Magazine Luiza S.A.

Good morning, everyone. Thank you for waiting.

Welcome to Magalu’s conference call about the Second Quarter 2022 Results. [Operator Instructions] Be informed that this event is being recorded and will be available at the company’s IR website, [email protected] where you can also find the release and the presentation both in Portuguese and in English.

The English presentation link is also available at the chat. [Operator Instructions] Now I would like to turn the floor over to Fred Trajano, CEO of Magalu.

Fred, please you may begin.

Good morning, everybody. Thank you very much for participating in our earnings conference call about the second quarter of 2022.

Once again, I’m here together with all the executives of Magalu and they will be available to answer your questions at the end of the presentation. Myself and Roberto Bellissimo will be answering.

I would like to start with a slide of the presentation that you can see in the material that you have received. In the second quarter, we had the characteristics, which is the following: We have a normalization trend of the growth curve of the online market.

After the second quarter of 2020, when we had the full quarter in this modality in Brazil and in the world, there is a normalization of the growth curve. And I would like to say that this normalization is not – it is just an adjustment because during two quarters, we had boosted, so to say, quarters because people were online because they were at home all the time.

But the future trend is maintained at the same level that we had before with the penetration of e-commerce both in Brazil and in the world. With stability online and there was a slight decrease at the beginning.

But as I said before, we had two years of not normal growth. So this is not an inflection.

This is a normalization. It’s going back to normal.

The future of retail – of advertising is analog. It is digital both in retail and online.

It is very important for us to be aware of what we are seeing in 2022. We’re going back to normal.

By explaining our growth, it is very important to look at the movie or at the film of the last three years. Magalu grew 34% per year since the beginning of the pandemic up until now.

In the second quarter of 2019, the GMV was BRL5.7 billion. And in this quarter, we maintain BRL14 billion of GMV vis-à-vis the second quarter of last year.

34% to the three years average annual growth and reaching 72% e-commerce as a percentage of total sales. Even with the situation of normalization of growth, we were able to grow in the quarter 2%.

And over this period of COVID, we got 11% additional market share and 61% here. We sold 4x more in this quarter than we sold in the same quarter of 2019.

You can see that we have been able to keep a very high sales level, a very high revenue level in spite of the situation that we see of going back to normal and our marketplace was the big highlight. You can see 84% year-on-year.

And in spite of the very high comparison base, we were able to go to 114% from 2Q 2019 to 2Q 2020, 63% in 2021 and 22% over this very high base in 2022, 84% three-year average annual marketplace growth. You can see the consistency of our – planning of our strategy in 2018.

We announced to the market that we had already digitalized Magalu, transforming it into a digital company but with human work. And this is exactly the strategy that we see in place and the data are self-explanatory, 84% three-year average annual market growth.

And in the quarter vis-à-vis last year, year-on-year with a very high base in spite of that 22% growth. I think it’s important to mention in our strategy that we announced to the market that we had the diversification category in the pandemic.

We also had a boost in durables and Magalu grew significantly before the pandemic with the third biggest chain of durables. And then we had a drop in the category such as was the case in the home market in this quarter.

On a year-on-year comparison, we gained share and we keep a very sound position much higher than what we had in the pre-pandemic period. But what is important on this slide is the growth in new categories in – with a higher offer of durables.

And besides selling very well all the durables, we grew also online new categories, at least twice the growth of durables in the new categories. As you can see that our online GMV is already 52% made up of new categories.

Most of what we sell online is new categories because of all the investments that we made in the company that we acquired, Netshoes, Zattini, Época Cosméticos, KaBuM! and all the investment and all the consistency in our planning for the growth of our marketplace with a major proportion and penetration of these new categories.

So with the deconcentration of categories, we are leaders in durables. We like the category.

But you have a counter cycle. When the counter cycle comes to an end and – but we are doing a very consistent work.

And you can see the evolution quarter-on-quarter, 52% in the second quarter of 2022 of GMV coming from new categories. One of the major driving forces of this diversification is our marketplace.

We reached 200,000 sellers at the end of June. And the major driving force behind that was a strategy that we launched in the pandemic, the Parceiro Magalu, the Magalu partner.

And we believe that the future growth of the Brazilian retail is on the omnichannel seller. In order to be 30%, 35%, we will have to help the Brazilian off-line retail going to the online.

