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Edited Transcript of MGLU3.SA earnings conference call or presentation 13-Aug-19 2:00pm GMT

Q2 2019 Magazine Luiza SA Earnings Call

Franca Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Magazine Luiza SA earnings conference call or presentation Tuesday, August 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Galanternick

Magazine Luiza S.A. - Executive Director of E-Commerce & Member of Executive Board

* Frederico Trajano Inácio Rodrigues

Magazine Luiza S.A. - CEO & Member of Executive Board

* Roberto Bellissimo Rodrigues

Magazine Luiza S.A. - Executive CFO, IR Director & Member of Executive Board

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Conference Call Participants

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* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Luiz Felipe Poli Guanais

Banco BTG Pactual S.A., Research Division - Research Analyst

* Richard M. Cathcart

Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

* Ruben Couto

Santander Investment Securities Inc., Research Division - Research Analyst

* Thiago Capucci Macruz

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Magazine Luiza's conference call referring to the second quarter of 2019 results. (Operator Instructions).

Now we would like to turn the floor over to Mr. Frederico Trajano, CEO of Magazine Luiza. Mr. Trajano, you may proceed.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [2]

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Good morning, everyone. Thank you very much for participating in our call about results of the second quarter of '19. Here, I have all the executives of the company as traditionally we do in all our calls, and we will all be available to answer your questions at the end of my presentation and Roberto Bellissimo's presentation.

Exceptionally in this call, we have the presence of [Mike] from Netshoes, and he will be available as well to answer questions about the operations based on the result of the second quarter that will be incorporated into the balance sheet of Magazine Luiza.

Now turning to the second quarter. A lot of the good result that the company has been delivering in the last 2 quarters comes from clarity from strategic consistency together with the disciplined execution, and this was what happened in the cycle of digitalization of Magalu, and it will continue to be so and in this quarter, we see the beginning of this new strategic cycle as well.

And our focus is the construction of the platform and -- popularly known as Marketplace. And due to the dynamic of the platform itself, we have a nonlinear growth. I would say a Chinese-type growth since the beginning of the year because with the platform, you do not grow all by yourself. We are talking about thousands and thousands of companies, small, medium and even large companies and that have their products show to our millions of clients through the platform.

So I'm very happy to see in the first, but especially in the second quarter, very consistent indicators of progress in this new strategic cycle that we announced at the end of last year, even more so because I usually say that the main competitor of Magalu in 2019 is Magalu 2018. Our comparison base of last year was extremely strong. No retail company in Brazil has a comparison base as strong Magalu of 2018, and especially the second quarter of 2018 in which we had maybe one of the best quarters in our whole history, which had the World Cup, with the campaign, a successful campaign. And in the first -- in this quarter, we sold 1 million TVs, smart TVs, over 20% market share at the time. So it was a big challenge to grow at Chinese levels on a very strong comparison basis as the second quarter of '18.

And these strategic pillars of this new cycle are, as we have been saying in our calls, that is -- at last -- in the last 2 calls, Chinese growth, mainly in active clients and frequency of purchases, growth of Marketplace and the services rendered to the sellers, which is the second pillar. Both in our client base and the app, we are focusing a lot on our app as a universal remote control, as a center for universal control of this platform, which is our super app and a very good evolution there. New categories, fast delivery, efficient delivery decide the best level of service in retail with a very strong work on Big Data as well. These are the pillars that we mentioned at the beginning of the year.

And in this quarter, we delivered in all fronts. We will be talking about some figures in order to evidence this delivery and to make the delivery more tangible to you. But I would like to stress 2 relevant points in this delivery, which are Marketplace, the second pillar of our strategy that a core platform, but it goes much beyond because it has to do with taking your whole infrastructure and deliver this as service to sellers. And this is a construction that is achieved in the long run, but we have already had significant deliveries, and we are growing the number of sellers and sales and it was a brilliant outperformance and it was even beyond our internal, our in-house expectation.

And new categories is the second one. Most of the time of our executives and my time was invested here in order for us to conclude one of the most emblematic acquisition in our history, which was Netshoes. And it was fundamental for us because we have 70 years of history in one specific category. To really get into this business as a new category and do a very strategic move such as the conclusion of the Netshoes acquisition. It was a very competitive process, a very complex one, because it involved a company that was built in Cayman, listed in New York and operating in Brazil. So you can imagine one of the most complex deals -- and totally complex deal and it took quite a lot of our time. And it started in the first quarter, but April, May and June were taken and [Marcio Bride] and the whole team of Netshoes, they all worked very hard in this process in this quarter. So we delivered on these fronts.

