRL10.6 billion in Q4. Very strong cash generation, around BRL2.2 billion. Our capital structure, we consider it to be very solid and net cash position. If we discount our debt, our net cash position is BRL3.5 billion or 1.3x EBITDA. We also underscore that our debt is long term.

So as of 2024, '25 by the end of 2026. So when we have turbulent markets as the credit market today, we don't have any outstanding debt. And no need for funding and our debt is relatively competitive with an average cost of CDI plus.

On the next slide, a couple of words on our working capital. We explained everything about last year, expected growth over the year. And actually, in Q4, we had our best evolution, our best performance in working capital. We managed to improve our sales at a very fast rate and at the same time, lowering inventory, which shows the assertiveness, the quality of the inventory, low breakout, and we also improved inventory turnaround by 30 days in Q4. So a very significant performance, and we'll keep on doing that over 2023 as well.

We already had an additional disclosure here about working capital. In the balance sheet, we broke down from the total supplier account, how much is direct, how much is indirect with the banks we work with. And we always disclose it all in the supplier line, in our explanatory notes. And now to bring more transparency, we brought it to the balance sheet.

And we also disclosed that of all prepaid operations, prepayment, we pay the bank on the date in which we would pay the supplier, agreed with the supplier. And once he is paid, we pay the bank and there is an average term of 54 days. That's why we consider these operations to be very usual and totally within market times. Our average purchase time today is around 90 days.

In other words, in average, in between, we have a prepayment with suppliers, some do it before; others, later, but on average, is around 45 to 50 days. That's the average term of prepayments.

And this operation is win-win. We win, suppliers also win, and the bank also wins the spread. And we also are part of the spread of the bank as well in this agreement when we confirm the operation. Now let us talk about financial expenses. Here, we also show a reduction in financial expenses vis-a-vis the previous quarters from 6.3% to 5.1 percentage of net revenue, net sales. This improvement is related to cash generation in the quarter and reduction in advanced receivables.

We have the cost of debt, like I said before, and prepaid receivables, which were reduced this quarter owing to higher cash generation and thanks to an increase in fixed rate. Now 34% of total sales in some channels exceeding 40% of our sales. And we keep on boosting picks as a means to further lower financial expenses in addition to other actions related to having shorter card terms and reduce interest rates. On the next slide, we show our performance from BRL9 billion total cash to BRL10.6 billion. We highlight operating generation investment and agreements made with fintech of BRL200 million positive and also lease and interest of BRL600 million totaling , which is one of the greatest cash generation in a quarter that we ever delivered.

And then we can talk about Luizacred as well. We maintain the base of cards nearly flat over the year. There was a slight reduction in credit granting since the beginning of the year. Despite all that, we keep on growing very well in our sales. this quarter, growing by 14% for the full year, 30%, total sales over BRL54 billion, a credit portfolio, more than BRL20 billion. So we keep on growing owing to activation, relationship, frequency of our customers who are very loyal to our Luizacred and Magalu card.

On the next slide, we talk about our results at Luizacred. There is evolution in short-term indicators. Most recent cohorts are improving. Short-term default or delinquency is going down. We already revisited some positive results in recent months, owing to this improvement. And short-term ranges in IFRS, they are more related to provisions rather than long-term cohorts because long-term cohorts are nearly all provisioned. So in NPL over 90 days, what we see is a slight increase. There are already signs of stability. Over the year, we expect to see going down again, particularly in the second half of the year.

But the most important thing is that short term is better in need of less provision and Luizacred, as you can see on the right-hand side, this is the best quarter for Luizacred in the full year. This is mostly driven by better operating efficiency, higher revenue over BRL1 billion and also a lower level of provisions.

What about fintech, our total TPV, This, we see growth in our channels. We also speak of digital accounts payment, banking as a service, growing by 30% in the quarter, 40% in the year total TPV exceeding BRL90 billion.