And Magalu has already developed all the technology in order to help these retailers. And we have the full support of our multichannel presence in almost 1,000 cities, the support of our field team and the whole structure of the physical stores of Magazine Luiza in order to help us.

Half of these sellers came from our physical stores. Of the 200,000 sellers, 100,000 came from our team in the physical stores, who are helping them convert from analog to digital.

And also the Caravana Magalu, the Magalu Caravan, we went to Sorocaba, Piracicaba, Limeira, São José dos Campos and the last two with a full caravan Maceió e em João Pessoa everywhere we go with our caravan, we increased more than six-fold the number of sellers integrated in the platform. And we show all the options that these sellers have, financial products, et cetera.

And the caravan is a total success and helps us attract the analog sellers who come on board. With the caravan with multichannel care channel, we are able to have a very relevant marketplace for the multichannel analog sellers and with two important points for our company.

One is the diversification of our categories and the sellers that come, we have apparel 11%; 9% sports; 10% groceries and with a very important diversification. And this is available, everything is available on our digital platforms to our clients.

So you can see a very positive trend – growth trend in these new categories. And interlocality is very important as well because we are able to reduce the concentration of sellers and GMV in the Southeast such as we had before.

We increased 7 percentage points the Northeast, 3 in the Midwest, 1 in the North. And we haven’t even had the caravan there.

The caravan was in the Southeast. And we are going to do this in the South, where we already increased 0.2 percentage point.

We are deconcentrating and it’s very important because interlocality is very important mainly when you have a low ticket. And it also helps the carbon footprint of the company because this characteristic is present in all the products from Sao Paulo to the whole of Brazil and from the economic viewpoint and from the environmental view point is really a plus.

So we have to continue to do this so that we do not have very long businesses with the merchandise. So it’s very important to extend our footprint more and more.

And I would like to talk about the stores. I have already talked about the importance of our physical stores, bringing 50% of our sellers to our platform.

And they help the seller to connect to the ecosystem. And from the logistics viewpoint, it is a major advantage that we have 500 stores at Agência Magalu, Agency Magalu.

And they start to post the product at the store instead of going to a postal brand. So this saves 50% of the freight or the shipping cost.

Almost 20,000 sellers are already using these stores as Agência Magalu. And we have a growing participation of clients who buy from sellers and they pick up at the store.

And of course, 17% lower cost if you have store pickup. And I would like to talk about our logistics, mainly after the acquisitions that we made in terms of logistics Logbee and Sode and all the others.

We went from 90% in 48 hours to 90% with a growth of 20 percentage points. And the trend is to continue to evolve and thereby increasing the conversion rate and of course, continuing our growth looking ahead.

So a very good job being done by logistics here at Magalu in order to meet the needs of our sellers in the marketplace and bringing their services to the same level as ours, 80% of 3P [indiscernible] to Magalu Entregas. Part of our endeavors have to do with leveraging our assets show that this may materialize.

Last month, we launched our fulfillment, which is fully integrated. And it is important to say that this is a different value proposal from the market one because our sellers stores the merchandise in the same distribution center that Magalu stores its products.

So the margin of cost is zero for the company. We have more space available now in the distribution centers to place the products of our sellers.

We have the same delivery, network and the cost that we can offer the sellers is very competitive. And Magalu in spite of all the policies of free shipping, et cetera, we have an improvement here with the fulfillment and the multichannel model.

Some sellers in less than a month, they came on board, and we are very enthusiastic with this proposal. Our view is hyperlocal and multichannel.

And the best option is to use the network that we have. And mainly for the big sellers, they have the possibility of having very selective levels of delivery.

And I would like to highlight here that we have already reached over 50% online in new categories. And I would like to talk about the excellent performance of the company that we acquired.

We made huge investments. The first one was Netshoes in 2019.

And we have been making great strides in the categories that are very important for the Brazilian online. I would like to mention a few figures here, how we make investments that have to do with the general strategy of the company.

Over BRL1 billion in Netshoes in total GMV, 2.5 percentage point increase in market share in the category. Net earnings is BRL32 million in 2Q 2022.

And we have all these advantages that I mentioned for and the same for fashion, for apparel, 37% increase in the category growth, including Zattini and Magalu. In the Magalu, 88% increase with over 30,000 sellers in the apparel category, BRL1.6 billion annualized GMV.

So you can see that even if you consider the long-standing players, we are really standing out in this area. And I would like to highlight Época Cosméticos.

