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Edited Transcript of MGLU3.SA earnings conference call or presentation 30-Oct-19 2:30pm GMT

Q3 2019 Magazine Luiza SA Earnings Call

Franca Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Magazine Luiza SA earnings conference call or presentation Wednesday, October 30, 2019 at 2:30:00pm 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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* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* 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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(technical difficulty)

(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. And thank you for participating in our call for the third quarter of 2019 results. I'm here, as usual, with all the executive committee and everybody will be available to answer your questions at the end of the call. I will be making the presentation, the introduction and then Bellissimo will continue and then we will be opening for questions.

This quarter was a historic one for very important things, mainly -- well, even if you consider an over 60 years of age company, I would like to highlight some of these brands for the company. We opened the number 1,000 store in August in Franco da Rocha, 63 after the first one that we opened and the coming onboard of 2 new [states] in Brazil, Mato Grosso and Pará and the purchase of Netshoes -- the acquisition of Netshoes, although we announced it in the previous quarter. We integrated and now it is part of our financial statement as of this quarter.

In the previous quarter, was only 3 days so now it's the first time that we have the full quarter with consolidation of the results of Netshoes and we held the first large B2B event, ExpoMagalu, in our [history] and that was held in September with [factoring] 1,500 people, most of them entrepreneurs that are trying to make their businesses digital by means of our platform. So it was an event by Marketplace in which sellers and service delivery people in our ecosystem. It was in the center [notch] . It was a very special event for us. And I would like to highlight as well, specifically in September, another very important point that shows the results of all these efforts of digitalization of the company in September.

As we said in our executive message with the growth of market base, we had 50% of our sales of Netshoes. And I think this figure is very important, it's very emblematic of what we have been saying. We digitalized the company and this represents quantitatively the digitalization of the company. But I think it is especially relevant if we take into account the fact that was not to the detriment of our physical stores. The physicals stores, as you will see, had a very robust quarter as well, besides having number 1,000 store being opened.

And same-store sales 9% over 16% of the last quarter. So overall our physical stores moving by 20%. So multichannel -- omnichannel strategy and the summation of the channels, once again, this is very well evidenced in this quarter. And also this quarter, there was a lot of competition, a lot of PR, a lot of investment, a lot of moves and from the viewpoint of competition, both from foreign players and Brazilian players as well. So I think it's very interesting because for over 15 quarters, we have been delivering very positive results. And most of them are much higher than the market expectations. And in some moments, I heard that these results were coming from a weak competition and the competition was not well structured and that they were suboptimal from the investor viewpoint. In this quarter, nobody can say this because there are many things happening in the market and I would like to mention those because the result that the company has been delivering is driven by a totally talented and hard-working team, and our staff and our team is excellent and performs on a strategy that, I believe, is extremely winning and assertive. And this strategy is being implemented with a lot of discipline over many, many years.

And recently, it went to a redefinition, I would say -- and I would like to start my presentation by reinforcing this point. We presented this during the [ML] Day at the end of last year and trying to give one example of this strategy, we digitalized Magalu and now we want to digitalize Brazil starting by the Brazilian retail. So everything that we lived as a company and all the effort that we made in terms of digitalizing the company, now we want to roll this out by means 3P and the Superapp and all endeavors in terms of building a technology as a platform. We want to make this available. We want roll this out to the market as a whole. And this is the new strategic cycle that we are already living.

So I would like to start with the first slide here, which are the strategic drivers of the company. Here we have 2019, but of course, it is triannual.

As we said that at the beginning of the year, we are focused on the strategic pillars: Exponential growth; platform leverage, Superapp; new categories growth; best retail experience; fast delivery; and data-driven and automation culture. I am not going to get into many details, I am going to focus on the results of the third quarter. But what is very clear, based on our figures, is that when you start a new strategic driver consistently, you have to show it in your figures, and your quarterly results more than in a QR narrative and you have to show this quarter-on-quarter. And the big highlight of the third quarter is exponential growth, which is the first driver.

If we look at the result and I would like to start by e-commerce Slide, if you turn to the next page. You will see that we grew 96% in e-commerce. Of course, BRL 700 million Netshoes , net 54%. But even without considering Netshoes, we had 54% growth over 50% growth base in the previous quarter. So this is the exponential growth based on an exponential growth that we achieved in the last quarter.

We have been talking a lot about the Superapp as the main growth driver, and I always say that this is the future. And including the apps of the company's -- of Netshoes, for instance, and we reached MAU, monthly average usage, of 14 million MAUs [previous] month. So this is a major growth vis-a-vis last year, 14 million people, and including Magalu Superapp, Zattini and Epoca. So the number of extensive users using the app this month and now we want to grow it even further, that is to say, from onward, we have already reached a very important figure there if we consider all the apps that are booked. The highest number of downloads rose -- if you look at the Google Store and iOS store, you will see that we have 2, 3 apps and the Magalu app fighting to be first in shopping. And in downloads, we are in the top 20 and competing with social media apps that are very relevant to the market. So the (inaudible) that apps has been very good and also for sales, it's not only for downloads. The apps are very representative in our sales growth and the app sales are driving the sales overall besides Marketplace that I will refer on the next page.

And I would like to focus now on Netshoes (inaudible) will be talking to. And you see that it's much higher than we expected the full quarter to be integrated from the view of financial statements and not from the view of integrated assistance. We had BRL 700 million sale, much higher than what we expected initially. And in the dynamic of supply chain of this category and we have been learning consistently with the Netshoes team. So these purchases are made ahead of time. So we are programming for next year and we have condition to increase our supply for the next quarters because these purchases were made in a cycle that were before our acquisition. In spite of that, we had a very extensive result from Netshoes both in sales based on the previous quarter as well as being in a positive direction regarding balance sheet and profitability. But because we already have practically the breakeven in our EBITDA of operating results and we reported this as well in a message from the Executive Committee. So already, reaping the fruits from this match -- from this marriage from (inaudible) next. And the bulk of the savings, mainly in SG&A, come from the logistic integration, most of them, and mainly from the back office that will be done over next year's logistics. We have already announced and in the presentation, we already have the in-store pickup at some Magalu stores. One of the stores has over 1,000 orders in this modality.