And last but not least, we also highlight fintechs with a number of novelties and launches over the year. And we also highlight our digital account for sellers. Since December -- or September and October, when we started to foster migration of sellers into our digital account, we already have 15,000 active sellers and this quarter alone moving more than BRL1 billion, actually BRL700 million coming from our marketplace. So one of the main focus of our fintech this year.

In addition to prepaid receivables, which is highly profitable and greatly contributed to the result last year and will keep on helping us this year, we also incentivized the use of our sellers through our digital account and therefore, provide our corporate credit and loans. So these were our financial highlights.

And now we would like to begin our Q&A session. Thank you.

[Vanessa Rossini, IR]

[Operator Instructions] Citibank?

[Unidentified Analyst]

I have two questions about the beginning of the year. You had a very good result from the fantastic sale. And I would like to know about the competition with this scenario. There is a relevant change that we already see when we look at traffic and monthly active users, what is the outlook for growth for the company? And what do you see already in the short run?

And the second question is about the monetization of the marketplace. Fred has already shown a very interesting slide about the economics, unit economics and he talked about the logistics and the improvement in margin. I would like to know about the margin from the marketplace for this year and the weight that this will have on the consolidated margin for the whole company.

[Fred Trajano, CEO]

Thank you very much. Well, thank you for big questions. I touched very briefly. On the beginning of the year, we had a very positive beginning higher than our expectations, and we had a challenge at the beginning of the year, which was the return of the tax and that reflects on interstate operations.

So we have the need to transfer these in order to offset the interstate taxes. And we were a little bit concerned about the volumes in this quarter because of this new tax. And in the very competitive scenario, it would be very difficult to transfer this on. But we have been able to do this with a lower growth, maybe than the potential that we see for the full year. I'm talking more about 1P, okay? You end up reducing the opportunity to grow. But as competition is more rational, I'm not going to get into details about competition. But with the market dynamics, that are favorable. I have never seen before in 22 years, I have never seen such a rational market. Everybody wanted to use profits and pay their bills, everybody passing the cost of taxes on, everybody very rational regarding marketing for an interstate. We like to work in this scenario because this has always been our philosophy. So it's very good to see the whole market in the same situation.

And in this scenario, Magalu tends to gain share when everybody uses the same rooms, and we still have a very big focus on transferring this on. We have been doing this and all the companies in the group, Época and KaBuM!, Netshoes, Magalu, 1P. But the highlight is the 3P. We have a lower base. As I said before, we had a good year. January, February and March were very good. Growth of sales in 3P. We have been increasing our take rate, and we had a recent increase also in January.

And we continue to have a total rate with all the cost that we charge the sellers lower than the market leaders. So we still have an opportunity there. About the monetization of the marketplace, I have a very good expectation going from . You see that the characteristic is very similar to Magalu. The tickets are similar, the same frequency of purchases of shopping, and we can improve our ads. We are investing quite a lot in the platform. So there is a great opportunity here.

And the fintech as well, I still see opportunities to improve sales and margin and efficiency in 3P. So I have a very positive outlook.

Most of the increase in the gross margin was by means of the marketplace take rates. In the short run, we will be seeing the impact of that on our results and on the improvement of our margins. So we are positive. And even in marketplace, you can see that everybody is working to make money.

So before that, people were giving free freight and this situation was very difficult. But now the market has come to its senses, and it is much more rational. Consumption is not growing a lot yet. So at the macro level, things are not so good. But in the micro level, this is the best ever scenario since I started 22 years ago.

[Vanessa Rossini, IR]

Our next question comes from Luiz Guanais with BTG.

[Luiz Guanais, BTG]

Two questions on our end, Fred. I wonder if you could tell us more about this equation in the market where you see earlier this year. What about the rationale of suppliers in the negotiations in the deals? And how do you believe this will unfold over 2023?

Second question, considering monetization alternatives, what is -- how do you see fulfillment grow? And you showed an interesting chart in the beginning of the presentation, but how do you see it growing in penetration in marketplace over the year?