Top of mind today in cosmetics and fragrances, a company that has been generating cash and earnings as well as Netshoes. I would like to mention that the Época products are all available through Magalu.

And – besides selling in Magalu, they are going to sell in Época as well to have a very efficient onboarding and selling not only in Magalu but also in all the sales channels. And once again, I would like to mention KaBuM!

again. BRL150 million cash flow from operations and profit and cap generation 2Q 2022, adding a lot to the company, a totally new category with a huge future potential and giving more visibility to AiQfome BRL1.4 billion annualized GMV, BRL3 million deliveries per month and the biggest growth in delivery.

Almost 1,000 cities being served, continuing our expansion. So it’s very important to mention that investment that were made by Magalu are giving us return and they are positive.

They are contributing to our strategy of diversification in revenues, in results and cash generation. Another important acquisition that we had in the past was Inloco Media.

We had – next slide, please. We had some interesting progress this year.

The most interesting us that – the ads in retail is very important especially in the internal search that’s what brings the highest return to advertisers is that when they can announce and sponsor that product that is being searched in our channels. So we launched that.

You can see it in the video in the presentation. And also, we developed a self-service panel so that the seller or the advertisers can publish their products and promote them in a very easy way and create campaigns in our seller portal.

The revenue in the second quarter doubled vis-à-vis the same period of last year. And we believe the ads will be an important source of monetization in the future.

And also, Lu is monetizing a lot, our digital influencer. She was at Times Square this week and we were awarded Cannes Lions in 2022.

It has over 32 million fans, its representative is growing. And it’s also being used by other brands and showing all our digitizing efforts.

And finally, before I turn the floor to Roberto, I would like to say that this week, we already had that position of the best company to work in Brazil in terms of PTW. Now we have a ranking for Latin America.

And we are also the best company to work in Latin America, even in a difficult year where we are having to make many adjustments, where we are facing lots of challenges, the company is still maintaining the focus and the strategic execution. It’s taking care of people and also clients’ customers.

So we have RA1000 in all brands of the group. We have a high NPS, and we want to keep growing when we look ahead, and we want to have our team happy, motivated and engaged for our next steps.

Now I turn to Roberto for the next details on our financial presentation.

Good morning, everyone. Thank you very much.

I would like to start with the financial highlights. As Fred mentioned, we have grown 22% in marketplace, 2% in e-commerce.

We gained market share there. Total sales were up 1% on and we are able to have a physical store sales stable.

Total sales close to BRL14 billion in the quarter gross margin of 28.6%, an important evolution in gross margin when compared to last year, and we’ll talk more about that. EBITDA of almost BRL500 million with 5.7% of adjusted EBITDA margin and a negative adjusted net income of BRL112 million, close to negative 1.3% margin.

In the next slide, we have our EBITDA on quarter basis. This is to show our EBITDA since 2020 with significant performance in the last quarters, especially when we compare to the end of last year but also when compared to the first quarter of this year.

And our objective here in this half of year was to increase our profitability without losing market share. We were able to do that and also to reduce or increase our efficiency to reduce operating expenses without losing sight of service level.

We were able to achieve that as well. And gross margin, we were up three percentage points.

We increased the product margin. We transferred cost inflation.

We sold more with interest rates and less with no interest rates. But we also grew our service revenues that are related to Magalu Pagamentos and Marketplace, which increased 22% and we were up 25% in our services revenue.

And also, we reduced our expenses, marketing, logistics, contracts and fixed expenses. And we also should remind you that this quarter, we had basically no recurring expenses that we had in the prior quarters.

And this quarter, we have a lean operation already. On the next slide, we have another main highlight in the quarter.

Our cash generation of BRL1.3 billion in operating cash. We increased our total cash position from BRL8.5 billion to BRL9 billion, BRL500 million more of net cash.

And we went from BRL1.6 billion to BRL0.1 billion in adjusted net cash position with a very robust capital structure and a best cash position for the second quarter of the year or the midyear. And this cash generation in the next slide, we can see that was thanks to the performance of our working capital.

Another highlight, we reduced further on the inventory levels and we increased the suppliers’ balances. So our working capital improved from BRL1 billion in this quarter.

We did not make any changes in terms of the average purchasing terms. But since in the first quarter, we had purchased less because we were bringing down inventory levels.

So this quarter we brought purchases back to normal. We purchased BRL1 billion more, so supplier balance was up in BRL1 billion.