And on the Netshoes platforms, like mobile, you can select the Magalu store for the in-store pickup and 1 store of -- I think it was on the (inaudible) Street had over 1,000 orders in 2 days only. The client [bought and] -- chose to pick it up there and if we roll this out to all the stores and we only have a handful of stores that have power of penetration and the savings in terms of shipping because you also have free freight. There will be a very good impact in the third quarter as well, so this is very positive. And a few days later or after the authorization by CADE and the integration of Netshoes, we integrated the catalog and we purchased the Superapp and the brands, as they authorized us, we integrated in the catalog. And from the viewpoint of search in catalog, so we already have most of the brand that we integrated at the beginning and some authorized us recently, such as Adidas, and we are still going up in these categories and we are seeing very good evolution in our integration. [Everyone] (inaudible) will be -- give you more flavor regarding app -- net. And I am particularly satisfied and positively surprised with the first quarter of net and also the way that we are integrating and so congratulations to all of you and to all of us and you responded very quickly after this process because this process of acquisition, M&A, et cetera is not an easy task. From the viewpoint of e-commerce, besides the in-store pickup, which is already over 30% of e-commerce purchases, we are rolling out the shipping from store in order to deliver and we have over 145 stores already in this modality and rolling this further out. So this is another factor that will help us a lot in terms of our delivery. And I will come back to that later.

One of the highlights of e-commerce in the quarter as it was in the previous quarter and all the -- I have already talked about that for Magalu. But I would like to talk to the 300% growth of our 3 '18 vis-a-vis the previous year. So this is a very robust figure. We are talking about almost BRL 1 billion of GMV in the quarter. So it's incredible from the viewpoint of growth. And over 1/4 of the sales of e-commerce overall of Magalu, 11,000 sellers and I would like to remind you that we have a very good curatorship for sellers. By far, we have the most rigid process for the authorization of sellers coming onboard and also the most robust process in terms of obliging the seller to issue invoices in all sales. So we are extremely careful in our Marketplace and we want to grow but grow in the right direction, in the right way. We don't want to have people who are not in the -- not legal market just to say. And we want to have sellers that are as serious as we are in terms of pay their taxes and issue their invoices and delivering the best service to our customers in Magalu. I interacted personally with many of these sellers and I saw that there are so many good people there with the same commitment as Magalu regarding the level of service. And by the way, it has been improving a lot with this exponential growth. All the NPS indicators of 3P have been improving. They are not yet at the level of 1P but it is consistent improvement with sustainability and informal companies, they do not grow. If you look at the productivity of the informal companies, they come to a feeling that they can no longer grow more. And you cannot have a large company growing informally or not paying taxes. And we want these companies on our platform to become bigger and bigger in the future. So we made it very clear from the start that in order to work for Magalu, all sellers have to abide by our requirements and delivering the same level of service. And it's very good for the sellers as well in the long run.

And I would like to talk about the Magalu Entregas, our delivery system. We have to tap into this basic (inaudible) and we want to monetize the space with additional services both in trackers or deliveries in Magalu Pagamentos or Magalu Payments. There is a lot of room to improve the way of the -- and we do not really monetize this very much. So we are delivering a basic model. And as we roll out special delivery services and special payment services, we will be able to tap into this more and more and delivering a better and better service to our sellers and to our consumers. And here I am talking about 2 point, delivery or fulfillment and payment, which is the prepayment of receivables and credit and financial operations for these 3 actions that go to the Marketplace. So we have opportunities there and we would probably be able to tap into them as we roll out the services that we are developing in our labs and with the help of our business people in Marketplace. And the most basic model of delivery, which is Magalu Entregas, we already have 72% of our sellers, but I still consider this very basic [cross-docking] and other things. We will be growing over next year. During the Q&A, we will be able to talk about this.

Talking about the physical stores. It was a very positive quarter after quarter, in which we grew less because of the comparison base with the World Cup and I highlight the entry into 2 new states, Mato Grosso and a historical inauguration in Pará. And we practically -- the whole state practically came to a halt because of this, event in the Greater São Paulo, Santa Catarina, Rio Grande do Sul, for instance, and the Northeast as a whole. But this entry in Pará was really symbolic because we started very strongly with a very assertive market, a very well-located base of our stores and a fantastic team and I went there on the inauguration day and I was really impressed. And it continues to be very robust and it is very positive also the fact that we are getting into Mato Grosso.

In this quarter, we opened 52 new stores. And with an expansive gain of market share where they are well distributed in all categories, technology, [white line, like] product. So our core categories continue to be very good, and we are getting to new categories with our Marketplace and with Netshoes and 1P, many of our categories and we want to be a one-stop shop. But we don't forget our traditional categories, they are the cash cow on the company, so it's important for us to continue to gain share and there is a lot of room to grow. If you look at the standard categories, our market share is about 15%. So we still have a lot of room to be shared in our core categories. So we're growing in other categories but we have a lot of room to continue in our core categories online and physical. And mainly, about 15 quarters in this dynamic and to end my presentation and give the floor to Beto for the financials.