And I will start the presentation on Page #3 now with the first pillar of our new strategic cycle. Our client base already incorporating Netshoes' clients. We have about 10 days of Netshoe balance sheet, but already incorporating the client base of Netshoes, we have 22 million active customers in our base, 53% increase vis-à-vis 2Q '18. And even without Netshoes, it would be a 30% increase, a very sound one. And the comparison base had the World Cup, and in spite of that, we had a growth of 20% vis-à-vis the previous year. And we are focusing on fairly [selling] lower average ticket product as well because it's important for us to increase the number and the frequency of clients. And with the growth of Marketplace and exponential growth, we were able to evolve the client indicators at the same time. This is a huge challenge as to have less control over this base.

In -- on your only -- so the RA1000 seal in the Reclame Aqui, we do not separate e-commerce from Marketplace. We contemplate both in the same mitigator, and most of our competitors separate 1P from 3P. 25% of our total sales is Marketplace and e-commerce, but we kept them together here in this analysis. And we evolved, for instance, a growth 23% in first call resolution in our call center, a significant reduction of phone call complaints and several complaints as well, so a very significant evolution in all fronts. And physical stores, e-commerce and also a very positive NPS for, well, not at 1P level, but higher than our expectations, original expectations, and growing. So client indicator, satisfaction indices that are very important for the compensation of our team, all this evolved quite a lot in the last quarter.

E-commerce basically had a significant growth in the client base. The MAU, or the super app with the Netshoes base, which has a very high monthly frequency, which is the monthly average users, MAU, reached 12 million in this quarter. And recently, we had 3 apps among the top 3, the most downloaded ones, the Netshoes Magalu. Last week, we did the net app in all our apps, so we have 3 of the top 10 apps in Brazil in terms of downloading, Netshoes and Magalu continuing this week as well.

Showing the strength of the combination of these companies and I would like to highlight the logistics work of Magalu, recall to an indicator of 40% of deliveries, the last-mile delivery, that is to say, in a couple of days, and in the consumers' home. If you consider the click-and-collect, we are talking about 70%, 75% of deliveries of Magalu today being carried out in up to 2 days. And these numbers are already compatible with U.S. operations and Chinese operations. And most of these deliveries, we are already doing in 1 day, in up to 1 day, because of the huge endeavor made by our whole logistics team and with the acquisition of [Uber life] from deliveries, Logbee, and helped us to have this participation and we already deliver in over 100 cities.

And another highlight, 10% of all the products sold by e-commerce are -- they are done by e-commerce, but they use the brick-and-mortar stores' inventories. We have been talking about that and conventional stores instead of distribution centers. And we want to make this available and roll this out as much as possible to Netshoes, ship-from-store and click-and-collect.

So we are evolving in e-commerce, and one of the main highlights of the app and the logistics level that is much higher than the market average, due to the fact that we work with own network driven by Logbee now.

And undoubtedly, the major highlight in the quarter was Marketplace. And as I said before, it was higher than the market expectation and higher than our own in-house expectation, 289% growth year-on-year. And I would like to remind you that it took us over 40 years to reach BRL 1 billion in 1P; and in Marketplace, less than 2 years to reach BRL 1 billion. So it's an exponential growth in a way that we have never had before in our history, BRL 583 million GMV.

And one thing that we mentioned in our message, 100% of our sales with issue of invoices, 100% of transactions have invoice issuance. So we do not encourage informal activities, so we have much more control over all transactions. And they are much more formal nowadays and much more formal than we see as the pattern in the market. So we believe that there will be a very strong regulatory initiative, and operators will have to sell original products and will have to take care with their policy of service. So our growth is not based on "informal operations" or non-original products.

And as I said before, we are talking about over 8,100 sellers that play according to the rules of the game. And we want to stimulate sellers that do not have any informal operations because we believe that this is the only way a company can grow, in an organized country such as in the case of Brazil, what we are trying to do in Brazil. And at every 2 clients, 1 buys at the -- Marketplace, growing a lot in lower-ticket product, and this helps e-commerce to gain new clients.