And we have a working capital position in the middle of the year that is balanced. Basically, it is neutral.

But when we compare that to last year, we see that there is still room. And that’s also because of seasonality.

And we can have a good performance in our working capital. We have a room to improve it.

We improved our working capital in the second half of the year. And today, we already have inventory levels that are lower than in June of last year, not considering KaBuM!, which was integrated last year.

So we have a working capital that is better than last year’s. And we do have the potential to have a better performance there.

And to the right, we have our financial expenses always related to the interest rates in Brazil. CDI went from 3% to 12% in this period.

And to minimize the CDI’s effect, we are running a number of actions, reducing the average sales term and credit cards, increasing the share of cash sales and reducing the share of credit card sales. And we are also encouraging the sales by PIX.

That’s growing a lot, Magalu and KaBuM! That’s a reference.

For KaBuM! we have 40% of sales by PIX.

And we are working to reduce our main financial expenses, which come from the sellers’ prepayment. On the next slide, we’ll talk about Luizacred.

In the last 12 months, we have grown our base in more than one billion cards. We accelerated the growth of the card base here.

Total sales for Luizacred in this quarter was BRL13.6 billion, also increasing 42%. We had a credit portfolio of BRL20 billion, one of the largest credit card operations in the market, I’m sure.

And on the next slide, we see the delinquency rates are very low, 7.7% for late payment over 90 days. And lower than 90 days, it’s even lower now.

It’s improved and over 90 days late is still much lower than the level that we had in the pre-pandemic period. That proves the quality of our portfolio and also our conservative approach in approving credit and also Magalu’s score in credit approval.

In terms of results, Luizacred has a performance that is breaking even and very much drawn by the accelerated growth of the last quarters. The new client always brings a little bit more provisions and we prepay a little bit more of provisions as well.

So that’s part of the growth and our prior customers’ portfolio is still profitable as well. In the next slide, we have some of our initiatives of fintech.

We reached 5.7 million digital accounts. We went from 5 million to 5.7 million in this quarter and now fully integrated to our proprietary technologies that we acquired from Hub Fintech with the best purchase experience, the total integrated digital account and now also integrated in the mini app of AiQFome we are expanding Magalu Pay to all companies in our ecosystem so that it can be the digital account of all companies in our ecosystem.

And we also have made important evolutions in the experience of the Magalu card in the SuperApp. This is a faster, more intuitive experience and focused in the preapproved clients.

And it is bringing great results in the sale of Magalu cards in the SuperApp. And we also – this quarter, we launched the personal loan in the digital account that can be contracted within the SuperApp itself.

This is for consumers. Now on the next slide, let’s talk about the sellers.

We are also growing a lot. We reached eight billion.

We are promoting all our financial services, our digital account for companies, our point of sale, our company credit card. And we are promoting all of those in our events with the Caravans and Magalu Pagamentos is very profitable with over BRL40 million profits in this half of year with the potential to increase once we made some adjustments in the commission of sellers prepayment that we have done recently, transferring the increase of the CDI rates as well.

And finally, in the last slide, just to put things into context. The quarterly cash flow, once again, 1.3% cash flow from operating activities, investments of BRL200 million interest rates and leasing.

We paid debts and we paid interest on equity. And we ended with a final cash position of BRL9 billion.

So, I now thank you very much. We conclude our presentation.

And we can start our Q&A session.

[Operator Instructions]

Thank you Vanessa, thank you, Fred, Bret. I would like you to talk about the evolution of the services for the sellers for the Parceiro Magalu, the Magalu partners.

How could we expect this evolution over time? And the second question related to this one.

What about the economics of the platform for Parceiro Magalu? First, there is an incentive for them to come on board.

But on the other hand, you have added services and new categories that you’re bringing on board as well. Considering all these moving parts, how could we think about the economics and their evolution?

I’m Luiz. Thank you very much for the question.

The focus of Magalu this year, first, you have to think about the GMV. We had a few sellers and a few sales in 3P.

We have to increase our seller base and increase our GMV. We have already grown our GMV significantly this year and in the pandemic years.

And we launched many new products in this quarter that we intend to explore in order to further increase the monetization of these sellers. First, you have the GMV.

And then after that, you have monetization. So, what we do is the following: The Caravan, we are using the Caravan for two markets.

The first market, like Passou, Maceió [ph] 35,000 sellers and only 500 selling online. The focus of this market is to bring them on board.

