Magazine Luiza S.A. (MGLUY) Q4 2023 Earnings Call Transcript

Magazine Luiza S.A. (OTCPK:MGLUY) Q4 2023 Earnings Call Transcript March 19, 2024 9:00 AM ET

Company Participants

Frederico Trajano – Chief Executive Officer
Beto Bellissimo – Chief Financial Officer
Carlos Mauad – Executive Director
Eduardo Galanternick – Executive Director-E-commerce
Fabricio Garcia – Vice President-Operations
Andre Fatala – CTO

Conference Call Participants

Irma Sgarz – Goldman Sachs
Eric Huang – Santander
Gustavo Senday – XP Investimentos
Vinicius Strano – UBS

Operator

Good day everyone. Welcome to Magalu’s Conference Call regarding its quarterly results. For those of you who need simultaneous translation, please click on the interpretation button, the globe icon at the bottom of your screen and choose your preferred language, English or Portuguese. This event is being recorded and will be available on the company’s Investor Relations website at ri.magazineluiza.com.br where you can find the earnings release and the presentation in both Portuguese and English. The link to the presentation in English is also available in the chat.

Please advise that all participants will be in listen-only mode during the presentation. Then, we will begin the Question & Answer session. To ask questions click on the Q&A icon at the bottom of your screen and type your name, company and the language you speak. When you’re announced, a prompt to activate your microphone will appear on the screen and then you must enable your microphone to proceed with your question. Questions received in writing will be answered later by the Investor Relations team.

Now I would like to turn the floor over to CEO of Magalu, Mr. Frederi Trajano. Please begin.

Frederico Trajano

Good morning everyone. Thank you for joining us in our conference call to discuss fourth quarter 2023 results. I’m here with the whole executive committee of the company and we will all be available to answer your questions at the end of the company’s presentation.

I would like to say that fourth quarter ’23 results represent a very important symbolic moment for Magalu turning point for Magalu. I took over the company 2016. And my 22 quarters presenting sales increase, net income increase, and cash generation. After the pandemic, with a macroeconomic context, high interest rates, high taxes, we faced a very hard reality.

For two years, we did not deliver the expected results. Myself, together with the whole Magalu management decided to absolutely focus on helping the company resume its profitability, which was exactly what we delivered in Q4 2023, and which we’ll know will continue starting now. And this week was not trivial to give an idea. Higher interest rates in the post-pandemic period increased taxes, particularly the return of default added BRL3 billion to the company’s cost. The BRL1.5 billion of financial expenses with the interest rates increasing from BRL2 billion to BRL14 billion and practically BRL1.5 billion would increase the default last year.

To be able to extract BRL3 billion from the operation is not a trivial task. It required a lot of effort from everyone, particularly from the 35,000 employees in our leadership. We increased the margins, we reduced expenses, we improved the working capital, added services revenues, more revenues coming from the marketplace from financial operations and sale of insurance, sale of financial products.

And with that in Q4 ’23, we had €100 million of recurring net income with the highest EBITDA margin, 7.2% in the last four years. In 2020, it was 5.2%, dropped to 2.6% in ’21, increased to 6% in Q4, ’22, but then we did not have default yet. And now 7.2% in Q4, ’23. It is a lot of hard work that is finally, allowing us to reap the fruits.

On Slide number 2, we show that in the quarter, we posted sales of BRL18 billion. If we look annually 63% of sales, 5% growth year-on-year 2023 over 2022 and practically stable in Q4, 2023. Our focus was to deliver profitability to again be profitable.

In this quarter, we had a comparison base, which was a little polluted by the World Cup, which for the first time in history happened in Q4 2022, and we were sponsors of the broadcasting of the matches in Brazil. So, we had a heavy comparison base, heavy operation, particularly for 1P physical store sales and we maintained sales flat and GMV flat in Q4 and delivered margin of 7.2% with a 30.3% gross margin even with the Black Friday. When we operated differently compared to previous years, it was the first Black Friday with a positive contribution margin. To us, this was a fundamental change in strategy, fundamental for us to help deliver our earnings.