[Fred Trajano, CEO]

Thank you, Luiz. Thank you for the questions. I went to the second question, first, and then Fabricio is going to tell us about relationship with our suppliers' vis-a-vis the first quarter.

About fulfillment. Like I said, we have 5 distribution centers. The operation started in Louveira, then we started with Guarulhos, Extrema, et cetera. So we are growing. We want to have fulfillment in all our more than 20 DCs.

We've been growing very significantly in the number of sellers in the platform. This was very accurate from the very beginning, considering level of service and a lot of good ratings from the seller. So we are not charging from sellers yet because it's a marginal cost for us.

We can have a more positive policy to encourage the guys to bring their products in. I'm not going to give any guidance on penetration, but we do want to grow a lot. As a reminder, today, we have 30% to 50% idle rate.

Like Beto said, we reduced by 30 days, the number of -- the level of inventory last year vis-a-vis 2 years ago. This brings room in our DCs in order to improve fulfillment with rental costs that already included security, a network that is already frequently found in the DC. So this is marginal cost for us.

Even if we decide to charge for fulfillment, the levels will be way lower than the market because we have very good logistics from 1P to 3P. So sequentially, it's going to be more and more significant in marketplace.

We prefer to give an option to sellers who have very high turnover rate rather than having products ideal at the DC. So we are even choosing the sellers that come in and also the products they bring just to check the turnover.

As for suppliers, Fabricio Garcia is going to answer the question.

[Fabricio Garcia, VP, Operations]

Good morning, everyone. Good afternoon, Fabricio speaking. Our supplier relations, we always had a very sound relation with all of them. Today, we are the #1 based customer for several suppliers. Last year, we made some inventory adjustments. And right now, we have very healthy inventories. We are at the best breakout rate that we have for the last 8 or 9 months, with very robust partnerships as well.

Suppliers also working for the market to be rational. It helps a lot. So a very positive outlook. We don't have any problems of delivery volumes, which is important to our business, and it tends to become even stronger over the year. So we are very confident and very happy with our relationship with suppliers.

[Vanessa Rossini, IR]

Nicolas from JPMorgan.

[Unidentified Analyst]

I think most of my question has already been answered. But now is it evolve in the last 3 months and thinking about the marketplace, you talked about the small and medium and big sellers. What remains to be developed for you to take more advantage from these 3 levels of the pyramid?

[Fred Trajano, CEO]

The cap is the cheapest we have ever seen. Everybody is more rational in investments. Some companies have even reduced their Google ads, for instance, or have totally removed them. So today, we have a situation that is much more reduced than during the pandemic when the figures were totally infeasible.

So we are able to grow sales with better margins and we are living a good moment, but we do not want to get away from rationality regardless of the way the market is now. I'm not going to mention any specific competitor, but we will maintain our rationality increasing our operating margins, and we will be making our best endeavors to increase returns about the medium-sized sellers and still talking about this increase, we believe that fulfillment and the work of Magalu Entregas or Magalu delivery will become more and more important.

When you have a higher conversion, you have a lower margin. So you must have the fulfillment that we have already enabled. It is totally integrated to the DCs that we have. So the marginal cost is low. So we can do this feasibly from the economic viewpoint. And with shorter delivery terms, we are able to increase our conversion, and therefore, we increase our margins.

All the improvements in the sellers' platforms are giving us a better conversion. The platform is already very good. The seller cockpit for them to operate. We even have a few things that some platforms do not have for the medium-sized sellers, where we had a smaller share, we evolved quite a lot, and they like what we have and nobody else has.

We have a very significant opportunity in the medium-sized seller, and they are the bulk of the market nowadays. Thank you very much.

[Vanessa Rossini, IR]

Our next question comes from Ruben Couto with Santander.