They are totally analog. They have never sold online.

So, we have to evangelize them. So teach them how to get into the platform, how to sell.

And then for the second half Luiz, we are already adding to the route of caravan more mature markets such as the ones in the Northeast that I referred to, where we already have a large base of sellers. And for this seller, we are selling the additional services.

I’m not going to mention any names. They already have a good GMV in the ecosystem.

And we want to sell the ecosystem as a whole, all the channels in the group. And this is being facilitated by everything that we are developing for the second half of this year.

Prepayment of receivables is something that is growing very fast. And also, we need to have the increase in the take rate.

But this is the second cycle of the caravan, which means that we have to increase our footprint. About the economics, what I can tell you is that we substantially increased our economics.

It is positive already. And then the fixed cost is practically zero.

It brings a lot of benefit to the company. And you can see the consolidated gross margin of the company as evidence of that.

So, we had an increase in the take rate for all the stakeholders, including the Parceiro Magalu. We’re growing more than the market.

And we have a much lower total cost per seller than the market, which means that we have a very big opportunity to grow and monetizing more and more. But our focus is to increase sales or our main focus, increase our conversion rate, liquidity, more sellers selling more products, more diversification.

Monetization comes with time and the new strategy of the caravan. With a very high base of sellers who were fully analog by means of product platform.

The sound is very bad. The interpreter apologizes.

It is not only financial services, but logistics services as well. And to finalize, I would like to emphasize that we have a deadline for these incentives.

And we have a very significant evolution in the contribution margin of the marketplace. And you can look at the consolidated balance sheet of the company to see that.

Thank you very much.

Our next question is from Maria Clara from Itaú BBA. Maria Clara, please.

Thank you Vanessa. Good morning, Fred, good morning, Bert.

Our question here from Itaú is related to the inventory levels. We realized that they are at levels that are relatively high.

Could we say that the cash generation in the short term can be benefited with higher inventory turnover? Thank you.

Thank you for your question. I will turn to Roberto Bellissimo first and then Fabrício will complement.

But we do not think that the inventory levels are high. What we had in the first half of the year was that we reduced the absolute value of inventories.

And the focus of the first half was a margin increase, expenses reduction. And we believe that in the second half of the year, sales perspective is better.

So, we have to look at inventory levels, analyzing what we are going to sell in the future, not with a picture of the past. So in terms of growth for the second half of the year, we believe that inventory levels are already normalized.

I just wanted to comment on that so that Roberto and Fabrício can add to it.

Just adding my comment, we have inventory levels ex KaBuM! lower than the inventory levels from last year.

Since the end of last year and beginning of this year, we reduced a lot. We sold surplus inventory.

We reduced our total inventory levels. So, we have a healthy inventory.

We have a ratio of inventory and suppliers that is balanced out. And we have a little bit more inventory than suppliers, BRL8 billion in inventory and BRL7.5 billion in suppliers.

So historically, we always had the turnover of inventory that was faster than the average purchasing period. So, we have an opportunity.

We are working to go back to this profile and to have more suppliers than inventory. This is in the mid and long run.

So in the second half of the year, like Fred mentioned, is a period where we have a better turnover because seasonally, that’s where we have better sales, and we already have balanced inventory levels now. And considering we have the inventory levels balanced, when you sell more, you buy more and the suppliers’ balance goes up.

And that happens in the third and fourth quarters. So looking at an upshot of the working capital from at the end of last year, just like at the end of every year, the trend is to end the year with a higher level of suppliers than inventory.

And then we see an improvement in the working capital. When we compare it to this current moment, up to – when you compare it to a snapshot of the end of last year, we have the cash generation coming from working capital.

So, I think this is a general overview for working capital and also opportunities for improvement. Fabrício wants to add anything?

Good morning. Thank you for your question.

Fred said it well. What I think is most important in inventories that we are at a satisfactory level.

Now, we are prepared for the year-end. But what is most important is that we have a healthy inventory and with no stock out.

And when sales improve in the second half of the year, I think our turnover should improve as well. And I think this is a good sign for us.

Perfect. Thank you very much.

Joseph Giordano, JPMorgan.

Good morning everybody. Talking about inventory turnover, and your expectations for the second half.

In July, you already see a trend online and off-line, the evolution of your margins. And what could we expect in this regard for the second half?

Will your costs being – going down, maybe an increase in 7% to 8%. Thank you.

