Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended June 30, 2019. I am Federico Sandler, Investor Relations Officer for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer; additionally, Marcos Galperin, Chief Executive Officer; and Osvaldo Gimenez, Executive VP of Payments will be available during today's Q&A session. This conference call is also being broadcasted over the Internet and is available through the Investor Relations section of our website. I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the Company, industry trends and product and technology initiatives. These statements are based on currently available information and are including assumptions, expectations and projections about future events. While we believe that our assumptions expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described on the Forward-Looking Statements and Risk Factors sections of our 10- K and other filings with the Securities and Exchange Commission which are available on our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found on our second quarter 2019 earnings press release available on our Investor Relations website. Now let me turn the call over to Pedro.

Great, thank you. So let's dive straight in and let me kick off this quarter's call by saying that we are pleased and optimistic about how this year is playing out. We've delivered another very strong quarter from a gross billings perspective as we continue to grow and gain scale on our leading e-commerce and fintech ecosystems across Latin America. Let's first take a look at how we closed a great second quarter that carries us into the third quarter of 2019 with solid momentum. The following KPIs place consolidated quarterly results within context. Gross merchandise volume accelerated to 33% year-on-year on an FX-neutral basis reaching $3.4 billion. Total payment volume also accelerated versus the prior quarter to 90% year-on-year on an FX-neutral basis to $6.5 billion. While total payment transactions grew in triple digits at 112.5% year-over-year and reached 182 million payments processed. Gross billings grew 73% year-on-year on an FX-neutral basis ascending to $606 million. We are encouraged to observe these robust rates of growth in key performance indicators all of which are pointing to increasing consumer validation of the innovative product and service offerings we have built around e-commerce and fintech. As a result of this and given the size of the opportunity, we continue to garner confidence in our cycle of investing aggressively to add more users at the expense of near-term profitability. Let me now walk you through our fintech progress report. During the quarter, total payment volume, accelerated both in dollars and on an FX-neutral basis, driven for the most part by off-platform TPV growth. The latter not only explained the majority of total TPV growth during the quarter, but reached an important milestone during June, as that was the first month that TPV from off-platform surpassed on-platform TPV in our history. In line…

[Operator Instructions] Our first question comes from Stephen Ju from Credit Suisse. Please go ahead.

So Pedro, so I'm thinking through the mobile point-of-sale opportunity. It seems like the per merchant utilization rate seems to be a fraction of where some of your competitors are probably right now. So given that the size of the merchants that you have may be smaller, but can you talk about what you may be able to do to drive faster per device TPV? And secondarily, I don't think we've ever seen a sequential dollar pickup in sales and marketing spend from Q1 to Q2. I heard the level that you showed on the support. So can you talk about where the main focus of that incremental spend may be and whether it's consumers et cetera facing. Okay, thank you.

[Technical Difficulty] Ladies and gentlemen, please continue to hold, your call will resume momentarily.

Can you hear us? Hi, Stephen. Sorry about --

I can hear you.

[Technical Difficulty] Let me start again. We have some technical problems. So Stephen, part of what you see in terms of per merchant utilization rate, if you want, by the time, when we started our MPOS business we first addressed the very low end of the long tail of the market and that is where we have been gaining lot of traction. And so it is to be expected that the number of transactions per devices is more than better some of our competitors. Having said that, during last quarter, we started to move up market. We launched a new device towards the end of last quarter, where we are starting to this small businesses - small businesses, but not the low end of the long tail as we are addressing before. So as this strategy moves forward, we believe we will be addressing this market segment that we have not addressed in the past.

And the second question very quickly. Stephen, I think the second quarter many times is somewhat heavy on marketing spend, is when the hot sale occurs in Mexico. So there's always increased investment there. Having said that, I think this year, what you see is the growing number of product lines we have particularly in fintech that we begin to invest more aggressively behind in terms of marketing, and also a renewed focus on brand building and brand marketing investments. Part of that is to start generating the MercadoPago brand and sub-brands around MPOS, credits, merchant services, but some of that is also to strengthen the marketplace brand equity positioning. If you look at it on a country basis, you'll realize that pretty much spread evenly across the significant margins, the pickup in marketing spend.