And I would like to mention also our brick-and-mortar stores, we did a lot of work in this quarter because the exchange of TV was a very big highlight, and 27% same-store sales driven by this promotion that happened, and the focus was on physical stores. If we exclude the TV or smart TV line, in spite of that, we were able to grow at double digit, now 10% in this quarter, excluding one category, which is smart TVs and all the other categories grew. And we already see our physical stores with a strong base in the third quarter, so the level is already similar to the other quarters in July and August. And we expect to publish these figures at the end of the third quarter.

But it was a great work. We grew 20% our active client base. And I would like to highlight the quality and the sales higher than expected in the stores that were opened last year in Maranhão, which has all the stores that we opened in other state, and very big success and sales higher than our forecast for the stores that were opened in the last 12 months. So a very good job done, we are very successful in these new markets.

And we are about to get into Pará, as has already been announced, and very encouraged with the state, and so is Mato Grosso in Brasilia. And we will be opening stores by the end of this year. So we are very much enthusiastic with the expansion of our physical stores and the remodeling that is being done in the stores.

We launched the Smartphoniza Brasil, the exchange of smartphones. And we give a certain amount for the exchange of your mobile phone, your smartphone. And we launched this campaign at the end of May. So now in the third quarter, it will be 3 months as a comparison base. And a very successful campaign, as successful as the other one that we did last year in which we exchanged smartphones, now -- smart TVs. And now we exchanging smartphones. And this buyback system was not popular in Brazil before. And this benefits our physical stores as well because people come and they exchange and it's frictionless.

Now let's talk about Luizacred. We continue to grow significantly our financial operation, 50% in the second quarter; credit portfolio, 44% year-on-year, almost BRL 10 billion. It's already the biggest independent customer finance company in the market. In terms of credit portfolio, the Luiza Cards' base grew 24%, reaching 4.6 million in 2Q '19. We are selling the Luiza Card also via Internet, and the Netshoes Card also with a very good performance.

And the highlight here is that our card is co-branded, issued by a JV with Itaú. It's a MasterCard Luiza. And the frequency of use of the Magazine de Luiza Card is 7 times per month. So it's a very strong figure, and it shows that it's the first card for most of the clients. And they use not only inside Magazine de Luiza, but they use the card very often in supermarkets and drugstores, et cetera. Sales outside Magalu represent 75%.

Netshoes, we have already highlighted the strategy and [Doug and Marcio] will be available to you to talk about integration. [Marcio] will be talking about the situation in Netshoes. We cannot talk about quantities, we can talk about quality, quantitatively, no, but qualitatively, okay.

Now I give the floor to Beto, and then I will be opening for the Q&A.

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Roberto Bellissimo Rodrigues, Magazine Luiza S.A. - Executive CFO, IR Director & Member of Executive Board [3]

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Good morning, everybody. Starting with the highlights of our results. Total sales growing by 24% on a 43% base, very strong, reaching BRL 5.7 billion. We have already talked about the sales in Marketplace, e-commerce. In gross profit, Marketplace growing very soundly and giving it already a very good contribution and the gross margin dropping 0.8 percentage points. Because of the end of Lei do Bem, operating expenses, we kept at the same level, around 22% of our net revenue, in spite of an increase in the level of service and the acquisition of new clients and services and faster logistics.

With that, we were able to deliver an EBITDA of BRL 304 million, 7.2% margin; a net income -- pro forma net income of BRL 108 million at 22.6%. (sic) [2.6%]. Operating cash generation from operations continues to be very strong, BRL 700 million. ROIC, 17%, and 23% in the last 12 months. We continue to have a strong return and very good cash generation at the same time. And we closed the quarter with adjusted net cash, BRL 800 million, even considering all the investments made and the acquisition of Netshoes and the payment of the Netshoes debt and the net cash position of BRL 2 billion based on receivables from credit cards as well.

And then we show the evolution of the user base. Fred has already referred to this. It's growing, number of stores, over 100 stores opened in the last 12 months; 27, 28 in the last quarter with the Shoestock store; and opening about 50 new stores in this half year with the Pará coming -- Pará state coming onboard. We are increasing our investments according to our strategic plan, over BRL 200 million in the first quarter, highlighting technology and logistics that are the fastest-growth areas.