[Ruben Couto, Santander]

If we think about margin, cash generation, liquidity, this was very good. You have a privileged condition now, the good position for year 2023, which still has very high interest rates. In this context, what should we expect to see in terms of CapEx, deleveraging? What do you see down the road? What do you think might happen over the year?

And a second question, if I may. Fred, I really like what you said about opportunities in different ticket ranges. Some are more attractive. So I just want to better understand. Your comments are specifically for 1P. Am I right to assume that? And based on that, what about the current brand portfolio in terms of IT, logistics? Is this already ready to capture the opportunities you mentioned? Or is it something that you're just beginning to map and to be seen in future years?

[Fred Trajano, CEO]

I will begin answering the first question about CapEx. No, we maintain. We are very conservative in our CapEx investment. Today, it's totally in IT. So for Fatala's team, the IT team and we maintain everybody in the team. We're even growing in some segments. We believe our future is to be a platform, and as a platform with big investments, they are all earmarked to IT, data, artificial intelligence. And this requires CapEx, but at a much lower rate.

So we opened DCs, stores, 30 days less inventory days. So we don't need to invest so much in CapEx and interest rates are also very high. So for any investment return is in a longer term, and we are prioritizing shorter term right now.

[Roberto Bellissimo, CFO]

Good afternoon. Beto speaking. Fred told us about our CapEx. And what's most important when it comes to cash generation and reduce deleveraging. First of all, we don't give a guidance, but we are constantly working on this, and we've posted evolution in our operational profitability, as you could see.

In addition to these factors, another very important thing is working capital. Last year, we delivered greatly our working capital, greatly reducing inventory days, like we said, inventory turnaround. And for this year, we expect to keep on evolving in inventory turnaround turnover.

Now in the scenario of higher growth, it becomes a lot easier to have this turnover. Our stock-out rate, like Fabricio said, is very low and we are very assertive. And the quality of inventory is also quite good. So we will keep on pursuing improvement in inventory turnover.

Supplier-wise, our average turn is already very healthy. We always want suppliers to have a balanced inventory level. And now from the moment we evolved in our inventory turnover, we can even have a healthy level, and this contributes for cash generation.

And lastly, another very important driver this year, has to do with tax monetization. Last year, with DIFAL return, now we have more taxes to pay. And consequently, it also gets easier to offset the level of taxes we already have in our assets. So that's a year to continue working capital in our aspects, again, particularly for inventories and suppliers. So we are very optimistic with cash generation for the year evolving our net cash position over the year.

[Ruben Couto, Santander]

And what about the question about 3P?

[Fred Trajano, CEO]

We don't have 3P. This is economics, critical of 3P. I'm not saying is Magalu, but we have a rationale here because we have other tickets. I know everybody should have their discrepancy, but I'm just working on a rough level, but it's important to see that the market has this vision. For 3P right, we included the take rate in our explanation.

[Vanessa Rossini, IR]

The next question is from Thiago Macruz with Itaú BBA.

You're going to ask about working capital. Let us continue with questions, Macruz, and then we can go back to you.

Next question, Danniela Eiger with XP Investments.

[Danniela Eiger, XP Investments]

I have two questions. Firstly, I would like to go back to better understand possible impacts. Fred, I know you said everything you have to say about the material information. But just to better understand, it was not clear exactly what is being complained about. What is the irregularity.

According to our interpretation, it's something related to the buyer and the supplier. But no financial impact on Magalu. We just want to understand if the potential impact would be like dismissing an employee or anything else that could be seen in the numbers? This is not so clear. I wonder if you could for instance, give us some more color on this?

And then my second question, my second question is about margin dynamics. You said it's important that everybody has this rationale in marketplace. So I want to better understand how you see the margin dynamics for the year. If I'm not mistaken, you mentioned last quarter, they expected the margin to exceed 6%, but this was not the case this quarter. I'd like to understand how we could consider this evolution and also your strategy in this regard?