Now on the next slide, Slide 5, when we break down sales, we can see that from the standpoint of brick and mortar stores, even with a very high comparison base with the World Cup in 2022. And I think this shows a trend for this year. And Fabricio Garcia will be able to talk about our physical stores in 2024. But in 2022, compared to 2021, physical store sales have grown 15% because of the World Cup. World Cup and we were able to grow 4% come in Q4 ’23 over Q4 ’22. So, after a long period of difficulties in physical stores, we are resuming the growth of sales in this channel.

In January, February, we are posting close to double-digit growth for physical store sales with a great potential of improvement ahead. Because if we stop to think about it, interest rates have not yet dropped significantly. So, there’s a huge opportunity for this channel. Our market share is lower than online. We have about 20% market share in physical stores.

In the traditional categories about 35% online, so there’s a lot of room for improvement and gains for physical stores. And as I said, Fabricio will be able to detail more of this in the Q&A if you want.

On the next slide, let’s talk about e-commerce. In e-commerce, we had two different situations. 1P dropping 8%, 3P growing 10%. In the full year, we closed with approximately BRL46 billion in online sales. We are vice leaders in this segment. We are we’ve been investing in this channel for 23 years. BRL46 billion is a considerable amount.

On the full year, online grew 5% in this quarter. In the flat AMV concept, we had some drop in 1P given the comparison base of the World Cup, but 1P also had to recover about BRL300 million of default because default like I said accounts for about BRL1.5 billion, BRL1.3 billion in the full year. If we break it down by quarter about BRL300 million that we had not withheld in 2022, which we started having to withhold in 2023. So, there was a significant increase in prices, a big focus on 1P margin and with the World Cup included in the comparison base, that led us to an 8% reduction. But in Q1 ’24, we have a more stable situation. Last year, we already paid default. So, we could have a fairer comparison base for 1P. So, I see new opportunities for 1P this year.

Regarding 3P, we continue to post 10% of growth. But I would like to highlight, next, the growth of our revenue in 3P. We grew 10% GMV 3P, but with an increase of take rate that we had along the year of 3P in the quarter. In terms of revenue increase from services, we had 26% increase. 10% GMV with 26% revenue increase better monetizing our operation. 3P, which contributed negatively to the EBITDA of the company in 2021, now started having a contribution in 2022. And in 2023, posted a significant contribution to our EBITDA. This reality tends to continue. Looking forward, we are at a good level of percentage contribution margin, and we want to continue to increase the 3P sales. I’ll speak a little more about this.

As regards 3P, we also added from 260 sellers to 340,000 sellers. We continued to increase the number of offers from 91 million offers to a 128 million offers. Practically half of the online GMV does not sell traditional categories and 3P has helped the company to diversify. To give an idea, 40% of all items sold at Magalu come from 3P. 3P has exceeded the physical stores. We have 67 years’ operating physical stores in terms of GMV and amount of orders. 3P has been contributing significantly to the company, and the trend is that, this will continue looking forward. Still on 3P, we see some tailwind. We are improving a lot on level of service in our deliveries.

In terms of percentage of 3P orders delivered in up to three days, increased from 43% in Q4 ’22 to 51% in Q4 ’23. I’d like to remind you that, 80% of our deliveries go through Magalu Entregas. We minimally rely on the postal service around 10%. But after the four acquisitions, there we had of logistics companies that are now under the umbrella of Magalu Entregas 80% of marketplace offers pass through our own logistics platform. 51% of deliveries are delivered in two days and the trend is that, this will improve because we are very positive and confident.

Next on the expansion of our fulfillment. We took a little longer to do fulfillment because we wanted to have a differentiated fulfillment operation in the market. We have a truly multichannel fulfillment unlike other proposals in the market. Sellers have their products exactly in the same distribution centers, where we have 1P products. Since in our 1P operation, once in the DCs, the sellers’ operations benefit from a multichannel approach. The level of service or the NPS of Magalu is about 80%. The NPS of 3P is 30%. The moment that more and more 3P orders go to 1P, we’ll be able to significantly improve the level of service to our customers.