Then we go to the sales performance. Once again, accumulated 26% growth vis-à-vis the market of around 3%, so an extremely high market share gain. In e-commerce, 56% growth in the quarter vis-à-vis the market, much higher than the market. And Marketplace reached BRL 1 billion already in this quarter, and total e-commerce by almost BRL 5 billion in this quarter with just a few days of integrated operation with Netshoes.

And we show the evolution of our expenses, from 21.7% to 22%, a small variation and totally in line with the strategy of increasing our level of service vis-à-vis the Luiza Card, the app and the focus on our clients.

Equity income from BRL 10 million to minus BRL 3 million, basically because of Luizacred and it will be because of the IFRS 9 gap, but with a good result, BRL 35 million in the quarter.

Now the EBITDA margin going from 8.5% to 7.2%, and with the nonrecurring effects, IFRS 16, they were positive, and the total EBITDA margin was 8.8%.

Financial results, from 2% to 2.3% Financial expenses, basically due to the growth of sales via Cartão Luiza.

In line with our growth strategy for Luizacred, working capital continues to have a very good performance in the quarter. It continues to be negative by BRL 600 million. Inventory turnover, very well balanced, around 72 days, very much similar to the same quarter last year; and 92 days, similar to the third quarter of last year.

So this variation in our cash position is totally related to the acquisition of Netshoes, as I've said before. And then we give you more details in this breakdown of our cash flow and the total cash position. Once again, we maintained practically (technical difficulty) duration of the investments that we mentioned, including the acquisition of [solsay doca] last year and Netshoes this quarter.

So the net income was BRL 130 million pro forma in this quarter, BRL 108 million in the quarter. Considering in IBRF (sic) [IFRS], it will be BRL 130 million, the pro forma Luiza. And talking about Luiza, continues to grow very consistently, reaching 4.6 million cards, almost 600,000 downloads of the app, expenses -- 6,400 million Luiza Cards, growing over 30%.

And the net revenue of Luizacred, it has been growing consistently. And in this quarter, we had most of the growth of the net revenue in the last 5 years, so growth of over 50% year-on-year. And also because of that, the efficiency ratio has been improving quite a lot, from 46% to 40% in this quarter, one of the lowest-ever level of operating expenses in the last few years, and with a downward trend together with growth in our sales.

And still talking about Luizacred, we talk about the evolution of the portfolio. The over 90 days past due went back to the level of 2 years ago, basically because we have many more new clients than we had a couple of years ago or 1 year ago even. And as you know, the new clients usually have 10% compared to the other clients -- the older client, 7%. And today, our portfolio has much more new clients than 2 years ago. So delinquency continues. We continue to have a very good expectation with this new client. And short-term delinquency, very low, 3.2%, very much under control. And the coverage ratio, 78% of the portfolio.

So with that, Luizacred had BRL 8 million in net loss in IFRS, so very high provisions also due to limits granted to the best clients in our portfolio. So there was a rise in provision because of the IFRS 9. So we expect to have a very good results for the full year.

So these were the main remarks that I had regarding the financials of Magazine de Luiza. So I will give the floor back to Frederico.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [4]

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Before opening for the Q&A, I would like to give you a highlight about the third and the fourth quarters that we are starting. We will still have a very strong comparison base in the third and the fourth quarter, but it will not be like the second quarter. So I believe that this will be reflected in our growth indicators for the third quarter and the fourth quarter as well. In the fourth quarter, we had an exceptional Black Friday and we intend to continue now to plan our Black Friday so that it may be very strong in the fourth quarter.

I would like to make a highlight that a winning team has to be very good, everybody, and we have very good players in our legal department. And a big gain regarding the intermittent employees, this was a new legislation that was enacted, and there was dispute, and we had some defeats in the first level, the first court or the lower court. And our team was excellent as well as our legal advisers. And everybody in retail was turning their eyes to us because they all have intermittent workers, intermittent employees. So this was a big victory on our part and on the part of -- with the legislation still, that we continue to have the right people, that we need them at the peak of retail.

And we continue to grow a lot the Marketplace team and all the [Bau labs]. And with the team of Netshoes, we have over 1,000 people in 4 different locations: São Paulo, Franca, Uberlândia and San Carlos. So we need to have these 4 locations because we dilute the risk because I [filled up] only at the lab. But while the economy is not growing still, but the labor market is growing and our professionals, our leaders, are being contacted by many people and we wanted to set up a very robust team for the long run. We have over 50,000 people, 250 people in Magalu are partners of Magalu. We have already distributed shares of Magalu to the main leaders of Netshoes, and we want to go more in depth in this program and considering other levers and -- to be contemplated by the program.