Thank you.

Our next question comes from Robert Ford from BOA. Please go ahead.

Congratulations on the quarter and thanks for taking my question. Osvaldo, can you discuss wallet funding frictions across the major marketplaces and how you're addressing those please?

So I would say that this is just on a country-by-country basis, we made a lot of progress with the last few weeks in Argentina and we are in the process of making that same progress in Brazil. First, in Argentina, in the last few weeks, we were able to bank from - transfers from any bank account through [indiscernible]. So, we are able to receive transactions or transfer from any bank account and that is way easier than what it used to be in the past. And in the case of Brazil, we are integrating right now with [indiscernible] and we expect that also to make the funding significantly easier than what it has been so far.

Now that's helpful. And can you talk a little bit more specifically on the growth of the mobile wallet two-sided network in Brazil in terms of the number of payers, collectors and the frequency and then maybe can you share with us what you're doing there to make the wallet stickier, it seems that you've had several successful strategies in Argentina and I was wondering how difficult it is to replicate that in Brazil?

Let me - we have not disclosed numbers of specific payments in wallet in Brazil. So let me give you qualitative approach, as we've said in the past, we are probably one year behind than what we were in Argentina, we are later to launch. But we are starting to see traction both in terms of some large merchants where we are adding and also in terms of consumers who are starting to use the platform and we're starting to see monthly growth rate that are very interesting. As we mentioned in the past, we know this market will take longer to develop than the one in Argentina, since we required maintenance integrations with software houses, but we are encouraged by the results we've seen.

Our next question comes from Edward Yruma from KeyBanc Capital. Please go ahead.

Thanks for taking my question. I guess first on Brazil, I know you seem to remediate some of the issues that you encountered there but maybe digging in a little bit deeper, what do you think has kind of the flat penetration to 1Q? And then I guess second obviously some big competitors moving markets like Mexico, any change you think in the competitive environment that you're observing thus far? Thank you.

Can you just clarify which penetration you're looking at, if it's fulfillment by MercadoLibre or which adoption of which metrics?

Yes. The fulfillment by MercadoLibre.

Yes, so just to put that in context, I think what we said in the earnings is that we saw quarter that exited on actually a much more positive note than it started. So a lot of the initiatives in terms of investments and technology behind making it easier for sellers to adopt our fulfillment solution and also incentives for them to adopt our fulfillment solution are beginning to gain traction. That's encouraging. I think also, very importantly, when you look at the end game here, the end game is to improve the cost and the quality of deliveries in the country and I think the other side of the coin for Brazil in fulfillment is the cross-docking efforts, which are evolving extremely well and consequently Brazil already has one-fifth of all volume going away from the dropship market, which is not that far behind where Mexico is. So, all in all, I would say overall shipping strategy in Brazil continues to perform very well driven primarily by cross-docking but also when we look at the end of the quarter, adoption of fulfillment was beginning to ramp up. Let's see how that evolves over the next few quarters if it becomes a trend, which we hope that is the case.

And then on competitive environment in Mexico --

In terms of the competitive dynamic in Mexico on retailing business, I don't think there have been any significant changes over prior quarters, I think Mexico continues to be hyper competitive, we continue to see very strong performance from our business and I think we're pleased with the GMV growth we continue to deliver there and obviously the financials have begun to improve considerably from a top line perspective as we get more efficient and rationalize more and more our free shipping spend.

Our next question comes from Deepak Mathivanan from Barclays. Please go ahead.

It's Trevor on for Deepak. First question. Can you elaborate a bit on the GMV growth in Brazil? The 27% was faster than overall e-com growth but the comp was a lot easier and you have strong momentum on various categories. Is there anything specifically that you can highlight that maybe it's going to offset some of these tailwinds. I know you guys don't give guidance, but is this sort of the run rate we should expect going forward? Second question, on the fintech side, can you talk about the frequency increase on some of the new use cases that you're launching? What should we expect to edge along the lines of new use cases and merchant categories? Thank you.

