MercadoLibre CFO Martin de los Santos on Growing E-Commerce in Latin America

With a market cap of just over $95 billion, Macardo Libre, one of the biggest players in Latin America to be listed here in the United States on the NASDAQ and the largest e-commerce player in the region. Well, there's a lot going on at the company as it fires on all cylinders from its e-commerce business to its fintech business and is building out the infrastructure to ensure that across payments and logistics, online retail can continue to penetrate the big Latam market. Well, to break it all down, I welcome to After Earnings, Martin Delos Santos, chief financial officer of Marcado Libra. I am so excited to talk to you because I am obsessed with the business models of Amazon and Walmart. And so, when I found out more about your business, which to me feels like the Latin American company that everyone should know about, I was excited to break it down with you. I want to just congratulate you because you're the first publicly traded company of significant size to record 30 straight quarters of at least 30% revenue growth. You're firing on all cylinders. Break down for us in simple terms each of the cylinders each of the business lines that you have. >> Well, thank you first and for having me. It's a pleasure joining you and thank you for your kind words of introduction. Uh we are a company that operate in Latin America. We were founded 27 years ago by colleague of mine the star for graduate Marcos Garber and over the past 277 years we have been growing uh and to become one of the top five largest companies in Latin America in terms of market cap. So lots of growth. Uh we have we have to explain Maria for people who might not be that familiar with our operation. I would say we are the largest e-commerce platform in Latin America. We operate in 18 different countries and each country where we operate, we're the number one player. Obviously, Brazil, Mexico, and Argentina are by far the largest the biggest operations. And over the years, we have built a fintech operation as well. Back in the days when we started with e-commerce in in the early 2000s, there were no payment processings online in Latin America. So, we had to build our own payment infrastructure. We became experts at processing payments online. So we started offering payment processing outside of Marad to third parties. And today we have a fairly large acquiring business that process payments throughout the region online as well as in the physical world. And keep in mind that we operating a region where cash was the main payment method several years ago and we're making significant progress on digitalizing those payments. On top of that, we have built a digital bank operation that is al also helping us fuel a lot of growth. In Latin America, penetration of banking services is very very low. As an example, in Mexico, only 50% of people have a bank account. >> Less less than 15% of people have a credit card. So, it's plenty of room to bring more people to the system. And that's our banking system, banking operation. And then finally, our advertising business is growing very rapidly, north of 50% year on year. We provide digital retail advertising, growing very fast, but we're still only 10% market share in Latin America. So, the opportunity to continue growing is very very large. So when you put all those together plus the execution that we have been delivering year over year for for for several years now that explains the growth that we are delivering which we are very proud and like you said it's very consistent growth at a very large scale. We are on run rate to be more than a $50 billion revenue company and we're still growing. The last quarter we grew 50% yearon year at topline. So lots of opportunity to grow and obviously executing and working towards capturing that opportunity. Let's start uh to dig in at the place that you started that's e-commerce and and just to set the stage for us Martin you know when I take a look at the penetration of online retail in Latin America it's about 16% this year which is roughly half the rate that you see in the United States and much lower than China that's got about 40% of its retailers e-commerce and it's interesting because you know I've traveled extensively through Latin America I love going there. And these are urbanized countries. You've got a lot of the population in dense cities. Why therefore is there an underpenetration of e-commerce? Because you the region lends itself to having e-commerce in place. >> Yeah, I would say if you look at the history of our company is also the history of e-commerce in Latin America. We started in 99 where >> penetration of of people didn't even have internet back then, right? At the beginning, as I I said, we had to build our own payment infrastructure. There were no payment methods in Latin America. There were no process acquirers that process payments digitally. There were also very few digital payment methods, credit card adoption was very low. A lot of infrastructure in terms of payments was not there to begin with. And we created a lot of that. I can go into more detail on each one of those. 10 years later roughly 2014 we realized that with the local infrastructure in terms of fulfillment and shipping we were not able to provide the service level that we wanted to give or the service level that you experience in the US for instance. So we had to build our own logistic infrastructure and we did so over the past 10 years. 