The clients are one of the most important KPIs for us. We involved a lot of the 24 million active customers. We reached this and here I include almost 5 million active clients of Netshoes, with a lot of representation in our base, which was one of the big objectives of Netshoes acquisition. So you can see we grew 44% versus the 3Q '18 and we're growing not only the base but the service level much higher than the others in the market. We are the only ones that have the RA1000, and we have the best score in the Reclame Aqui site. And we have to grow exponentially but top-notch service level. So I'm very happy with this evolution and it's very difficult to grow as much as we grow. And at the same time, with the level of service at the call center we have the first goal, wait time less than 2 minutes and the third-call resolution reached 95%. So we're improving our level of service. We don't want any problems to arise, but when one arises, then we need to have a first-call resolution and we have been doing a very good job in terms of avoiding problems. But if there is a problem, we have to solve it quickly. And the average NPS is 79 and those who are familiar with Net Promoter Score, this is an indicator by means of which to compare with companies all over the world. And this is the first time that we opened this. So we went up 3 percentage points vis-a-vis last year. So the NPS of 79% is one of the highest levels of retail not only in Brazil, but in the rest of the world. This is totally impartial, that is to say we hire external companies in order to evaluate this. And based on that, beyond the next quarters, I will continue to show you our NPS, but the NPS is very important and it is also [not] the indicators for the compensation of the executives, including the CEO of the company. So it's very important for all of us. And one of the things that has been helping the NPS is the fact that we are raising the bar for logistics as well for 1P. The data that I have been talking about is for 1P, we have over 42% of total last-mile deliveries that is just the express delivery. And in Brazil, the average was 5 to 6 days and we are bringing this down with the fantastic work being done by the logistics and the supply people, the commercial people and the operations people as well. And the stores also participated in that too.

So 42% is very high. In 5% of the 48 hours that we deliver in 2 days, we are talking over 60% that are delivered in up to 2 days. We promise 42%, but in fact, almost 60% we deliver in 2 days. And in some cities, we promise 1-day delivery for most of the categories of our SKUs. In terms of -- I talked about 1P and 3P and we are making our best endeavors to roll this out to 3P. So as I mentioned before, this refers to 1P and rolling this out to 3P, using Magazine Luiza and Logbee and everything that we did for 1P, we want to do for 3P. But undoubtedly the NPS is very high, mainly because of the brilliant job done by our logistics team. And I would like to highlight these factors. And now, Beto, I give you the floor to talk about the financials.

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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 and thank you for participating in our call. I will be talking about our figures and we talked about sales already. And the adjusted highlights now. Here, first we will be talking about the adjusted highlights because we had tax credit and nonrecurring credits and provisions and the results are more comparable to last year's but they include Netshoes for the first time.

Our gross sale growing -- we were able to increase our gross margins 0.9% because of Netshoes sales that has the gross margin, which is higher, around 40%, and also because of the Marketplace. Marketplace helps us a lot and Marketplace is based on gross profit and this helped a lot Magalu and Magalu (inaudible). On the operating expenses line, we increased our operating expenses a little bit because of the acquisition of Netshoes and due to the first steps of integration and also because of the increase in service levels and faster delivery and acquisition of new customers, in line with our strategy.

With that, we had an adjusted EBITDA of about BRL 300 million, with a 6.2% margin already, including Netshoes, practically with a breakeven in the EBITDA margin. Then we had a dilution of expenses -- financial expenses and benefits regarding interest on equity, and we got BRL 136 million adjusted net income, including Netshoes 2.8% margin net income growing vis-à-vis last year. So this was a very solid result and we continue to generate a lot of cash, practically BRL 800 million in the last 12 months with a ROIC of 20% and return on equity very high as well. And we continue to have a very comfortable cash position, BRL 600 million net cash, BRL 1.8 billion total, including receivables. And I think the main message is that we continue to grow profitably and generating cash. And including the nonrecurring events, the EBITDA was over BRL 500 million and IFRS 16, a margin of over 10% that equals to BRL 235 million.

Then we go to our client base, the MAU. Fred has already referred to this. Then we show you the evolution of new stores. We opened 52 new stores and we started investment to open in addition of 50 stores in the fourth quarter. And this is already -or most of that is included in the total investment that was BRL 186 million in this quarter, growing over 65% vis-à-vis last year. And in the year as a whole, we have already invested almost BRL 400 million, in line with our strategy.

On the next Page, we show you the quarterly evolution of our sales. Year-to-date 33% growth, with a major market share being online and offline and also the evolution of market rate, almost BRL 2 billion in the year. And we show the quarterly evolution of gross profit. On the equity income line, here we see a better result of Luizacred in IFRS 9, already impacted by the improvement of the short-term delinquency indicators. So this was the best IFRS quarter this year.

And expenses, they went up. Operating expenses went up due to the acquisition of Netshoes and also investments in increased service level.

We show you the EBITDA on the next Page, the evolution of the EBITDA. Once again, very consistent around BRL 300 million every quarter. Margin 26.2 -- 6.2%, EBITDA margin 6.2%. And here, we are talking about operating expenses over net revenue. But GMV expenses have a lower weight because we are growing a lot with Marketplace. And the performance of e-commerce Marketplace, et cetera, helped growing the nominal EBITDA that went from BRL 281 million to BRL 301 million. Margin from 7.7% to 6.2%, but due to the factors that we have already referred to. Financial results, we were able to dilute our financial expenses, in spite of all the investments made this year, not only in Capex but also the acquisition and the payment of previous debt.

Financial expenses 1.9% dropping and then adjusted working capital, we continue to generate cash based on the working capital around 70 days. The average term for purchase is 90 days. So favorable cycle for cash generation. And Netshoes has already improved its working capital profile as well and has already improved the inventory turnover and the average term for purchases and generating cash for its own operations.