So let me take the Brazil number first. Osvaldo can take the payments question. I think like we've said, going forward with Brazil, we've done a lot of innovative work around improving shipping, not just the quality, but also the pricing around that. And so, hopefully that continue to generate positive momentum going forward. Additionally, from a comp perspective I think the tougher comps are behind us. So we know how much we'll grow, we'll give that out once we report future numbers. I think in general terms, we continue to have an ambition to gain market share and to continue to grow faster than the market is growing. And if we remain focused on the innovation that we've been delivering on the marketplace front, that should play out favorably.

And regarding the second question regarding FinTech, we are seeing an increase in frequency and probably the one thing where we see the most is in Argentina with the wallet where over the last year what we have seen is the number of transactions per user is increasing and also the number of users who do, let's say, 2, 3, 4 or over 5 transactions per month is also increasing. And when we look at that and try to understand why that is happening, we see that those users who adopt multiple flows of payments are accelerating - are accelerating the growth and by that I mean users who are doing those not just that one kind of transactions such as paying with a QR code or topping up a mobile phone from utility and when we get users to do more than one or two of these flows in every month we get them to significantly increase the frequency of use. So we are in the process of ramping that up in Argentina and trying to replicate it in Brazil and Mexico.

Our next question comes from Ravi Jain from HSBC. Please go ahead.

I have two quick questions. Starting with Pago first, the credit business is scaling up nicely, so could you give us some color on, what is the real key initiatives that you are focusing on for now and how you want to manage risk around the credit business? And second thing on the e-commerce coming back following up on the Brazil question, is - how is the competitive environment in Brazil you're seeing, is it getting - is it getting more competitive? Is it neutral? I mean, how are you seeing, like the new product categories that you're focusing on which is maybe apparel and the basic items? Thank you.

So in terms of the credit business, as you said, we are - we have been able to scale during this year. Part of the things that have been going very well are the consumer credit business, which we launched in Brazil last year and in Argentina - we're in the process of launching in Mexico and Argentina, we have gone beyond just pay to buyers to include personal loans. So we're already offering credit in Argentina where people can take the money and not been on our platform and just take into the bank account and withdraw it and then pay us back. And all of these initiatives have shown lots of traction, and those are what are driving the consumer business this year, in terms of merchants, as we said in the script, what we have been doing is we have been able to improve our models, and as we improve our models, we have more comfort level reaching out to more merchants and offering them the larger loans.

In terms of Brazil competitive scenario, again, I think no significant shift from the last few quarters. Brazil has been a very competitive market with multiple players. I think we've seen some nice share gains this quarter when we look at consolidated market numbers. From a category perspective, I think apparel continues to perform well for us. Consumer packaged goods, which was your other question, I think is more of an opportunity going forward, perhaps the back half of this year, beginning of this year, beginning of next year. And when we break down market share gain opportunities on a category-by-category basis, there clearly are categories that we still haven't fully explored and that we hope to tackle moving forward. So, I think there is still room for us to sustain our leadership and even gain in terms of share, as we focus on these categories. And just in general on continuing to improve the user experience that we offer in that market.

Our next question comes from Irma Sgarz from Goldman Sachs. Please go ahead.

Thanks for taking my question. Two quick questions. Firstly, on the TPV, you obviously reached a milestone this quarter with off-platform TPV in June surpassing the on-platform TPV and I think you've in the past sort of consistently said that you're - you see room for having the off-platform TPV growing to multiple times the volume of the on-platform TPV. Now I was wondering, as you sort of think about the road map going forward, do you still think that it makes sense to run this business directly? Or would there at some point also be an opportunity to potentially to partly separate your payment or fintech opportunities from the e-commerce in a more formal way? I hope you sort of understand where I'm going with this question. And then the second question on customer acquisition, I think, very much in line with the messages that you passed on the past quarter that you're investing more on the marketing side and driving further customer acquisition. I was just curious if you could shed a little bit more detail on where you may be seeing the biggest opportunities in terms of driving, it is through cohorts of customers into your basin, is that maybe mostly on the e-commerce side or is it mostly on the cargo side on sort of the consumer-facing side? And are there any specific regions or demographics that you're going after in this push? Thank you.