10 years ago we did not touch one single package that was sold throughout our ecosystem. Today we deliver almost three billion packages a year and 75% of those packages are delivered within two days which is something that would have been impossible to think about in Latin America 101 15 years ago because it's true as you said that we have a lot of big cities but also it's a very you know we have very large countries if you take Brazil it's a huge in terms of the size and we are delivering products from Sa Pablo to Visante you know next day or two days which is something again very very difficult to do at the scale that we have today. So I think the way to to you know to increase penetration of e-commerce as you said going from the levels that we are today to the levels that we see in the US or China is to continue to eliminate friction points. >> Payment is a friction point. We're working to provide more payment methods and financing to our users. Logistics is a is a pain point pain point that we're solving with logistic infrastructure and also the the free shipping that we're offering. We lower the free shipping threshold. This is very important. One of the main friction points for people moving online is the cost of shipping. >> Right >> now almost 80% of the volume that we transact is provided with free shipping that requires an investment from from our side but also moves a lot of people online. And finally I would say pandemic was a turning point for us. I mean the pandemic the penetration of the coral was roughly 5% back then only five years ago and today it's at 15. So we've seen a significant acceleration of penetration but we expect that to continue growing over the over the years and there's no reason why we shouldn't have penetration similar to the US or Asia. The infrastructure is a little bit behind those countries and we need to build it ourselves. That's probably the main difference. And I'm curious to understand, Martin, of the e-commerce growth that you've seen, how much of that has been on mobile? Because it's interesting, your e-commerce has come to life really at a point in time where many more people are shopping on their mobile devices, at least in the United States. What are you seeing in the in the countries that you're present in? >> It's a significant significant part. We lived through the mobile shift in in in our countries. back in 2012 2013 we changed our platform to adapted to mobile and in a way in Latin America we live from a lot of the traditional e-commerce and most people access our our platform through their mobiles I mean the they just like you said we have a lot more volume today going through mobile than the digital the the desktops uh but we adapted to that early in the days and that also generated a competitive advantage for us because we have very you know very unique user experience on our mobile platforms as well as the desktop platforms. >> So you hit recently 89 million unique active buyers that's up over 25% on the prior year. Is that growth coming from uh taking share from other e-commerce players or is that much more the case of taking share from offline retail and informal retail and the penetration play? >> I would say both. If you look at our share of e-commerce continues to grow, we have, as I mentioned, we have the leadership position. Let's take Brazil, which is the the biggest country. We have roughly 40% market share, but that market share grew by 5x over the past 10 years. So, we have grown significantly a market share. At the same time, penetration continues to grow. So, we are making a big progress in terms of bringing people online. So I would say it's a combination of mostly bringing people online and bringing more volume coming online by eliminating friction as I mentioned before but on the other hand also gaining share from other players as well. >> So with that number of active buyers so you know roughly 90 million that's a lot of eyeballs and that's a lot of data. Martin talk to me about how you're using that data and access to those eyeballs to build out your retail media business. I would say two two things. One is obviously advertising but also credits and I can elaborate a little bit more and I have a bit of my heart with credits because I used to run the credit business for many years before taking the the CFO position but advertising is a tremendous opportunity for us. We have >> 88 million monthly active users of our payment platform. We have last year we had 225 million buyers on our e-commerce platform and obviously we have a lot of users that are ecosmic meaning that they are active on both platforms. >> We'll get to that. Yeah. >> Tons tons of data on them that we can use to target advertising campaign that are very valuable for advertisers. We are by far the number one digital retail advertising Latin America because of the large e-commerce platform that we have. But now more and more we're growing our footprint even outside of our ecosystem. So today we have partnerships with Disney for instance this day plus so we can place advertising advertisement video advertisement on their on their streaming service. We have partnerships with with Google that we can place advertising on different platforms and we are leveraging all the information that we have on our users and the traceability of those advertisement placements to provide a much better value to our advertisers. So it's an opportunity it's a business that is growing very fast but the opportunity is immense. I think