And we had only just a handful of people leaving the company during these months. We have [almost] 40 directors of Magalu, 15 in Netshoes that we maintain. We want to count on them, so we kept the team. And they are important for our development, for our growth and we'll be -- so this was a very big concern on my part and we are very well protected now. I don't mean that there will be a few changes, but we are very well protected.

And I would like to highlight the integration plan for Netshoes. We started, and the officers of Netshoes, we'll be talking about that. In the second half year, we will be planning this, and the heavier systems integration will be after Black Friday in the end of the year. It wouldn't be prudent to accelerate this. And there are many things that they will be talking about during the Q&A.

So now we would like to open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Robert Ford from Bank of America.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [2]

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Could you talk about the changes being carried out in the 1P inventory?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [3]

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We made provisions for the sale that we will be doing in the second half in order to sell the product that have a slow turnover. We want to accelerate the turnover of our inventories and the turnover is already good. It has always been good, that is to say 60, 70 days. But we would want to have more campaigns in the second half for the goods that have a slower turnover. So the provision that we note for that specific purpose, with the objective of moving these products faster from now on.

I don't understand the second part of your question. You talked about the changes in the assortment. What was your question?

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [4]

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Your use of technology in order to optimize your inventory situation.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [5]

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But there are many fronts [forms] of technology here. They are proprietary algorithms that we are creating to forecast demand. And we also use external information, Google and other kind of information to -- for our forecast and also the assortment and the forecast of demand. And for the stores, we use information from our website, searches for products and we are being more assertive in this assortment. And the algorithms of replenishing and the process of replenishing is more and more automated, no human factorable.

So most of these algorithms are very recent. They were developed with the commercial team and the e-commerce people and the labs team and the physical store team. And at the lab, we have a team fully devoted to that. Because of that, we believe that, well, we will take advantage of the sales, special sales. And we have one holiday coming in September, and we want to use this provision made in order to move these products in a more assertive fashion than in the previous model.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [6]

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Growth in credit continues to be high, provisioning even higher. How do you think about Luizacred and the sustainability of the growth rates that you have today?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [7]

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Luizacred has a very specific factor. All the consumer finance companies are under IFRS 9 now, which is a different accounting method than the Brazilian GAAP. It's another model. And the IFRS 9 is a peculiarity, so to say. And we and Carrefour and everybody, or any company or retail company that has a consumer finance company has to follow this model. So it has to do with the provision. It anticipates or brings forward long-term provisions. And the disadvantage is that when you grow a lot, you have to make a lot of provision. But when you project the result to 2, 4, 5 years, you see that in the third, fourth year, your income will be much higher. So no surprises there. So from the viewpoint of our projection, the result, the future results are very healthy.

And as we said at the beginning of the year, this is a strategic definition. We want to grow in -- even if it comes to the detriment of the short term. We want to grow our portfolio, 40%, 50%. Not very much concerned with the results of the fourth quarter being affected because this is only an accounting factor. And if you analyze our results, the results of Luizacred is very sound. And the EBITDA margin could be better, but I will continue to grow our client base because this increases loyalty and frequency. And I'm not going to stop doing that because of the short-term results.

So we're very happy with that, and Itaú is very much enthusiastic about this operation. They even want to accelerate this further. So we will continue to grow at Chinese pace in all products and services that we are selling through Luizacred.

And also, the digitalization of Luizacred, the app of Luiza is one of the biggest downloads of financial apps, over 600 new clients are using this app. And with the very strong -- and the presence of sale of cards in the stores as well, so Luizacred is becoming more and more digital. And this will help us to continue to have our client using the Luiza Card as their main. We are talking about preapproved clients. They are old clients, so activation is improving the portfolio. The frequency is improving as well. And operating expenses are improving. We are improving the efficiency of Luizacred. This is just a temporary situation and it only has -- it is just an accounting point.