If we consider macroeconomics, consumers are very frail. So not prioritizing expanding margin right now to gain share might perhaps make sense to you. I want to understand this balance margin and growth in the short-term.

[Fred Trajano, CEO]

Danniela, thank you very much for all your questions.

Of course, when you have a theme such as this one the more details you can in part the better it is. But if you don't have it, you are very responsible if you try to say something. So you do have the material information that has already been disclosed. And you already know that everything will be investigated. And it got here 1 day before the disclosure or the publication of our quarterly results.

So it's really too early to say anything whatsoever besides what we have already published in the material information. Should we have any information you can be sure that we would be informing you.

We have 3 distributors that are -- distributors that are mentioned in this acquisition, and the total sum represent 3.5% of their purchases last year. And this is the only thing I can tell you. I cannot tell you about any consequences or any further steps. And we will have to limit ourselves to what is public in the material information, as soon as we do have some information to give you, we will do that.

About margins, we have evolved quite a lot over the year. I have already informed you in the fourth quarter. If you see quarter-on-quarter, you will see the margin situation that we had in the quarter. And our focus continues to be increasing our margin.

People ask me well with the current competitive scenario, are you going to focus on market share. And I'd say, the main focus that we have today, of course, we will continue to gain share, but we are not going to waive our margin. Our main focus continues to be increasing our margin.

Reminding you that we had the transfer of this tax already in the third quarter and because of the less competitive scenario, more rational scenario, we were able to do this in a satisfactory fashion more or less what we had planned for the quarter, but we continue to gain share.

And as of the second, third and fourth quarters, I have a very positive outlook. We will gain market share without losing profitability. We want to bring our EBITDA margins back to historical levels. I have already talked about 3P and Beto talked about fintech. There was a negative contribution from Luizacred to our margin last year.

And as the short-term NPLs improve, we will be having a more positive situation. So we are very positive in terms of our possibility of improving our figures, getting closer and closer to our historical operating margins. But the interest rate situation has to be dealt with.

[Danniela Eiger, XP Investments]

The strategy has to do with the different categories. And my next question has to do with the competitive scenario in sports goods and because of Netshoes in terms of end because of net shoes, we thought this would really bother the competition a little bit more, maybe? Or do you have the same strategy for all the categories?

[Fred Trajano, CEO]

Yes. Yes. There was a price increase on the part of Netshoes. So in this sense, we had to transfer taxes because almost all the sales from Netshoes came from Extrema, and this competitiveness didn't come from us, I would say.

[Thiago Macruz, Itaú BBA]

Thiago Macruz. I'm sorry. I apologize, I had a technical problem here. I would just like to better understand the economics between fulfillment and 3P via single channel. So if fulfillment becomes more has a better share as expected. Should it be positive for economics? Should it be better via 3P? How do you think that at the company level?

[Fred Trajano, CEO]

Thiago, when we begin to charge for fulfillment, the answer is yes. And then we can charge from seller the DC, operation costs and also the movement of the goods. And obviously, because the goods leave the DC for our network that meets 1P and physical stores. So it's marginal cost for us. For us, it becomes more positive rather than collecting the goods at the seller because then we have a cost, which adds cost to 3P.

Anyway, even though we don't charge it, remember that the cost that we have at the DC, we're already paying for the rent, operations. We have a team there. The truck is already delivering in different cities. They already have a route for the stores force.

So this is positive in the sense that it improves our conversion. Naturally, we -- there is a slight increase in the number of people in the DCs working on the goods. But once penetration goes up and we manage to charge economics tends to be better, thanks to the way we set the fulfillment, which is benefiting from 1P and using synergies of multichannels.

[Vanessa Rossini, IR]

Our next question is from Vinicius Strano with UBS.

[Vinicius Strano, UBS]

About fulfillment, I wonder if you could tell us more about the road map for fulfillment, both about logistics, investments and also the subsidies for fulfillment? How could we consider this evolving over the year?