Sure. So the first question, your investment banker question. I think quite the contrary, when we look at the road map for the next few years, what we still see a significant opportunity for cross-selling across the different pieces of our ecosystem, very closely tied to each other. So, when we look at adoption of many of our fintech products, for example, among our marketplace users, both merchants and consumers, there is still significant adoption opportunities there, and those are obviously the lower - lowest customer acquisition costs we have. So as we roll out our loyalty program and as we try to get better at cross-selling across platforms, the synergies of having these businesses together, I think is potentially the biggest competitive advantage and differentiator we have against many of the competitors that we face, both on the fintech side and the retail side. So we still see these businesses as very, very intrinsically United and as a critical component of our competitive advantage. In terms of where new user cohorts in customer acquisition can come from, like I said before, the investments have applied to both the payments businesses and the marketplace. I think just the nature of the addressable market that we have in front of us in payments, probably means that if we look at a 3-year to 5-year view, payments should be an area of greater user acquisition as we aspire to become a digital wallet for mass market. But that doesn't mean that there is still aren't opportunities to increase the number of users on the marketplace, we've seen a pickup this last quarter as we noted in terms of new users for the marketplace as a consequence of this investment. And I think that's very positive news as well. So again, customer acquisition investments for both marketplace and payments, obviously payments as we roll out QR in MPOS across multiple countries will probably be source of new users. And then as we cross-sell, hopefully, some of those users also become marketplace users. Regionally, I think the strategy is typically, we would like to eventually have coverage of all countries, the MPOS and the QR strategy sometimes do start with a certain regional focus and then expand, but at the end of the day, our aspiration is to become a payment standard across entire markets.

Our next question comes from Kunal Madhukar from Deutsche Bank. Please go ahead.

Thanks for taking the question. You talked about new users. Can you talk about the geographies from which the new users are coming from? And as you roll out the newer fintech products, how many users do you have that are on both platforms, both the e-commerce platform and are also using fintech products on a regular basis?

So, if you look at the ramp-up in investment, marketing, as I said before, it's not focused on any specific geo. Marketing spend as a percentage of revenue has increased sequentially in most markets and certainly in the three largest markets, and so we're looking to drive acceleration in new user acquisition, both marketplace and certainly for payments as we build out the ecosystem across different markets. We will probably see the heaviest estimates in Brazil, Mexico, and Argentina which are three markets where we're most focused on right now in terms of building out the part of the ecosystem.

[Technical Difficulty]

And a follow-up on the investment side. So you talked about investment especially in marketing. Now that you have much more capital and you also have probably more extensive discussions with PayPal with regard to how you're going to invest the investment that they had made, how you are thinking in terms of investment in over the next few quarters in terms of like the amount of investments and the direction that those investments could take?

Yes. So I think, a lot of investments will be behind the rollout of the fintech platform. So, that's a combination of online marketing, brand marketing, subsidy of MPOS and commercial agreements trying to increase the number of large scale [indiscernible]. There are investments in our logistics efforts for the marketplace as we rollout a growing number of warehouses, sortation centers and distribution centers, those are the focus terms of or mental spend going forward. Consumer and merchant acquisition and on Fintech brand and marketing efforts and continued investment in the rollout of logistics.

Our next question comes from Gustavo Oliveira from UBS. Please go ahead.

Hi Pedro, thank you for taking my question. I have two questions, the first one is, if you could give us the rationale for the – flat fee implementation in Argentina and when and if you think about removing the flat fee in Brazil. And I would like to understand what are your thoughts on GMV impact if that was the case. And then the second question would be about your agreement we PayPal, if there is anything you can comment about it or on whether you expect to finalize in general lines what would be the thinking behind?