At the same time, reducing our delivery costs and deadline of deliveries. We now have eight distribution centers enabled to receive product from sellers. Three of these DCs are incentivized. The same incentive I have for 1P, we are passing through to the seller and we’re very optimistic, particularly with the more distant centers from Sao Paulo, because few companies today have the ability to provide these services to sellers in more distant locations. More than 2,800 sellers are using these services and I believe that, by year end, this 15% of 3P orders will be closer to 30%. Sellers who have their products in our cities have a 25% reduction of costs, compared to the cost of traditional carriers and 25% increase in conversion rates.

As we improve in our fulfillment agenda, which is one of the main targets of my whole platform and logistics team, we will undoubtedly improve level of service to clients, margins, conversion rates and we’ll grow sales. We’re very excited and we are very confident in this expansion. I think that, there are some opportunities which are not in the mind of any analyst that I would like to highlight.

Some of them I would like to highlight, then Beto can complement. I’ll speak about Magalu Ads. We do believe that we have a great opportunity to monetize our 500 million monthly visits. Like to remind you that Magalu, among its properties, has an e-commerce that is the most visited for sports, net shoes, the games, e-commerce most visited, the KaBuM! and Epoca, the most, visited and make up e-commerce.

So, all companies are profitable, and I’d like to stress that. Not just the controlling company, but all of them are being profitable. And also, the Magalu channel. In total, considering the content channels, tech and Jovem Nerd, we have a huge opportunity to monetize these channels, and a good part of our efforts and our CapEx as well will be geared to develop a platform for advertisers. We’ve had a number of products delivered this year and we have a consistent road map.

We assure that Magalu Ads will be contributing significantly to our EBITDA in the coming years and we sure that this is not included in market consensus and analysis. We’re excited with that opportunity. Another opportunity is the Fintech, but I’ll let Beto in the presentation and Mauad in the Q&A speak about this. And Magalu Cloud, the first Brazilian cloud platform with global scale. 30% of Magalu’s operation is already on its own cloud platform.

Now we have external clients experimenting our service and [indiscernible] is also here to answer questions about that. We have a number of important products for the cloud to be delivered along the year, and we’ll give an option to Brazilian companies to be able to use the cloud with local low costs. It’s not enough to have a cloud journey. We have to have affordable competitive costs. Because for Internet companies, for technology companies, it’s not just about growing, it’s also about profitability.

And we see that having a local cloud service in BRL, not in Dollars, we see it as a great opportunity, not just for us, but for many SMEs, small and medium-sized enterprises in Brazil. That’s also an opportunity, which is not in your market analysis. This will contribute a lot to our results in the coming years.

Now I’ll turn the floor to Beto Bellissimo to speak about our short-term results and then I’ll come back for the Q&A.

Beto Bellissimo

Good morning. Once again, thank you for participating on our earnings conference call. First, I’ll go through the big numbers, the financial highlights. Fred already mentioned already almost BRL18 billion in sales, 10% growth of the marketplace, 4% growth in brick and mortar stores, significant gains in market share. And the traditional categories. We also talked about gross margin.

Since the beginning of the year, we’ve been saying that our gross margin was evolving and changing level. And once again, we’ve reached more than 30% of gross margin, growing 2.5 percentage points compared to the previous year with an EBITDA of BRL56 million EBITDA margin 7.2%, the highest EBITDA margin of the last three years, and net income of a BRL100 million. We’re very happy with this income, 1% growth on the margin. And this is in the concept of recurrency that we say.

In the next slide, we have the published net income, BRL212 million in addition to the recurring net income of a BRL101 million, we highlighted the extraordinary events starting with the sales of the Luizaseg that contributed more than BRL200 million for net income. Once again, here in the financial results, the fair value of the liabilities of company acquisitions, the portion to be paid in shares has helped in the financial results, but we excluded it from the adjusted financial results.

We’ve also posted an IRCS credit before that Metchus because Metchus had annual losses in the past. And since it had losses, it didn’t account this credit. And as it started bringing an ink a profit in the recent years, we started to account this having a positive reflection on Metchus income.