I mentioned we have only 10% market share in a market that is growing very rapidly of the digital digital advertising in Latin America. So it's a great opportunity of leveraging our data and our distribution capabilities to provide both retail as well as branding advertising to our customers. >> Can you give us some dollar numbers around that? What is the dollar size of the revenue from the advertising business today? Martin >> the advertising business is a is a I would say is a run rate more than$2 billion business. It's a high margin business growing very rapidly. But still it's interesting if you look at one way to look at the penetrate or the the size of the advertising business in the marketplace is to look at the revenues relative to the GMV the volume that is transacted on the platform. That's a typical metric of penetration of advertising. We have a penetration of advertising roughly 3%. So out of$undred dollars of GMBB that volume that is sold on Marie we only generate three mill$ three dollars of advertising. When you look at that number for players like Amazon, it's north of 7%. >> 8% depending on the on the country. So, it's plenty of room to continue growing the advertising revenue as we penetrate further our our our e-commerce platform with advertising. So, so advertising is a great product because it's very profitable, but it's also very useful for both side of the ecosystem. sellers that can promote their products and we're also helping with the user experience or the buying experience to our to our to our buyers to our customers. So so a great product that benefits all sides of the ecosystem. >> So let's talk about some of the sources of data for the growth advertising business and let's talk about the financial technology and credit side of the company. Talk to us about the history of that Martin. >> Yeah, if you the initially we started with the proc payment processing business. >> Mhm. Then several years later, we realized that we had users on both sides of the equation, right? We have the merchants that we process payments for. We have the consumers that bought on Marad, but also more and more were buying on on retailers that process payments with us. So, we leverage all that data and we started to build financial solutions, financial solutions to people who live in a in a region where the banks have done a really poor job in terms of financial inclusion. So we have for instance more than two million small small and mediumsiz businesses that were operating on our marketplace and those people who those businesses did not have any access to credit but the banks is very difficult to understand them. It's very difficult to score them from a credit perspective. It's very difficult to serve them because the cost of service is very very high. So what we did is we leverage all the information. We have the information. We don't have to wait for a for an income statement from two months or six months ago. We can see dayto day the volume that they sell, the type of service that they provide to our users uh and so on. So we can use all that data to score them and to have sophisticated models that are very accurate at predict predicting default rate. So, if you're a merchant selling on our platform, typically you will not have credit from a bank, but based on your sales and your history with us, we can offer you a pre-approved loan that you can take with one click and you get the money right away in your account and then you can pay with your sales going forward. So, it's a business once again that is very useful for our customers. It generates lots of loyalty because you know that I'm financing your growth and at the same time it's profitable to us because the default rate is very low because you have users that are very much engaged with the platform and typically they pay with the sales that they make. That's one example. Right? On the other side of the equation, we're also providing credits to our consumers >> in a region where most people do not have a credit card. You can imagine and how difficult it is to buy online if you don't have a credit card because you need to go to the physical store, deposit the money there, come back the next day and complete the purchase. That's the way Maral worked 101 15 years ago. Today we have fi financing products that enable people who do not have a credit card to buy with Maria with our own credit and now more and more we're also growing our credit card business where we're offering the credit card to users on our platform to actually buy not only deliver but anywhere else. So very synergistic with the marketplace. We use that data to score to understand our users and al obviously we have the distribution capabilities of medical lit to enable us to offer financial products that are very useful and also very profitable because we have the very low cost to serve >> with a team of banking experts specializing in your industry. Key bank is always ready to take your call. And what's better? They relish a good challenge, a business challenge, a complex challenge, the kind that seems to change all the time. the kind that's so nuanced no one else could possibly understand. In fact, KeyBank says, "Bring it on." And they go even further by staying ahead of trends. Keybank has answers before you even know you need them. Business challenge accepted. Learn more at key.com/b2b. That's key.com/b2b. I want to talk about the profitability, but before I do, just to put in context here the opportunity. Latin