Let me start the second one, very quickly. So we continue to work through implementation details with PayPal, more and more working now on the nuts and bolts process and technology. I think we'll disclose where we come out what the appropriate time. This is a long-term relationship. So whatever we've launched now is the initial and then we'll see where it goes from there. But I think it makes more sense to disclose it when we actually launch the different efforts. The rationalize for the flat fee in Argentina I think we learned a lot from the launch of the flat fee in Brazil and if you look at the way we launched flat fee in Argentina, you'll realize it's a much smaller amount. I think it's positive in terms of eliminating from the site items that potentially don't really rotate well, because there is a fixed cost for a very small cost items that aren't that relevant. But the way we manage it in Argentina has been, that's detrimental to units sold it in Brazil. I think in terms of Brazil, whether we would remove it. I think it's something that we will always leave ourselves open to analysis either removing it or lowering it, but there is nothing that we've announced to our sellers or that have in the cards that we can disclose right now.

Thank you. Our next question comes from Pedro Fagundes from BBI. Please go ahead.

Thank you for taking my question. Just one quick follow-up on the customer acquisition question, in Brazil specifically now that you're investing more heavily in fulfillment adoption and probably also investing more heavily Pedro yourself, you mentioned maybe MPOS subject even things like that. Does it make sense to assume that we should assume relatively weaker margins going into the back half of the year in Brazil specifically? Thanks that's my question.

So, we don't give forward guidance for P&L. I think we've been answering is that we see as enormous mid to long-term opportunity. A lot of it's in the Fintech space obviously, I think we've raised capital, so that we can make sure that we capture that opportunity over the long run and not try to opt for any specific result over the short-term. So your incremental investment behind building out our logistics capabilities, building out the Fintech network across multiple geographies. I think we'll try to remain disciplined in how we deploy capital and make sure that it makes sense for the long term, but not focusing on short-term results.

Our next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Thanks for taking my question. I wanted to ask Pedro, Osvaldo with regard to the merchant services growth that was very impressive this quarter, what is the use cases and online merchant using their merchant service solution. What I mean is that typically a larger market or a smaller merchant is there any profile of who is using the MercadoPago solutions in commercial services?

So this is Osvaldo so mostly we have been focused I would say in the mid market. These are not the larger merchants we usually or [indiscernible] that the big market to whom we provide a very good solution, both in terms of, it's a full stack. In terms of fraud prevention of integration, customer and so on and what we have been doing lately is start to focus more also in the long-term, which was not really out in the past. And so, we continue to drive growth most through medium merchants, but we are more focused on the long-term and because it has to slow growth over the last year.

Okay I mean there is, I don't know this I should, but in terms of the QR code and MPOS overlap does the QR code just go to the merchants that do not take their mobile point of sale or is there a use case where they would have both if someone wanted the call it a non-party transaction or a party transaction, our fleet to thinking about like the rollout of the QR versus the MPOS?

[Technical Difficulty]

Our next question comes from Marvin Fong from BTIG.

Thank you for taking my question. That's the first one, I guess could you just update us on your goals in terms of how much you were running over year managed network. Have your goal changed I think you had a plan for the next two to three years. I was just curious, based on how you guys have been performing if you updated those goals at all and that? Thank you.

Hello can you repeat the beginning of the question.

Yes, I was just I think from talking to the – before that there were some goals that you had set out in terms of how much the deliveries that you wanted – going over to the managed network. I was just curious if you helping out what those, if you could just remind me what those goals are you've got more aggressive with your outlook on how much you want running over the managed network in the past few quarters as you're thinking change.

I think we've said that we strive over a multiple year view to deliver delivery times and costs that are best in market and as a consequence of that we would need to run in excess probably of 60% of all units shipped through a network that isn’t the old dropship network that we had. So when we look at the evolution versus that long-term goal. Mexico is at roughly a third I think of our shipments already not running on dropship. Brazil is slightly above 20, Argentina is higher than both of those and we're seeing consistent improvements in terms of lead times and also overall cost. So I think we remain optimistic with the rollout of our logistics capabilities. Obviously, if we are a third and a fifth in Brazil and Mexico, there is still a lot of work to be done over the next multiple quarters to get to that mid-term goal. But I think we see very good traction in that direction and I would say, equally important, we see our lead times as being very competitive in all of the markets where we operate. So things are planning out. I think very much in line with what we had set out to accomplish on the logistics front.

Thank you. Thank you, ladies and gentlemen for attending today's conference, this concludes our Q&A session. You may all disconnect. Good day.