In addition to all of these events, in a conservative way, we had the provision for the 2022 default in the amount of BRL370 million. This provision was done where we understand. Based on the opinion of our legal advisers, there’s a chance of loss that is higher than the chance for gains. Although, it is very important to highlight that it wasn’t, the agreement for the Supreme Court’s decision has not even been published yet. So, we’ll continue to contest and update you on this subject. It’s a provision for the time being with no cash effect at the moment. Noting that we have almost BRL1 billion in judicial deposits referring to default of 2021 and ’22 in our balance sheet.

Moving on, we had other nonrecurring expenses that were low amount, BRL35 million, which refer mainly to the expenses and write-offs with the closing of stores that we had in the first quarter of that year. We closed 23 stores, and this closing of these stores will have no impact in the results of this first quarter. It was completely provisioned for the end of last year. Also including a change of a distribution centers as well the move. And interest income tax on all of this effect getting to a total accounting net income of BRL212 million.

The next slide, we have other good news. We presented these results in the third quarter. And at this time, the balance sheet was completely audited with no comments, no claims. And as we mentioned in the third quarter, the audit service had not concluded its works. But once they completed the entire audit, we have here the results. There were no incorrect accounting entries identified in the recognition of the bonuses. So, it was not necessary to resubmit balance sheets from previous periods, as we had estimated in the past.

What we did was a revision of this estimate of the bonus balances to be received previously released. The amount of this adjustment was entirely disclosed in the results of the third quarter. And what we highlight here is, the same value that we disclosed in the material fact of November and in the earnings of November. The equity and balance sheets released in September 30th and all of the account had no changes. The adjusted recurring results of the third quarter was also not changed and the only change was in the accounting results because, again, the values that we had posted retroactively now were posted fully in the results of the third quarter with no cash effect, as we had already explained.

And it’s also important to note that, since the third quarter, we’ve been enhancing and improving and in the fourth quarter, all of the campaigns were already registered in our new campaign management system Trade Links and earnings of the third quarter, the fourth quarter already reflect all of these benefits of much better controls and much greater focus.

Moving on, we see the evolution of EBITDA margin, not only of the last quarter, but throughout the year, very important evolution. And a special highlight here for the main drivers of this evolution, highlighting the growth of marketplace and service revenue that adds a lot to our results, the increase in gross margin of merchandise and the pass-through of default. Fred already talked about Black Friday, the expansion of fulfillment, the market share gains, as well as the resumption of profit at Luizacred.

Next slide, we see that product margins. We were not only able to conclude the pass-through of default that we had already concluded in the third quarter, but we were able to go beyond. In addition to paying all of default for that year, we also increased 1.1 percentage points in the margin of merchandise compared to the 2022. Service margin has also been helpful as well. Again, 1.4 percentage point. This gross margin grew a lot more beyond the evolution of operating expenses. Operating expenses remained pretty much stable in both in nominal terms and as a percentage of GMV. And was just a variation compared to net revenue, due to the marketplace side and equity again contributing.

Next slide. We talked a little bit more about working capital. It’s important to point here that, this quarter, we had an evolution of working capital as a whole of BRL500 million. It’s another positive advancement of working capital. The highlight of the levels of inventory that we were able to reduce by BRL400 million, the inventory balance from September to December, and also to the net balance of taxes to recover in the balance sheet, which we have monetized and offset BRL500 million net and that became cash. It’s a trend as well from now on.

As we increase product margins and service revenue, we’ve been able to offset ICMS, PIS/COFINS taxes. So, there’s a quality of the working capital has greatly improved. And the balance from suppliers, especially, specifically, this quarter did not grow. It remained at the same value of September, from September to December for a number of reasons.

First, we purchased less because we reduced the inventories as well, but we also advanced the payment of certain suppliers. We made the payment in the fourth quarter so that we will not have to pay them in the first quarter. And the message here is, in the first quarter of this year, the variation in the supplier balance will be much smaller than on previous years.