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Operator [8]

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Joseph Giordano, JP Morgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [9]

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Some qualitative questions here regarding Netshoes. I would like to understand in the short run which are the main measures regarding the gross margin of 1P of Netshoes and understand also the relationship with suppliers. During this process in which still have -- there was a sensitive financial situation. And when we think about Black Friday and Christmas, maybe this is the focus for Netshoes. Could we think about driving Netshoes in the Maga Luiza, the Luiza network?

And now about Magazine de Luiza, you said that -- about investments in new clients. When we look at Magalu, will we continue to see investments in image and improvement in logistics? And in Luizacred, you have the app in order to do the card. But I would like to know why this is not integrated into super app of Magalu yet.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [10]

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Thank you for the question. And the first one will be answered by [Marcio]. He will be talking qualitatively.

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Unidentified Company Representative, [11]

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Thank you for the question. I will give you a general overview here. I would like to mention that Netshoes Brazil came to Magalu, Netshoes Brazil. We had some other M&A before the M&A in Brazil and Magalu acquired the business units that were more mature and more profitable of Netshoes, mainly sports and fashion.

And secondly and most importantly, we gained this confidence during our negotiations and we saw that the cultures of the companies were very similar. And we were very well-received by the Magalu executives and Net very quickly, brought into a Chinese-rate growth together with Magalu.

And the other step that was given by Magalu was the payment of Net debt. And trust, of course, was very quick to come. You have payment of the debt, a favorable environment and the process that was very tough during April, May and June and very quickly, net came back.

And we were working in 2 great fronts. One is the integration. We have 4 areas: So operations, technology, back office and businesses. And focusing on a super planning for 2020 is systemic execution, systems execution. But we can already reap some fruits because we have expenses more under control, our base is smaller and we -- everything was published in our last releases, so the work of integration is being done. The 2 teams, together with a consultancy company, focusing on the full systems integration as of 2020.

And on the other hand, thinking about the business' acceleration, Net had already the level of suppliers. We have 100% of the base already underspending this moment. And the inventory level of Net continues to be under control. And I would say it's at the best moment we have never had before in our history, in the recent history of Net, such a wonderful level of inventory.

And with that, we resumed our growth pace. And of course, a lot remains to be done. And we have a joint campaign with Magalu. And as Fred said, 22 million clients, we're already working on this client base together. And everything is okay with our suppliers. The inventories are under control at excellent levels, and we have already resumed a very good pace, higher than the market, 10%.

In a very frenzy environment, building things together from now on. Would you like -- well, some highlights about integration. We divided this into 3 stages. The stage 1 was the 0 moment (technical difficulty) coming from negotiations of contract and understanding of the back office structures, and we have a team that is supporting us, also tapping into joint business opportunities. And the Black App is very important, it was done hand-in-hand with Netshoes in the -- with very good results here in the last few days.

And we are also focused on designing very clearly and detailedly the coming together of the 2 companies' operations, logistics and customer service. Regarding the use of the Luiza network for Netshoes during the Black Friday, probably not because it requires a lot of systems integration, and we don't want to risk anything at this important moment, but execution will happen.

(technical difficulty)

We must -- the best process must prevail. We want to tap into Net's advantages as a whole. We have a long-haul work, like aircraft that we didn't have, the transfer of goods from one flight to another. They have last mile in some cities, some even better than ours. All the automation is more developed than in our case, so they have quite a lot of things. And it's important for us to learn from them as well and choose the best process. If the best process in a certain area is Magalu's, this one will remain, and likewise, Net and Magalu.

Regarding investments in clients, et cetera, our focus has been very strong in service level, mainly in express delivery. And we made investment because we are increasing (technical difficulty) investments in automation, and we're focusing our investments in SG&A. It's more an effect of the Lei do Bem the effect on the gross margin. We are not traditionally aggressive price-wise (technical difficulty) but we simply did not transfer this. It was a strategic decision.

Our investments is very strong in our clients. As we said, we invest a lot in order to grow our client base, mainly in the app and also the Luizacred clients' investments in terms of awards given to employees to sell the card, et cetera. Because the app -- because the GMV is higher, it's an intelligent investment in the long run, not in the short run. So what interests us is (technical difficulty) not only in our client -- not only the size of our client base, but also the frequency.

And the super app integrates now the Netshoes catalog -- category already in financial services, and cards will be added to the process of the app. Our app is a shopping app, and the other ancillary services will help the daily frequency of use and the monthly frequency of use. But our objective is to have the best shopping app in Brazil. And you cannot do everything at the same time. Thank you very much.