America has about 28% of the adult population with a credit card. For the United States, the equivalent is 67%. So you can intuitively see there the growth opportunity. But when I read the analyst research on Mado Libre and I take a look at the share price, it's not been an easy run for your company over the last year. Your stock is down um quite materially over the last 12 months. One of the reasons that people point to that share price decline has been some concern that yes, the growth on the credit side of the business has been good. But the question has come up, has it grown too quickly? And has that strong and rapid growth come with the risk that you're perhaps lending to merchants and to consumers with a higher risk potentially of not being able to pay back in the same quantum as you've seen in the past? Yeah, let me say let me break it down. I think the the share price has done pretty well over the past 10 years, but it's true that over the last year, there has been some volatility on stock price. For the most part, the concern for the market is not necessarily on the fintech side of the business. It's the commerce side of the business where we're investing. We're seeing margin compressions by the decisions that we make in terms of investment on the commerce side of the business and that's generating some pressure on the stock on the fintech side of the business and I live through this because I started the the the credit business about 10 years ago. >> Mh. >> Uh we take the credit business very seriously. I mean we are very cautious in the way we manage risk. We grow our our business only if we see metrics that are you know justifying that growth. So it has to be stable in terms of NPS and more important than that it has to be profitable. >> Our credit business is very profitable. When you look at the size of our credit portfolio is roughly 17 billion dollars today. If you compare it to any metric in the banking system is relatively small. So we are growing a lot from a relatively low base but with a very healthy book and with a very profitable book and we have a lot of measures to manage our risk. Uh let me give you some example. I was talking about the merchant credit side of the business which is very very low risk because these are merchants that sell through our platform. We collect their sales directly. So the only the only way for them to default on a credit is to stop selling through marad lie and marri typically is a very important channel for them to sell. So that's very low low risk on the commerce. On the consumer side we have models that look at 2,000 different variables. We we analyze credit risk very different from the banks. We have machine learning models that takes thousands of data points to try to understand individual by individual the level of risk that we're willing to take. So we have models that are very accurate at predicting default rate. Uh and let me use some examples, right? We we not only see what you buy, the type of products that you buy, but we also see, you know, what what computer do you have? If one example that was I was talking the other day is if you charge your phone on a regular basis or not. That's one variable that the model sees. When you put all that together, the model is very very accurate in terms of determining default rate. Mhm. >> The other thing that is very unique to us is that given the low cost to serve, we're able to offer loan lines of credit that are very, very small. All we need is to find to finance your your next purchase. We don't need to give you a loan of, you know, $5,000 loan. The average loan size is only $500 on our portfolio. So, it's very atmized and and it's also relatively short-term short duration. So, we have the ability to adjust to any shifts on the on the market. So when you put all that together, a conservative approach, lots of data, models that are very accurate, that explains why we have a business that is, you know, NPLs are very stable and is very profitable. But of course, we are dealing with risks. And sometimes when you look at it from the outside, when you see a portfolio that is growing 75% yearon year, that you know raises a lot of questions. But over the past 10 years since we started offering credit, we have always have a very healthy and very profitable portfolio and we plan to continue to continue to have it that way. We would not be growing if the portfolio was not healthy. Let me >> The reason I raise it, I know that Maka Libre recently recently raised a billion dollars in new notes. You're out there. Uh Moody's issued a report assessing your credit quality. It did point to solid liquidity, your leading position. And it did also call out lower profitability as you accelerate investment in logistics, customer acquisition and its credit business alongside funding and asset quality risk. So the credit market's been focused on this. >> The credit market should be focused on this. This is the job of the lenders. But but let's talk some more about the investments that are ultimately looking to support the equity value here in the share price. Can we talk a little bit about the margin compression um that we have seen across the business and and unpack for us Martin how much of that is one-time margin compression that's coming from your investments and things like logistics and how much of it is perhaps coming from something else like the supply chain >> I would say you know if you look at the margin compressions over the past year and a half or so the