Here, we show the adjusted cash flow. Adjusted cash flow in the quarter over BRL 200 million from the operations and we invested BRL 186 million. We have already said that net income BRL 136 million, BRL 367 million year-to-date, 2.7% adjusted, including nonrecurring events and higher results. And Luizacred, we continue to sell a lot of Luiza cards. We increased our base reaching almost 5 million cards in total, 90% active with a very high utilization. We highlight that the TBV of Luizacred reached BRL 7 billion, BRL 1.6 billion inside Magazine Luiza and BRL 5.3 billion, practically outside Magazine Luiza and these are -- card is co-branded so this means that it can be used in the whole market.

And our credit portfolio reached over BRL 10 billion, growing more than 40% in the last 12 months, a very healthy figure. And we showed that the NPL 90, had a slight increase from 8.5 to 8.8, reflecting, once again, such as in the last quarter, we explained the very high number of new customers. But on the other hand, we highlight the reduction of the short term nonperforming loans, which is very positive and it ultimately generated benefits in our net income in IFRS 9, as we said. So these were the main financial highlights. And now I would like to give the floor back to Fred.

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

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And I would like to open for questions already.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Macruz from Itau.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I have 2 questions. Could you share with us the KPIs of the 200 sellers that are doing cross-docking with you? And what about the improvement in the sellers service that you are piloting? And it's very clear that you're going towards a Superapp, and the brands are already many apps inside, but you have always said that payment will be part of the strategy. Could you give us an update in this sense what about the fintech operations and how do you see this?

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

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Thank you for your question. There was an important component -- strategic component there. So some information is not public. I will do my best to answer about the sellers that are in the cross-docking model. I can give you an overview, but as I said, we have 60% of our deliveries up to 60 days for 1P. And if you consider 3P, I believe that we have been less -- well, than 20% in D plus 4. So the service level and delivery time in 3P is much worse than in 1P. And these 200 sellers, we already -- well, there's time regarding you sending this through the mail, et cetera, and the operation becomes a little bit more complex. But for the sellers that can do this up to 1 day. We can already bring them onboard for the 3-day delivery. So we see a significant reduction already in delivery times and 60%, 70% reduction on average. And also a significant reduction in the delivery costs because we have level of extension that is much lower than the standard carriers, both for higher-volume products such as (inaudible), I would say that 20%, 30% but overall, just ballpark figures so that you may understand total delivery time and the reduction in delivery cost, only these 200 sellers are benefiting from that. And Magalu Entregas already have a benefit because they contracted large carriers which is this -- Magalu Entregas is not cross-docking, which is 70% that I talked about. Our -- the volumes are much higher than the small seller. So there is an advantage to there, mainly in terms of delivery cost and the level of service is better. Because when it is in Magalu Entregas, our tracking of the purchase is much better. So for the consumers, it's much better. The NPS is better of the deliveries. So more or less this is the answer. But the focus is to roll out the cross-docking modality. In Brazil, I don't believe that storage will be as relevant as it is abroad but we will be prepared to do this as well. So we are going to expand our area to have it also but mainly in cross-docking not so much in shipping from store. And collect from the store, we pick up in the store and then we do the cross-docking, you will see the whole [mess] in storage. We will be part of that but it is not necessarily the core in my view. We will be prepared for both situations. About payment, I can say even less because in order to increase the MAU, the monthly active users, in the app, we want to do this with new categories and with lower-ticket categories and high shopping frequency, such as the Net categories in the Clube da Lu, which is already represented at 25% of the website. Customers already come from e-commerce and -- but we do not achieve the high frequency. What we are talking about, not the average users, we want to [grow the] daily active users and we cannot do this with goods alone. We will have to have other services that you talked about, mini apps, and we are preparing to connect these mini apps. And payment is important mainly in the context of increasing the frequency of utilization. The Superapp is the major part of our strategy. However, I cannot get into details regarding the timing, et cetera, but we will certainly be doing something. What is more, in the short run, it is a prepayment and there lies a good monetization opportunity payment to customer today is like a [red] sheet. Although, it is important from the viewpoint of generating frequency of use, which is important for our strategy, a major investment is being made. And if you -- it's like having the kind of magazine without OLEDs. And in the OLED, market allows it for bonus and cash-back and coupons, et cetera. In order to give this kind of attraction, it is too expensive. But from the viewpoint of profitability, with everything that is going in the world -- going on in the world, even the online, of course, sometimes you can have a trade-off. But we have to be very careful in terms of the direction, not to get into this war of cash-back, et cetera. We will make some move but not so quickly, and it has a possibility of representing something more significant to our bottom line and we have a very good opportunity in receivables discount for the sellers. So this is the priority in terms of our endeavors in this directions. I'm not saying that payment to final -- end customers is not important but from the viewpoint of results and monetization, the payment -- or the prepayment for sellers should be the first direction.

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Operator [4]

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Robert Ford from Bank of America.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [5]

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Could you talk about the response of MaaS, Magalu as a Service? How does it work in terms of monetization and how do you expect this to evolve Magalu as a Service?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [6]