So, we have the forecast here that remains very positive for cash generation this year as well as the evolution of financial expenses that on the right side we show. Literally it dropped from 7% in the begging of the year, just 6% to 5% before and this job reflects the improvement in working capital, the increase of financial revenues, also including the financial revenues from advancement to suppliers and also keeping up with the CDI and a stronger capital structure.

On the next client, we show you that for the quarter, again, we increased total cost, the cash, by BRL1 million and increased net cash in BRL1 billion as well. So, there was no change in the debt balance, and this BRL1 billion did not come from suppliers. Normally, in the fourth quarter, the supplier balance froze, but it didn’t grow BRL1 billion. If we had, we would end with more than BRL10 billion total cash. But that was still very positive, because we had more revenues, reduced financial expenses, and we’ll continue to reduce these expenses in this first quarter as well.

The trend for financial expenses is again of a significant drop throughout this current year. Out of this BRL1 billion, we can say that BRL100 million came from the recurring results, BRL400 million from inventories, BRL300 million from taxes and BRL200 million from the sale of Luizaseg, just to summarize.

On the next slide, we’ll show you our capital structure. Again, 3 times total cash over short-term debt, BRL9 billion, compared to BRL3 billion. We’ve already paid almost BRL1 billion including the debentures and debenture interest in January and we’ve reduced another BRL2 billion. And along the year, we reduced our total debt from BRL7.4 billion to BRL4.4 billion maintaining total cash at very robust levels counting on the year’s cash generation as well as the capital increase that we are doing this month in the amount of BRL1.5 billion.

We now highlight, as Fred said, the subsidiaries that are all bringing in a lot of profit. Netshoes earning a profit with marketplace growing very rapidly. Epoca as well bringing an income and KaBuM! as well turning a profit and growing and also growing with marketplace, the KaBuM!’s marketplace, AiQFome.

And on the next slide, we show our Fintech Luizaseg with BRL18 million net income. MagaluPay as well very profitable on the payment side and the advance of receivables. We’ll soon launch the digital CDC and we’ve been making a lot of progress in our digital accounts for sellers which has reached more than 70,000 new accounts this quarter and a total volume of more than BRL800 million.

Moving on, on Luizacred, we continue to grow in TPV credit card base of almost 7 million of active cards getting to BRL15 billion in the quarter and BRL58 billion in the year. So, it’s a portfolio of BRL20 billion. And the best thing about this portfolio on the next slide is that we see that default rate has been dropping significantly, NPL, as well, both in the short-term and in the long-term. The level of provisions also dropping significantly.

Cost of funding as well going down. So Luizacred also turning the results around. So, it’s also a turning point or a turning quarter for Luizacred, opening a new phase with BRL18 million net income in the quarter with very favorable perspectives with the reduction of the cost of funding and delinquency rates going down for the future.

And finally, we see the performance of recent vintages as well with a highlight for the recent months, performance both on CDT and card being very low. For cards, the level of default rate is under 3%. In historical terms, this is low.

To conclude, we have here a little bit more about our capital increase. We’ve announced an increase in private capital, a 100% supported by the controlling shareholders and BTG, showing that their confidence in the company and our strategy and business model. We talked about the use of resources to accelerate investments in technology, the expansion of Luizalabs and all of the platforms here that have high added value, high profitability margins, including ads, Fintech, fulfillment and cloud.

Finally, we’d like to also thank all of our shareholders for their participation as they have contributed participating in the capital increase. In a very impressive way, we had an appearance in the priority offer of already almost 86%. The controllers came in with a 100% of their potential and the minority shareholders participated with more than 70% of the total available volume, also requesting a great, participation in the division of the shares in the beginning of the month, we already paid up 71.70 [ph] and we’ll liquidate the remainder this week, totaling a capital increase of BRL250 million in the quarter.

With that, I turn the floor to Fred or rather we can go straight to the Q&A session. Thank you very much for your participation once again.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question from Luis [indiscernible] with BTG. Luis?