majority of it comes from the commerce business >> mostly was the lowering of free shipping shipping threshold that we did in Brazil. Let me let me unpack that. >> A year ago, we lower we have been lowering the free shipping threshold for several years now. >> As I I said, free shipping is very important to move more people online. One of the reasons why we're growing so fast is because we're offering free shipping. >> Yeah. >> So, a year ago, we decided to go even bolder. We lowered the free shipping threshold in Brazil from 79 Res to 19 Res. So, perspective, that's $4. >> Yeah. Anything above $4 we ship for free. >> So in practical terms just like just about everything that we sell on Maria Brazil today ships for free. Obviously when we did that we lost a lot of revenues that we were getting from charging shipments within that range but we were happy to do that and in fact we have done in the past because we see a lot of benefits by doing that. Let me give you some examples. Before lowering the free shipping threshold, items sold in Brazil were growing by 26% year on year. Very impressive growth. And when we lower free shipping threshold, we're now growing at 56%. More than double the rate of growth. Engagement with a platform is a lot stronger today. We have buyers coming in and buying more categories than they were buying in the past. We have better retention of new users. We have a lot more users buying on the platform. We mentioned 125 million buyers throughout the ecosystem. A lot of those came because of free shipping. We have the highest MPS of any platform in Latin America. That's part So, we're making that investment consciously because again, we're very early on in terms of the development of e-commerce in Latin America. When you are only 16% penetration and we only have 120 million buyers in a region of more than 600 million buyers. We think this is time to invest on our platform, improve user experience, bring more people to our ecosystem and despite compressing margins in the short term as we're doing it today. We are very comfortable trading short-term margin compression with long-term growth and with the long-term opportunity that we have in front of us. Having said that, we're still run a very profitable operation. We made $3 billion of operating income last year. We generated more than a billion dollars of free cash flow even after investing on credits and the capex. And that's the reason why the rating agencies have improved our our rating to investment rate a year ago. And that's the reason why we were able to issue last week an investment grade bond in the US capital markets. And let's just put some numbers around the ecosystem to your point. It's that trade-off between short-term margin and generating higher growth and free cash flow. Uh when I went to your website and your investor materials, Martin, just to quote some of this, 70% more GMV from your ecosmic users, 90% more more TPV. Is there anything else you're planning to do when it comes to loyalty? You have stickiness obviously from your financial services. Are there loyalty programs or redemption programs you're looking to build out or partnerships with other companies to try and build joint loyalty programs as well? >> That's a great point that you're you're you're touching. Let me step back and we have as I said an e-commerce platform and a fintech platform which is very unique. There's no other player in Latin America even the US that has those twosided ecosystem. So what we have found over the years is that users that are active on both commerce and fintech, we call them ecosmic users tend to have a lot more engagement. As an example, if you are active on both commerce and fintech, you tend to buy 70% more volume than if you're a e-commerce platform only user. On the flip side, if you are act ecosystemic users tend to pay n 90% more TPV >> than users that are only fintech users. >> But just to interrupt for a second, the equivalent you're seeing here in the US is at the checkout there's now options for buy now pay later. Right. So it's not exactly the same as having a full financial services inhouse, but companies are trying to replicate that with some kind of system. >> Exactly. What they try to do is try to partner. So if you're an ecom, you bring a partner that offers the buy now pay by late or the credit at checkout. We have that all integrated within within our ecosystem. And I think that plays to our advantage. So as we have more and more of those ecosystemic users, we can leverage both side of the ecosystem and the critical part of that just like you said is the loyalty program. We have a very unique position where we can offer you a loyalty program that gives you benefits both on commerce with free shipping, better financing alternatives on the on the marketplace, more more installments or special discounts and at the same time we offer you better remuneration on your deposits on the fintech side of the business, more more installments on your on your purchase with the credit card and so on. So that's quite unique and that generates an incentive for people to use both sides of the ecosystem. And as I said, when we have an ecosystemic users, they tend to be more engaged and more profitable to us. That's a segment of users that is growing at the fastest rate. Today, we're growing the ecosystemic users at 37% year on year. So, we're becoming more of a platform. You know, we're bringing more users that use both sides of the ecosystem. >> So, I want to finish