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Rob, thank you for the question. Magalu as a Service, the concept is retail as a service. What we do today in marketplace is a standard operation. We are generating sales for the seller. We are working with customer acquisition and take advantage of the traffic that we already have in our digital channels and stores, but it's the basic service level in the context of the Marketplace. And our strategy is to be a digital platform that will help the Brazilian retail to become digital, and we have to have value-added services such as payment, that was the object of the previous question. Magalu Pagamentos is part of Magalu as a Service. So that the seller may use working capital, et cetera, from the viewpoint of fintechs for sellers in this component. This is the most basic one, but there are many others regarding payment and credit that we can offer to the sellers that are -- will be coming onboard. And we also have the deliveries of entregas. If I take a delivery I do for 1P and I make it available as a service to the seller, it will be under the context of Magalu as a Service and I talked a lot about delivery in the previous answer. And we have an opportunity to monetize here. Although, in the short run, it is more to increase the level of service and decrease the numbers of days for delivery. So those who use Magalu Entregas here, it is free shipping and Magalu subsidizes this. So we announced this during the ExpoMagalu and it helps to increase the delivery service. This is the service I have contract with carriers and I have the delivery service and I am either to make it available to the seller or via technology, via API and via platform. I am doing the delivery for them that is to say retail as a service again. And there is an important component that we announced during the ExpoMagalu, which is the following. Today, most of the sellers that are selling online, are companies that have -- well, there are maybe 50,000 to 100,000 companies that sell online. But it is 1,300,000 retailers overall and only 50,000 to 100,000 sell online. So we are growing over 1,000 sellers online per month. And via Integra Commerce, that was the company that we acquired in our platform, we want to develop system so that the analog sellers may sell. And we announced one of the first products, while the startup Softbox developed the IPTV. The physical retailer [faces] this in their store the small- and medium-sized retailers and most of the large ones already sell online. And they installed this in their physical stores. And the system does all the tax part and inventory and issues invoices. But when you have the inventory on this IPTV, it is made available through the Magalu app. So it is still a pilot in Uberlandia and we intend to roll this out. We have already had some sales of goods that were in the physical world only and that were sold over the Magalu app. And we intend to develop this even further. During ExpoMagalu, we launched Magalu tech for the sellers that do it by hand, that is they issue their invoices by hand and even in the 11,000 sellers that sell through Magalu Luiza Marketplace, some of them have the financial ERP but some don't and they do this manually and they are very small sellers among the 11,000. So we launched Magalu tech in order to help them to collect taxes and issue invoices in an easier fashion. So these are services that we will be delivering to sellers to make their lives easier and we will be charging a very small fee and these are opportunities that we have to improve the level of service in 3P. We want to be as good as in 1P and at the same time, monetizing the space that has already grown 300% in this quarter, almost BRL 2 billion year-to-date. So we developed lab. At lab, we will be developing everything digital with software-as-a-service. And on the platform, we will be making this available to the sellers, and of course, deriving some revenue from that.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [7]

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There is a question about Netshoes. You said that the Netshoes has already reached equilibrium or breakeven. Which is the highest gross margin in the categories? How should we think about Netshoes margins in the long run?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [8]

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I will ask Eduardo to describe the integration process, okay? And I will come back and talk about margin.

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Eduardo Galanternick, Magazine Luiza S.A. - Executive Director of E-Commerce & Member of Executive Board [9]

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So this last quarter, we made a commitment to get to November with the design of this integration already completed with mainly the workgroups and we are reaching the final process, the organization design. And we are getting to the Black Friday and we have to be totally focused on that. But right now, we have already been able to tap into very important things, integration of catalogs and the possibility of having store pickup for Netshoes and we launched a new version and -- which is much more user-friendly, with filters and this is already in our app and Netshoes. And we have already taken long lead to cater to Netshoes orders in order to reduce delivery times, and we have already done the work in terms of synergy with contracts for service providers. And collectively, we have already decided to marketing initiatives [the second week] , which will be broadcast by Facebook and we are sponsors only because we are together with these 2 brands. And from the viewpoint of structural integration, we are finalizing the plan to be executed in 2020. And from the business viewpoint, we are already capturing some advantages. And I would like to turn the floor to [Marcelo] who will be talking about this.

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Unidentified Company Representative, [10]

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Adding to what Edu said, it's very important to have the inventory levels with the best situation possible and this is what we have already achieved. We have new inventories and the payment terms already reflect the partnership that we have with our suppliers, with our partners and growing more than 20%. And with the EBITDA already capturing everything that -- as Edu said, it's important to stress the new sponsorships with marketing and this places Netshoes at a very beloved mark and that changes, of course, as well but scores going up. And the creation of a road within Magalu together with the brands in a very well-structured model, we are bringing readily to a controlled environment, a healthy environment all that, so that we may grow very quickly. Just to give you an idea, we are already completing over 50,000 products on the base of Magalu for November 4, Black Friday. So these are some details of the business.

From the margin viewpoint, we do not give guidance. But together with integration, we are doing our strategic planning for Netshoes. We hired a consultancy company and we are drafting a business plan, tapping into opportunities and my view is the following. Net sales BRL 2.5 billion last year in a market of BRL 140 billion. The penetration of fashion in Brazil is still very low if you compare this to any other place in the world, so one of the biggest opportunities for growth in e-commerce is fashion. And there, I include sports goods as well. Net has achieved a high penetration in Brazil. It's really changed the world of sports goods, but if you look at fashion as a whole, the penetration is low, about 5%, not considering some figures on Marketplace but some countries already have 20% penetration. So the focus of Netshoes is growth. We want to balance the result and we already have some signs of this breakeven. We want to improve the cash generation of the company. In this quarter, we already have evidence of that. But achieving this breakeven, the focus of the company will be both growth and revenues because looking at the opportunity as a whole and we're including the fashion opportunity, we can further increase GMV of all the categories that Netshoes operates with, and this is [Marcelo's] focus and his team's focus, growth with balance because Magalu grows with balance. So this is the way they do things. So working with higher margins, this is the principle after we get to a higher revenue. But the advantage is that this helps dilute fixed cost and part of the dilution will be with the integration of the back office next year and Netshoes would have to have a large structure for 2.5. And for Magalu, a higher GMV needless and part of that has to do with Magalu Luiza and store pickup, [reducing for] many geographies for Sao Paulo, not so much. But in many other places, this will help reduce the delivery expenses of Net, but the focus on Netshoes is to tap into this great opportunity, which the apparel and fashion and sports goods market in -- I believe that a major wave that is coming is in these categories, such as what's the case with electronics and appliances before.