Good morning, Joseph. Thank you for the question.

I will try to answer without giving you any guidance. You know that we do not give any guidance, but I will try to address your question.

I believe that part of the margin gain as of now will be from our operating leverage. In the first half, we had many adjustments regarding our interest-bearing sales and shipping fees and increase in term here and there, transfer of product cost to prices, increase in the take rate.

When you execute all this agenda, the role of the labor is to change the course of the river. And when you change the course of the river itself, you have to be very focused.

It’s impossible to look at that and focus on increasing sales. I think we had a very positive result.

We maintained our share and we gained share in some categories. But the focus of the company was on the increase of the percentage.

For the second half, the improvement in margins, when you talk about our gross profit, it has to come from sales and growth of our sales. In the short run, it is necessary to change the course of the river, as I said before.

But for any retailer in Brazil or in the rest of the world, you have to increase sales. So now we have a very good base.

We have already made all the adjustments. Contracts have been renegotiated and expenses they always go up and you have to cut them all the time.

And we will continue to work to reduce our expenses. Many of the projects have not been implemented in the first half.

And they will be implemented in the second half, not in the same way as in the first half. But the company will try to bring down the absolute amount of these expenses.

But it has to be with operating leverage now. I’m not going to give you any guidance, okay?

I promise to work very hard. We have credit.

We have inventory. We have digital channels that our access very frequently.

And we have to go back to gain market share even if it does not grow overall. In the first half, there was no, like rider, no quota, no 5G.

So there were many factors that were absent in the first half, but will be present in the second half. It’s very improbable not to have growth in the second half, because we have all the conditions to gain market share.

I would like to remind you that our – in physical stores is above 20%. And online in many categories, we have less than 30% market share.

So, we have a huge opportunity to gain share with the Magalu Caravan and many other things that we’re offering our sellers and improvement of our delivery times, our lead times. And I believe that as of the second half with a more adjusted operation, we will be able to gain share.

And the evolution of the market would come with the help of operating leverage. This is not a promise.

This is not a guidance. What I can tell you is that we are going to work very, very hard in this direction.

And retail starts by sales and everything comes later.

Thank you Joseph. Our next question is from [indiscernible] from Goldman Sachs.

Hello, thank you Vanessa. Good morning everyone.

Good morning, Fred and Bret thank you for this opportunity. Fred, you mentioned fulfilled in the presentation.

It looks like it’s working well. leveraging the structure that you already had.

One, can you give me more details where you have already implemented fulfillment, where it makes sense to roll it out, where it does not? And if you allow me another question, changing subjects, going to physical stores.

Considering the current scenario, what is your expectation for opening and closing new stores in the short term? Do you think you have room to optimize your stores network?

Good morning. Thank you very much for your question.

I will start answering. I’ll turn the floor to Leandro and then to Fabrício.

Well, we do have room for fulfillment in all our DCs. We have over 22 DCs in the company.

With the inventory level reduction today, we have an idle capacity in many of these DCs in 30% to 40%. And this idleness can be used and we can add the seller’s goods.

We have to have fixed fest authorization from each state. The states have different particularities and that involves a lot of legal work.

Right now, we have elevators [ph] DC and we are getting the license to do that for Guarulhos year as well. But the idea is that all DCs and all the stores can be part of our fulfillment offer for sellers.

That is the idea. But I will ask Leandro to give us some color on how sellers are using it so that you can see our potential.

And then Fabrício can add.

Thank you for your question. I think that – well, I think the results are promising.

We have – in a short period of time, we have 100 sellers using our services. And we are choosing the sellers.

We do have a number of partners that intend to use our services, as I mentioned. We started with our DC in Nevada [ph] our main DC here in the region.

And we already see very positive results. So first thing that we see that we can bring the delivery time to three days and that’s very good.

Within the state, we have over 95% of our promotions in less than two days for our clients. But we also grow in one-day deliveries when you have a partner that is more difficult to get because usually, that’s the period of time that it takes for the partner to deliver the product to us.

But with that, we are also delivering this benefit to our customers. So it’s very promising, and I’m sure this will improve in the future.

And also another differential in addition to what Fred mentioned and related to our DCs is that we can also have fulfillment for heavy products. We already do that.

This is another competitive advantage that we are offering our partners.

Hello. This is Fabrício.