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Operator [12]

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Richard Cathcart from Bradesco.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [13]

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I have 2 questions. What is the (technical difficulty) sellers?

And the second question, could you talk about the dynamics of Marketplace vis-à-vis the 1P operation of Magalu? The growth of Marketplace, is it totally incremental? Or is there some kind of elevation level from 1P to 3P?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [14]

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The first question, so thank you for the question. We are focusing -- now Magalu...

(technical difficulty)

some people in our brick-and-mortar stores. This is a very big target, important one. We have a very big participation of excess delivery in 1P, and we cannot deliver this yet to 3P. And this will be the big difference for Magazine de Luiza in the next few years. This is very complex because we have to create a different legal entity in logistics in order to operate this. We have already done this. But over the next few quarters, I will be able to talk about the progress in this area.

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Eduardo Galanternick, Magazine Luiza S.A. - Executive Director of E-Commerce & Member of Executive Board [15]

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Thank you for the question. This is Eduardo. Regarding 1P and 3P, naturally, what we expect is to implement this, not only in the number of categories and products, but also in the categories that we operate in the long tail. This is what we have been seeing in the last few years, so much so that in 1P, we continue to have a very sound growth.

And say that there is no cannibalization? Well, I cannot guarantee this to you, but we try to deal with that in order to minimize any degree of cannibalization, focusing mainly on distribution and products and lines that are more complementary in the sales coming from these increments.

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Operator [16]

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Luiz Felipe Guanais, BTG Pactual.

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Luiz Felipe Poli Guanais, Banco BTG Pactual S.A., Research Division - Research Analyst [17]

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I have 2 questions. One has to do with new clients on the platform. Can you give us some more color, Fred, about how many of these clients that go directly to Marketplace? And still along these lines, do you already see any cross-selling among the clients that come through the Netshoes platform and those who buy 1P and 3P from Magazine de Luiza?

And then a question about logistics. You said that Magalu Entregas is already delivering to 60% of sellers on the platform. So what is the penetration of Logbee for these same sellers right now?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [18]

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So first regarding Magalu Entregas, these -- of these 60%, we have 2 modalities. 25% already go through our network and growing, growing because of the expansion of Logbee. In relation to cross-sell between the Net and Magalu, we started by analyze the bases and we identified what part is common to both. And we are working on our business plan and how to do this legally in order to tap into better results. And this is still in an preliminary phase. And new clients, we have the participation of new clients in the Marketplace. And in the beginning, Marketplace was working for recurring clients, and this has already changed. We have already had new clients, a higher number than we have in 1P. So overall -- 22 million are the single client, that is to say we did not include repeat clients. So this base is already clean, and this already gives you the very good perspective.

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Operator [19]

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Ruben Couto from Santander.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [20]

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Going back to investments in new clients. Can you give us some color about marketing expenses and your selling expenses? How much of your marketing expenses is divided between online, et cetera? Could you compare the marketing activities of Luiza and Netshoes?

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Unidentified Company Representative, [21]

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Today, over half of our marketing investment is online because the online base is growing a lot. We have contracts with [Costel] in commercial TV. We have contract with [Maize] and fadu, we are very strong and online growing proportionately. But brick-and-mortar stores just capturing more of this participation, but online is stable.

In spite of this growth, we are not -- it is not diluting because we keep a very good focus. Marketing investment in order to increase sale, but it's different from the marketing ROI, return on investments. We are focusing on client base, and we have to further integrate this in terms of our marketing decisions, but to bring new clients to our base.

And it's very difficult to compare because it comes from another category. And in fashion, for instance, it is higher than electronics or consumer electronics, or home appliances. So you cannot really make a comparison here. But their catalog is already in Magalu. This will be generating sales. And we're going to improve our algorithm so that we are going to increase their sales. So this will generate many new clients for Netshoes. But all electronic -- consumer electronics and home appliances have a higher ROI (technical difficulty).

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [22]

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So there will be a cross-selling between the platforms and not really increase investments in Netshoes?