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Operator [11]

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Luiz Felipe from BTG.

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Luiz Felipe Poli Guanais, Banco BTG Pactual S.A., Research Division - Research Analyst [12]

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I have 2 questions. The first one has to do with Netshoes. Can you already see some cross-selling? You said that 25% of traffic on the platform already comes from new customers. So do you already see some cross-selling, Netshoes customers buying products that were only sold at Magalu Luiza? And the ways you monetize, this is the second question you talked about Magalu as a Service, so what are the opportunities that you think about monetizing traffic? Mainly in terms of advertising, can you already see an opportunity such as already seen in more mature markets, more mature than Brazil?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [13]

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Thank you for the question. From the viewpoint of cross-sell, very little. We already -- well, we do have some categories, Adidas will be coming onboard this week. So the major brands are coming onboard now and the iOS store was updated during this last weekend. So we still have integrations here that are already being debated, but it is still scratching the surface. Basically, we have grown with the new categories that were already in Magalu and the new categories that were already in Netshoes. So within Magalu but far from achieving the potential. We already see something and we have to celebrate every million that we generate, but we are still scratching the surface. It is the tip of the iceberg, and we have a lot of room to grow in terms of CRM and cross-sell. About Magalu-ex, the focus now -- and when we talked about the strategic priorities, I said that we have a lot to grow in GMV in audience, and we have to grow sustainably. The focus will -- we are very much focused on growth to the betterment of margin even because when you have a large margin base, it's easier to monetize and not prioritizing new services yet. Magalu Pagamentos is a service in terms of monetizing and receivables and salaries and not end customers, Magalu Entregas and even less than Magalu Pagamentos. But I would say that the main focus is to increase the active client base. We are talking about 25 million of 150 million economically active population. So we want to have a much bigger base. We already have Magalu Ads but this is not our focus -- our main focus. We are focused on increasing the base and the frequency and we want the customers to return more and use the app more. This audience has to be monetizable, it's not only having the clients that [brought] in the last 12 months, but always going to the app, et cetera, then we will have relevant results in the future. So this is the business line, an important business line for the future. And this is an important fact for our monetization, but the focus is to increase monetization, the frequency of use, the MAU and DAU as well. First, the audience and then the revenues. We are focusing on the audience first.

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Operator [14]

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Joseph Giordano from JP Morgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [15]

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The first question has to do with the customer base. I would like to understand the behavior in your physical stores and how the Luiza Card, which is a major part of the total revenue of the company, how do you compare the using of the Luiza Card in the physical world and the online world? Do you have a lot of room to grow with your loyal customers? And talking about Netshoes, you talked about Adidas and other brands that are coming onboard and leading the assortment of Marketplace in the company. And as your competitor has a partnership now with another e-commerce platform, do you have any talks going on in terms of expanding the mix of Netshoes because there are some products of these brands that are not available online?

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Unidentified Company Representative, [16]

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Joseph, could you repeat your last question afterwards? I will start by answering your first questions and then I will like to ask you to repeat your last question because I have not understood it. Well, physical stores in the quarter and the active client base of physical stores, yes, there was an increase in the client -- customer base in stores, 16% growth in physical stores. Most of the growth in the active base of e-commerce comes from 3P and as 1P is growing with and without Netshoes less than 30% with -- I'm talking about 1P now, okay? Overall 54%. Of course, the customer base grows proportionally to the growth in revenue. So with Netshoes, you have 90% growth, which is a major growth. Of the e-commerce, major generator has been e-commerce 1P, but mainly there was a significant impact coming from the active customers of Netshoes and also the Marketplace that helps ultimately in the Magalu context. But physical stores is growing 16% in the quarter and this is a very important figure -- considerable figure for the physical stores. Such as e-commerce, the store teams have targets for active customers, and of course, the base is older. But we have a very healthy growth rate in terms of new customers and the active base, and we are including clients of other markets as well. So all these from Para, Mato Grosso, they are new customers. Some of them [brought] online, but most of them are new customers, the proportion of new customers is high. About the customer -- the Luiza Card, it is very representative and the customer that buys with the Luiza Card is more loyal and the frequency is much higher than the customer that buys without the card. And the lifetime value of this customer is 5x bigger than the customer without the card, so it's super important for us to increase the number of customers that buy with the Luiza Card and the IPP, 50% in physical stores is not so big in e-commerce, less than 10%, in fact, is still a very low figure but there is a huge opportunity to increase the penetration of the financial products in e-commerce, and we're now attacking this presence in terms of the flow of the shopping process and also to have a better product for the online customer. It's a little bit different from the offline customers, and we have a huge opportunity to increase the penetration of the card in e-commerce. Not to mention digital payments that are -- it's not only credit, sometimes it's banking -- bank account, et cetera, and it has to do with, what I said to Thiago, there will be an opportunity as well in terms of digital payments as well, but I cannot give you any details because this information is not public. And could you repeat the last question please?

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [17]

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The Netshoes assortment, the management of channels of global brands, Nike, Adidas and others. And some items were not available through online channels such as Netshoes, and we saw another company making a partnership with another company with a similar operation. And is there any intend to further strengthen the presence of Netshoes online because of these reasons?

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Unidentified Company Representative, [18]

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Fred has already said that we are doing strategic work with the brands with sports, fashion so that in 2020, we can achieve exponential growth and increasing the portfolio of Netshoes in sports. So we are talking with all the brands, are very well structured and very transparent talk, nothing is being done in an underhanded fashion. We are working hand-in-hand with these brands. They are 10 biggest brands in sports. 9 have already given us green light for the Netshoes world.