Unidentified Analyst

Good morning, Vanessa, Fred, Beto. I have two questions. First, could you comment Freddy since we have Mauad here on the evolution of new services on the platform? So digital CDC as you mentioned, fulfillment, ads. How could we think about this as a driver for growth and improved margins in the coming quarters? And my second question, how can we expect the margin growth equation along the year? It’s clear you want to have a more profitable operation and improved cash generation. But in terms of growth, could we think about additional investments to be made also given the capital increase you’ve heard? How could this equation work’s during 2024? Thank you.

Unidentified Company Representative

Good morning, Guana. Thank you for your question. I’ll start answering and then I’ll turn the floor to Mauad. In terms of margins more specifically, contribution to the operating profit, I believe that, there are three main lines or avenues to improve operating profit. Like I said, these are not included in the projections of most of the analysts and they are the Fintech. We have great monetization of financial products offline. It’s low online. Digital CDC and a number of other initiatives that Mauad will explain have a great opportunity to contribute and to monetize our ecosystem.

Advertising, I think I spoke a little about this in my initial remarks. There are a number of companies in the world that have a successful agenda of monetizing their business through advertising. I visited some of these companies recently in India and in Southeast Asia. Many of them, all of them are successful in monetizing their business through ads. We have one of the biggest online audiences in Brazil. I’ll ask Edu to speak more about that.

And Cloud, Magalu Cloud. Fintech, Magalu Ad and Magalu Cloud. They’re great opportunities for monetization. We have — if you’re curious to understand the cloud you can ask about that and fulfillment has to do with improved level of service and increased conversion rates. It’s not an opportunity for monetization, but 3P is here. We have better time frames with a lower cost. We don’t need to charge a freight tax if they have store pickup. But in and of itself, it is not a tool to increase profitability. I’ll turn the floor to Mauad to speak about the Fintech then Edu can speak about ads. And I’ll come back to speak about growth of margins this year.

Carlos Mauad

Good morning, Guana. Thank you for the question. In our roadmap of products, we’re expecting to launch a digital CDC. At the start of the second half, we are looking forward to have another payment method in our checkout both for 1P and 3P. Given the expertise the company has in granting credit to consumers in our physical stores, we can see how this drives GMV and builds a contribution margin. We are very confident that, of course, taking the necessary careful measures because granting credit online is more overheated than in our footprint of bricks-and-mortar stores. But we’re confident, we’ll be able to ramp up the operation. When we look at the market as a whole, we understand that, we can have a 5% share of checkout particularly in digital CDC.

Also, since we’re building a digital product from scratch. In the second half, the stores tend to benefit from a new chassis of products, so that we can offer more flexibility and provide a more risk-adjusted pricing and of course, a more fluid journey in our store environment as well. So, the second half of this year has many promises regarding the deployment of new consumer finance products.

I’ll turn the floor to Edu.

Eduardo Galanternick

Hello everybody, thank you for the question. Speaking a little about, Magalu Ads. I think last year was one of evolution of our product metrics. We have basically three products. One is the sponsored product. Those displays that pop-up during searches. We are developing a video display, feature. It needs some stages to be ready and we have the special content from our content portals, Canaltech and others. So, this was a year to consolidate this product mix. In this year, we have a focus of having a good go-to-market. It starts by reinforcing our team.

To lead the ads department of the company, we’re bringing in somebody who’s very competent. With a vast experience in this market. Celia Goldstein, she took over in January, and she’s leading this commercial team. We believe that this year, although we did post a good growth in advertisers and in revenues last year, we believe that there’s a lot of room to grow up. And we believe that this year will be one of accelerating stepping on the gas for this initiative. Back to Freddie.

Frederico Trajano

Well, additionally, I think that a lot of these inputs will lead to even more relevant outputs next year, including cloud. We’ll start reaping the fruit. We’ll invest in inputs that will lead to mid to long-term output.

In the short term, guana’s it is important to say that we have margins in Q4 that we didn’t have last year in Q1. In Q1 of last year, we had the impact of default with no price increase or price increase being passed through to customers. But with the physical stores with increased sales and double-digit growth, that tends to benefit the results and the results of brick-and-mortar stores.