And another question about tax. In addition to DIFAL, which was already mentioned, any other tax topic that you're paying more attention to as a point of concern? Or any strategy that you might have to mitigate that? Could you comment on this, it would be great?

[Fred Trajano, CEO]

As I said before, we have fully reduced the inventory days for 30 days in 1P, we have an idle capacity in the DC, and practically all investments that we make, be it in platform. For instance, the major point is to get all the licenses at the municipal level. It has to do with technology and bureaucracy as well.

So it's more -- it has more to do with the Fatala team. We have been making surgical investments, so to say. And undoubtedly, this is one of the areas in which we have been more flexible in terms of hiring people in the Logitech team.

Our platform is already very good, but there are some improvements that still have to be made. We have evolved a lot, but we want to improve the sellers' operations. In terms of taxes, Roberto, would you like to say something?

[Roberto Bellissimo, CFO]

Well, we have already talked about the tax that we talked about during this call. And besides the transfer, they are the multichannel operations and faster operations to be closer to the clients. And there are some teams that are being discussed internally, also including the tax reform, but there is no additional information that I could give you so far. So this is the situation regarding taxes.

[Vanessa Rossini, IR]

The next question [indiscernible] with Goldman Sachs.

[Unidentified Analyst]

Two follow-up questions actually on our end. Firstly, about Luizacred, what about the appetite for risk over 2023? And how do you consider default or delinquency behavior?

Second question on a different topic now. Could you give us more color on the road map for ads? What about the capabilities that still need to be deployed that will allow you to have penetration over GMV?

[Roberto Bellissimo, CFO]

Let me begin by answering about Luizacred. Like we said before, we always keep an eye on the cohorts on a monthly basis. And the most recent cohorts are overperforming delinquency-wise. Please remember that we stopped -- we started reducing credit granting by the end of 2022, 2021, beginning of 2022. And now focusing a lot in preapproved customers. Customers who use our app or those who are preapproved in our stores. This is so important, and that's why this allows us to have a stable base, even though that is a little bit more of default in Brazil as a whole.

December and January showed relatively good delinquency rates. February was slightly different owing to Carnival, like Fred mentioned before. And we expect to see a positive trend for the year, be it for NPL short-term, which seems to keep on going and long-term NPL as well.

Based on our forecast, it's expected to be flat soon and maybe will go down by year-end around 9%, for instance. That's not a guidance. It's just a sign we see today with a slight expansion in our customer base not changing so dramatically yet. The approval rate, but also bringing improvement, always trying to grab the best customers, preapproved customers and convert more lower-risk customers.

We are very optimistic with Luizacred elsewhere in this evolution, particularly in midyear and until the end of the year, be it by increasing revenue again and efficiency ratio at Luizacred is already quite good and keeps on improving. It's one of the most efficient we have. Some months is even lower than 30% efficiency rate, which is a benchmark.

Once delinquency goes down, it improves, and funding costs also improved as the CDI goes down as well. So we are very bullish in terms of Luizacred's results over the year and for next year as well.

[Fred Trajano, CEO]

So I'll answer about ads in 2022, it was a year where we delivered -- well, the platform, core of the ads. If we think about billing, ads, recommendations, everything is there. So what is our focus now is in the evolution regarding algorithms for dynamics, prices, CPC, matching and the audiences that are there.

So from the moment, this improves, we also deliver more results to advertisers and naturally grab more investment from media. So we're very confident that the major platform is ready. And now all we do is operations, improving technology and also commercially. More actions on sellers, brands and suppliers. So we're pretty confident that these are the major drivers for growth and profitability of the company, not only in January, but for the full year.

[Vanessa Rossini, IR]

This concludes the Q&A session. I would like to give the floor back to Frederico Trajano for the closing remarks. Over to you, Fred.

[Fred Trajano, CEO]

Thank you all for joining our call. Good afternoon.

[Operator]

Thank you all for joining us today. Have a good day.