(technical difficulty)

In the Magalu app, you can search products and the catalog is indexed, you have it within ASO and Google, et cetera. You cannot do overnight so it's a native integration between the Net catalog and our own catalog, and it is indexed on the internet. If you do not integrate natively -- if it's not in the catalog, it's not in the search, it's the same as not being there. Regarding this, what we did. I'm not saying that nobody will do this with another partner, this is not what I am saying, what I mean is that we have a native integration and the brands have to be consulted and I need to have the authorization of the brands. It is in the site engine, the word is so indexed that I need the brand to authorize me. Otherwise, I will go ahead. It is, as if it were not integrated. The difference that we have is that we did a native integration, as Fred said, and all the formalities that we can give our clients come also with a Netshoes product.

So now we're increasing the store pickup and all the experience is natively going to be delivered there, all the improvements in the searches. So in the analysis that we carried out, we have this desktop mobile site version, (inaudible) that invokes the site of the other brands inside the desktop and inside Luiza mobile site. So it's totally different from the experience in which all the features that get into the Magalu app. All the customers will benefit from there because it is truly integrated and natively integrated. It will be only natural for offline companies making partnerships with online partners, and we will be looking for companies to have in our app. But we are looking for native integration, maybe with the different look and feel but with a unique shopping experience. If you do not have this natively indexed in search sites and the catalogs for internal search and external search, this integration will not bring benefit to anyone, neither to the retail or to the platform. We're not talking [a daily spending] movement, but we are explaining the difference between our approach and how we want to get ahead. I intend to have the IPTV and other integrations with physical retailers that placed their physical catalogs on our platform. We want to be a digital platform, not only with our own physical stores, so our mass strategy of heart of the strategy is to integrate not only with large retailers, but the small, low and medium-size, of course, the large ones as well. And we will make our best endeavors to integrate with large companies as well. But when you have the product or the catalog inserted in our experience, it has to be totally seamless for all customers. I'm trying to explain, it's not very easy to explain. And the cart, the shopping cart is unique, it's the only one. So I do not want to create many different environments within my Superapp. Everything has to be totally integrated with a shopping funnel, so to say, with no friction whatsoever, very user-friendly in other words.

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Operator [19]

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Richard Cathcart from Bradesco BBI.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [20]

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I have 2 questions. The first one has to do with -- you said that your delivery in 4 hours in 40 cities. Do you see any change of conversion and frequency in the clients -- customers that are using this service in these cities? And also regarding the initial results of what will be available in October, I would like to know what you see in this regard?

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Eduardo Galanternick, Magazine Luiza S.A. - Executive Director of E-Commerce & Member of Executive Board [21]

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Richard, this is Eduardo. Thank you for your question. About the impact regarding conversion, it is directly proportional. We have internal studies that show the conversion in terms of the promise of delivery times and this is very obsessive on our part, that is to say, with using Logbee today is the main tool or main strategy to get this reduction today in São Paulo City. We can give you more information, but most of the deliveries in São Paulo, in 1P, already have 1 day promise delivery time. But you go from 1 day to 2, you have a drop in conversion, which is about 20% drop in conversion rate. About click-and-collect for Netshoes, Richard, I really didn't understand your second question. Could you repeat it?

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [22]

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Fred, you saw that -- you said that the initial results of click-and-collect in the Magalu stores were outstanding. I would like to better understand the results that you see so far?

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Eduardo Galanternick, Magazine Luiza S.A. - Executive Director of E-Commerce & Member of Executive Board [23]

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Well, today we have 4 stores. And in one of these 4 stores, we had 1,000 orders that were done in click-and-collect of -- in 10 days, not in 1 day, in 10 days and in one of the stores only. So we are very positively surprised and then all the stores you see mainly a big amount -- a big number -- you have the Center, the Lapa, the (inaudible) and the other. These are 4 stores. And I visited Lapa yesterday. I went to 595 as well and all of them have a lot of items available in the stores that are being collected by the clients. And talking with the teams, it's great to see that most of the customers go there and they are new customers. They had never been to a Magalu store before. So there is an opportunity for the physical stores to convert both selling financial products and financial services, physical products, like insurance or other products, financial products. So there is a big opportunity there. And of course, we are going to roll this out. We should be rolling this out very quickly. What is done for Netshoes is valid for 3P in general. So we have a pilot for Netshoes, and we're going to roll this out to Netshoes. And soon, we are going to roll this out to other partners of the platform, other sellers. Well, Netshoes as a seller, and other sellers will benefit from this movement and it's part of [mass].

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Operator [24]

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Ruben Couto from Santander.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [25]

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I'm curious about Netshoes and click-and-collect. What about opening new stores focusing on this category? I understand the relationship with the industry is very specific. And it comes from Netshoes. And with all the benefit that you see from click-and-collect, I would like to know how do you see this possibility?

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Unidentified Company Representative, [26]

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This is Marcelo. Thank you for the question. As we said before, we already have 4 stores of Magalu, super surprised and -- with all this going there and we are using this as a pickup point. Right now, we do not intend to use Magalu stores for sales or just to show the products and we do see how Netshoes behave. And thinking about online, physical, digital, all the models we discussed. So going to the previous question, so that we may increase our portfolio and have a bigger footprint and also using these stores in an omnichannel operation, more on the Magalu [itself, so to say.] We are very happy with the click-and-collect so far. And the customers, well they are new customers on both sides and we did not expect to have this level of adherence. So we have to fill the Magalu stores with these [purple bags] and bring other clients to Magalu -- other customers to Magalu.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [27]

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I would like to go back to the initiatives that you mentioned to increase Marketplace and mainly the reduction in the prepayment of receivables. What you intend to do in the fourth quarter? Can you see already some degree of acceleration in sales from sellers that are now participating and were not participating yet, but that want to take advantage of the free shipping or free delivery, have people coming onboard only because of that?