Martin by talking a little bit about your journey to your position as the chief financial officer. You've mentioned a couple of times that you spent six years prior to being the CFO building the credit business, running the credit business. Do you miss running a specific division or P&L? Do you miss having the tangibility of being responsible for a specific product? >> That's a great question. When I, as you can imagine, running a credit business requires lots of focus. You know, you're managing risk. you're going to sleep with a very large portfolio that you need to collect the next day and you're taking every day that you make a loan, you're taking risk and you're making a bet in a way. So I was very much for seven years and I started from zero. I mean there were two of us I I brought somebody from the from the finance team back in the days and we started from scratch. Yeah, >> he was actually a startup within Marcado Libé with all the benefits of Marcado Li but at the same time having to influence a very large operation to start the new business. Uh so it was a very exciting time you know to to to be building something from zero product by product country by country developing the team. Uh so so you I had a great memory from those days when I took the CFO position that was a big change for me. It required me to look up a little bit. I was so focused on credits that I looked at the ecosystem. I found Maravia to be a very complex ecosystem. We have 19 different countries, commerce, advertising. We have warehouse facilities in China, in the US. We have, you know, a fleet of trucks and and and vans and planes that deliver products. More than 50 warehouse facilities on our logistic infrastructure. Very complex operation. So in a sense it represented a big new challenge for me. >> Yeah. >> So it required me a broader view getting more acquainted in particular with the commerce side of the business. Uh and that you know has been very very rewarding for the past three years. So in a way I do miss the operation. I miss my team because because we build from from scratch from zero but at the same time I'm super happy with the opportunity of running such a large and complex operation as as as Marcato delivered today. uh and again very excited with the opportunity that we have in front of us in all fronts of our operation commerce, fintech, advertising. So it's very very you know rewarding journey both of them starting the business and bringing from zero to 20% of revenues that it is today and now leading as a leader team from a finance perspective that that gives me a broader view of all the things that we do deliver. Could you have imagined that a year after you became CFO that that breadth meant also living in a world with new tariffs? You know, you really stepped into the seat at a time when a new challenge was going to come up. You described the complexity and the scale of your supply chain. You have a fulfillment center in China that's very central uh to what you do at Macado Libé. Well, just I'm curious just to finish Martin, you know, what what do you think happens as a consequence of of of the tariff? Are you seeing from your seat real shifts now in supply chain to different regions and different sourcing that you think might be more permanent? >> Yeah, we remember we operate marketplaces locally. >> Yeah. >> The tariffs in a way did not affect us so much. We do not sell things into the US. >> Yep. >> We have US merchants. We also have fulfillment centers in the US >> or merchants from the US to bring products into Latin America. >> At the same time, there's a lot of demand from products from other places of the world within Latin America. So last year, we opened the fulfillment center in China to open the flow of products into Latin America and that represents a big opportunity for us. >> Lot of the merchants are selling on Latin America. Some of them were selling in the US and now they changed their focus and they ship products into our region. So we think that we have great opportunity to capture we're in a great position to capture that opportunity. So I think for the most part indirectly the tariffs play to to our advantage because it opens a new opportunity for us to bring more products in Latin America. Of course the biggest change from from a couple of year ago has been AI. AI really changed the way we do things internally, the way we develop our products, the way our users interact with that platform represents a tremendous opportunity for us and we're we are leveraging leveraging it so much consumerf facing as well as internally to gain productivity. So we are very very excited with that. But that also represented the big shift in the way we do things internally and myself you know the way I manage my teams, the way I run my day-to-day operations. So very excited with that and have to you know I have to adjust to very rapid change over the past two years. >> Well we could have an entire separate conversation Martin on AI. So now that you've taught everyone a little bit more about your company I hope you come back and we can follow up to talk about how AI is transforming the way that you do business. >> Martin thank you very much for help for inviting me and it's been a pleasure talking to you. Thank you. >> Thank you Martin. I'm Anne Bry. Thanks for tuning in to After Earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learned something today, don't forget to like, subscribe, and share with your friends. We'll see you next time.