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Unidentified Company Representative, [23]

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Well, I believe we will accelerate investments there, yes. In the last year, Netshoes decreased investments in marketing because of cash situation, and it was a very good campaign for the marathon and the Black App and full banner in [low], et cetera. So it was great to see Netshoes back and delivers sales through this year. But you don't have to do one to the detriment of the other. We want to grow at Chinese levels based on

(technical difficulty)

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [24]

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We have 3 questions, nonrecurring volumes in the quarter. Could you talk about this? There is some tax effect there? And how could we think about the evolution of this line for the year?

The second has to do with Netshoes. Could you give us an update about the model of store that you are thinking?

And in the opening remarks, Fred talked about the regulation that he sees coming in the future regarding informal operations. So what do you see there and how this shift could materialize over the next few months?

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Unidentified Company Representative, [25]

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Thiago, first the nonrecurrent. So they are nonrecurrent, so there's nothing to be said about that for the next few quarters. And the main thing is the tax credit that is related to our winning a suit. Excluding the ICMS from the calculation base of the PIS and COFINS acquisition. (technical difficulty) we had a gain of about BRL 1 billion in this line. And we talked about the provision and tax expenses and compensation regarding these gains.

Expenses regarding acquisition, very complex, involving foreign lawyers and Brazilian lawyers and banks and auditors, et cetera. So expenses related to the acquisition -- and some results of Netshoes in this 14, 15 days. And in this case, we left this out of the result because otherwise we wouldn't be able to compare this to the second quarter '18. So these were the main effects in the adjustments in the financial results line, nonrecurring effect and the tax effect.

Tax credits were restated, so the restatement of these credits is included in the BRL 1 million that I mentioned, close to the financial revenue line, and the PIS and COFINS that I mentioned. So there is financial expenses related to the acquisition, mainly swap and hedge operations that are in U.S. dollars and the prepayment of cards that, in order to pay the debt, 14 of June at the closing date and other smaller expenses. And the tax effect on all that between positive and negative, is BRL 291 million positive for the total results of the company.

But they are nonrecurring events. And we published our results focused on the recurrent result. And of course, they are nonrecurrent events. They are positive. These tax credits will become cash during -- over the next couple of years or 3 years, so there is a positive impact on our cash and in terms of cash generation for the next few quarters as well.

About the regulatory risk, when we launched Marketplace, we made a decision of anticipating any regulatory risk because we believed there would be a huge volume in terms of revenues in Brazil, with a very high penetration in the total transactions carried out by the Brazilian retail online and offline. You see all the Marketplace operations growing a lot. And we thought that most probably, government authorities and regulatory agencies would not accept for a long time operations that didn't have control over the sellers in terms of their issuing an invoice or not. So obliging them to issue the (foreign language) or the invoice and demand the sellers to be formal in all their operations.

So I do not have any privileged information about that. There is a lot of debate going at the level of many agencies that deal with tax collection. We're talking here about the executive branch and the judicial branch as well. And this is going to be more -- this will be increasing over time because Marketplace is growing a lot and the agencies, the regulatory agencies will not allow this.

Amazon, until a while ago, did not collect the tax in the U.S. It became too big, and the states saw that, and now they are obliged to collect the tax. And in the U.S., you know that the situation is not very easy. And this happened around 2011, 2012, and more than doubling the net.

In Brazil, we will see a similar situation. And in Magazine de Luiza, we wanted to set up an operation already imagining that this regulation will be coming and being proactive in this regard. So we do not want to be worried about that in the future. Should this regulation come, we will be ready and we will have a structure already prepared for that. And besides regulations, it has to do with ethics, so it would not be ethical for you to offer products that are being put on your platform by smugglers or by people who do not pay the due taxes. We have always grown being a very formal company, paying all the taxes and only offering products that are from ethical companies, so to speak. And our Board would not ever let us do anything differently, regardless of any legislation.

About Net, the main focus is that we will become a super seller together with Magalu. Integrations will start next year, as we said. But the one that we already have in our hands, we're already executing. So our focus is to accelerate and place Net in a position such as it had in the past and strategically, we will be discussing new business models, new stores, new possibilities. But now we are reaping the fruits of what we have in our hand, the integration that already exists between Magalu and sellers.

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Operator [26]

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The Q&A session comes on end. I would like to give the floor back to Mr. Frederico Trajano for his closing remarks.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [27]

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Once again, thank you very much for participating in the call.

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Operator [28]

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Magazine de Luiza's call is -- comes to an end. It has come to an end. Thank you very much for participating. Have a good day.

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