About the stores, this year, we are not opening as many stores in the second half of the year. We should have this low pace of store opening, considering this year’s adjustments.

We have closed some underperforming stores in the first half of the year. We should not be closing any other stores now in the second half of the year unless there is a special situation with an underperforming store, we could do it.

But we have done what we needed to do in the first half of the year.

Okay. Great.

Thank you very much.

Ruben Couto from Santander.

Good morning everybody. I have two questions.

I would like to go back to the Parceiro Magalu, Magalu partner. You gave us a lot of interesting information.

So, I would like to know the recurrence of these new sellers. You said that 20% already have normalized debt rate.

What about the participation of these partners? They have been consistently increasing the number of products?

They are selling more? What have you been seeing in the GMV for the 3P?

What about the sellers who have been for a longer time in the platform. And the diversification of 3P in other categories, are you really thinking the products that you have in the physical stores?

What about the experience of the online GMV and the 3P and the infant or the category of products in the physical stores?

Ruben, good morning. Thank you for the question.

What we see in the sellers is Parceiro Magalu. We compare them to the sellers that came on board for the medium and large ones in 2018, 2019.

The cohort of Parceiro Magalu, they are performing better than the cohort like we started in the marketplace. So they are very encouraging numbers.

What we have to do in Fatala with the leverage 3P conversion. We see a huge opportunity because we placed 70 million ads of products in our platform, which search algorithms and recommendation algorithm.

And the whole marketing team involved. So it’s a huge gigantic database and we have a huge opportunity with these average search recommendation.

So the major focus of labs in the second half is to give more conversion or increase conversion. And we will be working to have a growing figure there.

Many companies were saved by Magalu in the pandemic. Many beautiful stories that we have and that we may tell.

And if you get into Magalu’s history, you will see the story of a seller who brought his son to work in the company. And many beautiful stories of companies that were transformed and saved by Magalu platform.

So the potential is very positive from now on. And we will be doing a lot to further improve it.

We have – in three years, we have already achieved a lot. But we will do much more so that we may continue with this kind of performance.

I see that the main opportunity that we have is a local seller and multichannel. This is a very big belief that we have that our growth will be coming from this.

And we are very well prepared technologically, geographically. We have the capability to be a major player in these processes.

We are the only company that went from analog to digital. So we have a huge experience in this regard.

Thank you for your question. Our next question is from Vinicius Alberto from Bank of America.

Vinicius please.

Good morning everyone. Thank you for taking our question.

First, I would like to have a follow-up on Joseph’s questions about the first half of the year. What is your expectation about 5G implementation?

If you have seen anything improving in the smartphones category in the cities where 5G has been already rolled out? The second question about Magalu ads.

Can you comment on that? I would like to know what do you see as the performance of the evolution in terms of integration of our channels of the ecosystem.

And you mentioned that the revenue doubled year-on-year. If you can give us a little bit of more color on how relevant this revenue is for your results, I would appreciate.

Thank you.

Well, about 5G – this is Fabrício, I will answer. We have a great expectation.

We already have that rolled out in eight cities. And by the end of the month, we should have 28 cities already with 5G.

And by the end of the year, all Brazilian capitals it’s not that dream coverage. But yes, the demand is increasing and we are running campaigns in all cities that have 5G being launched, that we are seeing an increase in demand for smartphones that have 5G.

And that really matches the figures that we are seeing and the carriers is an increase of 40% in the demand. So 5G really generates demand, and we are prepared for that.

Vinicius, this is Eduardo. Let me talk about the apps.

In the first half of the year, we focused on the expansion, showing these products that are sponsored and the recommendations, the areas that have greater monetization potential. And that has been done, just like the improvement of the advertiser experience.

And we had already developed integration with payments. Now the next steps are in line to your question.

Yes, we are going to use customers’ data and geolocalize the promotions. You know that when we show a product that is closer to customers, the conversion is greater.

And when we offer that to advertisers, we are sure that it’s going to increase their conversion as well. And after that, the best matching of data and customers, we are going to expand that to other channels and to the other platforms in the group.

So this is the sequence just like you said. And that’s what we are working on with our tech team to be executed in the next few months and cycles.

Vinicius Strano from UBS.

Vinicius Strano from UBS. Good morning everybody.

Thank you for the question. Is there any difference between the sales per region?

We feel positive effect in sales because of some government aid. And what about the speed of delivery, we see a significant increase in deliveries in 48 hours.