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Unidentified Company Representative, [28]

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Well, it's still very incipient. We launched this last month and many things have to be done by the seller, such as the time for mailing it and many other requirements. So we're not going to give you guidance regarding impact on our margins, but we made our studies and there is nothing very significant in this regard. The logistics is very efficient and we have good quarter. There are some criteria for the app, like over BRL 99 and so on and so forth. So we are already giving free shipping or free delivery for 1P, so the investment is not so difficult, in the context of 3P. And it's very difficult to segregate 3P because it's going well overall. And to know exactly what contributes, it's very difficult. It's going very well and payment likewise, Magalu Pagamentos likewise. The advantage is the fact that the seller uses the platform more often. And today, we still have a third-party platform and we already have Magalu Pagamentos but the economics is in part by the other company. And we intend to do this 100% internally and not using other acquirers and the objective of giving this discount to the sellers is to help them have working capital and have more products and also show that the seller uses the tool and that the seller gets used to that. It will facilitate a rollout. Just to give you some more color, the main driver to make the seller joining this free delivery is to give him a better term of payment. All the sellers that came onboard in the program had a significant reduction in the delivery times promised in São Paulo. This was about 30% drop and when you go out of São Paulo, it's over 15% reduction in delivery times, connecting to what I said before. This has a direct impact on the increase in conversion. So we're learning a lot with this initiative.

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Operator [29]

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Irma Sgarz from Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Conceptually [marker] is under SG&A. How do you consolidate this? Of course, the level of investment has to be higher right now for competitiveness reason. So how do you think about this line in the future? Maybe if it impacts your profitability, will you be soon looking or focusing your eyes on growth? And the second question has to do with the macro environment to believe that customers or the market has a higher degree of confidence and what are your plans for '20 and for the end of the year?

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [31]

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Once again, we do not break down the marketing expenses. What I can tell you is that when we look at our investment, in the context of SG&A over revenues, there is an important consideration by that. When you look at the quarter figures, you have to include the net effect because we got to breakeven the EBITDA, there is an impact on the margin and you have to exclude the following as the GMV of the Marketplace becomes higher than the total GMV of the company, it's already 25% of e-commerce. Then when you compare the operating expenses with the net revenue, not considering GMV, you're considering the take rate. But when you look at your expenses vis-a-vis the total GMV and not net revenue, it has been increasing much less than it's shown in the financial statements. The marketing expenses essentially vis-a-vis the GMV have not been going up significantly. They are remaining flat. And I'm keeping it flat and you ask me why our financial expenses going up vis-à-vis the GMV, mainly because of logistics, investment in teams and we have been doing work for 3 plus 2. We are investing a lot in the whole supply chain, more truck frequency, more travel frequency, higher number of people in the DCs, higher number of people in the brick-and-mortar stores. We had to increase the number of inventory clerks because a lot is being picked up at the stores. So the inventory guys are the ones that are doing the hard work and there is a team of inventory people in the stores. So we are investing much more in logistics percentage-wise. I'm very careful and I do not do any overspending in marketing. We have a more assertive marketing investment, more focused on the app and on customers that give us the higher CLV, so client, our card customers, channels and others who have a higher frequency. A major part of the investments that we are making that shows in our results are not in marketing. We are increasing the team in our Marketplace and labs people, so we are investing in many different areas so that we may grow our revenues and not overspending in marketing. I don't like the dynamics of companies that grow based on customer acquisition cost that is very high and our customer acquisition cost is very low vis-à-vis the market. And as I said, we have not started digital payment for (inaudible). We are not participating in this expensive game of wallet. The idea is to get into that, take advantage of the Superapp and not making an investment in order to have an additional app base. So it's different from what the market is doing and I think it's going to be cheaper.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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What about the macro environment? The second question.

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Frederico Trajano Inácio Rodrigues, Magazine Luiza S.A. - CEO & Member of Executive Board [33]

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I'm very bullish about the market. We have the approval of the reform last year -- last week. The decision about the FGTS, which was very good because the government had done this in 1.5 years and it would not give the impact that retail needed and with a stronger stimulus given by the government, now we will see in next quarter or fourth quarter that will be very positive with tailwinds and not frontwinds. We have been growing for 4 years, but the best that we got was on percentage, it was either negative or 0. So finally, we have to grow with the help of the macro environment and I'm bullish because with all the players I have been talking with, I see that the economic recovery will be driven by the private initiative and not the public sector. And it takes some longer time because the companies have to set up a business plan and submit it to the board and it has to have the necessary funding because companies -- or private companies usually do not spend money that they don't have usually. And I see a high cycle of investments and this generates jobs and jobs generate consumption. And I see this as a recovery that will be slower initially, slower than the one that we saw in the past. But once it comes, it will be more sustainable and sound. I'm very bullish about it and we have been accelerating investment to see many initiatives in terms of automation of DCs and we already have this in place in the Luvata DC, a heavy investment and we're accelerating investments in all the fronts and we're very bullish. We believe that recovery will come and it will become stronger in 2020 and in the following years.

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Operator [34]

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The Q&A session has come to an 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 [35]

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Well, I have already talked a lot. It's already 5 minutes past 01:00, a very long call. And I would like, once again, to congratulate our team for an outstanding job done during this quarter and I wish you all very good afternoon. Thank you.

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Operator [36]

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Magazine Luiza's conference call has come to an end. Thank you very much for participating and we wish you a good day.

[Statements in English on this transcript were

Spoken by an interpreter present on the live call.]