What are the main drivers for further improvement? And how do you see this from now on?

This is Fabrício. We see linear demand.

And this week with this aid, we see that it tends to grow more than the remainder of Brazil. It’s very well balanced already.

And we believe there will be further growth. This is the issue from logistics.

Logistics has been working continuously with the distribution. And all the evolution that we had for 1P, we are applying this to 3P as well.

When you do a fulfillment when the product is within our DC, it becomes like a delivery for 1P. So for this reason, we believe that we will see many more opportunities to deliver very fast besides the ultrafast delivery.

Delivering directly from the seller on the same day or the next day, the latest with the use of our network and new routes being created so that we may decrease the distances. Because of all that, we are able to shorten the lead time.

Thank you very much.

Thank you for your question, Vinicius. Our next question is from Felipe Reboredo from Citibank.

Please Felipe. We’ll just turn to the next question.

And then we’ll test the connection. The next question is from Andrew Ruben from Morgan Stanley.

Andrew please.

Thank you. I was hoping if you could talk a bit more about AiQFome.

I’m interested in what kind of overlap you’re seeing between AiQFome users and the rest of the Magalu ecosystem? And then if you have any comments on profitability for the model, I have that’s trending.

Thank you Andrew, thank you for your question.

Good morning, Andrew. Thank you for your question.

Well, AiQFome, we are focusing now basically in the increase in the number of cities. We have reached 850.

And we are implementing the logistics services that we are using both for the team, but also a great synergy potential with Sode. This ultrafast delivery will have a lot of synergy, because the main movement for AiQFome goes in a different way on the delivery for Parceiro Magalu and Magalu delivery, because it’s usually in lunchtime or a dinner time, while we work a lot with other deliveries in the commercial hours.

So, we will have a lot to keep our delivery people busy. So for AiQFome, now we have, as I said, three million orders.

We are focusing in increasing GMV. It is available in Magalu’s SuperApp, by the mini app in all the cities that have AiQFome.

The figures are increasing, but we have opportunity to grow more. Customers buying the product without downloading AiQFome app, just downloading Magalu’s app and using the mini app of AiQFome.

So, we will improve the app so the process is even better. So one of the options is to use Magalu Pay as the wallet.

So, we can remove the friction of using a credit card and so on. So we are working on that.

But as I said at the beginning, first we have to increase sales, GMV deliveries and then to increase overlapping and integration, that’s what we are doing. In terms of profitability may be one of the only food delivery in the world that is profitable.

So this is a very well-managed company. And this is growing in a very rational way.

We are starting in the smaller cities before coming to the big cities, and that’s how Magalu was started. It started in the smaller cities to turn to the big cities later on.

Do you want to add anything?

Yes, that’s nice, Fred. I think what is nice to know that we have already made the integration of the wallet in play.

So it’s already working in the mini app of AiQFome in Magalu app so that makes payment much easier now. So, we are working on the integration of the e-commerce market as a category in AiQFome as well.

So, we are going to have a grocery store market category with all the base of AiQFome also available and the experience both off AiQFome’s app and also that is going to be reflected in the Magalu SuperApp experience.

Thank you for your question. Felipe from Citibank.

Thank you very much for the opportunity. Working capital, I think it’s very clear what you said before, regarding the sellers.

But what about the industry? How do you see in the mind of the industry for the second half?

And the second point we would like to understand the economics of Parceiro Magalu. We would like to know if this is a recurrent cost to – recurrent expenses, if sellers have an additional cost every time they go to the store.

Regarding the industry, expecting a second half better than the first half, but with no major changes. There are no supply problems up to the end of the year, there will be the World Cup, which is a differentiated time.

The industry is very well prepared for that. We made the design of demand and it increases in August, reaching a peak in October and November.

And the last quarter should be very good, and we have no pressure from the exchange rate. Regarding the store sellers, you know that there is idle time in stores.

So they use their idle time in order to bring on board more sellers. And we have a dilution of costs and it is much better to do this at the stores than in any other way.

Thank you very much. Very clear.

Thank you for your question. Our next question is from Gustavo from XP Investments.

Gustavo please. Gustavo, are you there?

That would be our last question, and we’ll talk to Gustavo later. So, we end now our Q&A session.

I would like to turn the floor to Frederico Trajano for his final remarks. Please, Fred.

I would like to thank you all very much for being here with us in this call. If you have additional questions, please talk to our IR.