For 3P, we started passing through prices or price increases and fees to sellers in February and it ended in June. So, I think that in the first half of the year, we are in a good moment regardless of all of these initiatives. I believe that they will create out outputs more towards the end of the year and next year. But this first quarter or first half of the year will benefit from this momentum that we were able to capture in Q4.

Now relative to last year, we’ll grow more significantly. In the beginning of last year, we had to deal with increased default without the ability to pass through all that increase to our prices and without all of the changes made. But we have a good expectation for the first half with the initiatives started in Q4.

And there is another point, I don’t want to be too long in my answer, but I’ll probably speak more about this in the next questions, but we’re investing a lot in user experience this year. So, we have a significant CapEx this year that will be geared to improve UX. We reduced complexity, but we have a lot of new categories and new services. We grew a lot this experience.

In the last two years to three years, our agenda was very much looking in-house, reducing expenses, increasing margins. The agenda this year will be focused on consumers and improving customer experience, UX. Of course, we can speak more about that in the next questions, but I believe that this will help increase conversion rates and increase the growth of 1P and 3P for this year.

Operator

Next question from Maria Clara [ph]. You may proceed.

Unidentified Analyst

Thank you for the opportunity. In Itau’s side, I would like to explore the expectation of evolution of 1P and brick and mortar stores because we’ve seen an improvement in credit KPIs. Internal proprietary index suggests a gradual recovery in the consumption of durable goods, and electronics and home appliances. But what about 1P? I’d like to hear more about that. And I’d like to hear about the strategy for each one of the channels for this year because this is potentially a turnaround year in terms of cycle and how this matches expectations for cash flow and profitability. Thank you.

Unidentified Company Representative

Maria Clara, good morning. Thank you for your question. I’ll start answering very briefly, and I’ll turn the floor to Frederico. So very briefly, I’ve spoken about physical stores. We are at a good level with excellent expectations. Frederico will detail that more. For 1P, we resumed profitability of 1P in Q4 last year. We took about three quarters to be able to fully pass through default to 1P.

At the start of the year, we have a comparison base, a part of it without default pass-through, so part of it. And so, we have this comparison base. But this is already better in terms of growth considering Q4 growth. And I believe that gradually, the comparison will be easier. We’ll continue to grow 1P channel always with a positive contribution margin. Frederico?

Frederico Trajano

Good morning, everyone. Thank you, Maria Clara, for the question. This is Frederico. Well, try to kind of give it a spoiler in a line. With this quarter, we have the default theme, but we are performing better than in Q4. More importantly, we’re able to perform maintaining our margin, which is at a whole new level. We are focusing on profitability. We want to go back to growing, and we are gaining market share this quarter. So, I believe that in 1P as of next quarter, we should post also increased sales, maintaining our profitability. That’s the point we’re working on hard here, and we’re performing well in practically all categories.

For brick and mortar stores, we did post a very good performance in Q4. In 2022, we had the World Cup, and the physical stores do benefit when there’s a World Cup. That’s when we saw growth and increased margin. And in Q1, we had a fantastic sale, which is very relevant for us. We grew our sales and we were able to grow our margins. The sale was great in all three channels, 1P, 3P and physical stores and we are maintaining growth at the stores at a double-digits this quarter, maintaining profitability. This is going to be the tone for the whole year. Stores should be a highlight in terms of increased sales. That’s what the scenario we’re working with for bricks-and-mortar stores.

Unidentified Analyst

Perfect. Thank you very much.

Operator

Thank you for your question, Maria Clara. Our next question, Irma Sgarz, Goldman Sachs. Irma, you may go ahead.

Irma Sgarz

Hello. Good morning. I just have a quick follow-up question to Maria Clara’s question about 1P. Do you have any view on which categories, either in stores or online, will perform better this year, maybe even considering product cycles and so on of recent years? The main question, Fred or maybe Fatale, the question I think is a little bit about the opportunities of cloud. If you can talk a bit little bit about the main clients and the first lessons that you’ve been learning in this vertical and, of course, the opportunities that you can give us more.

Fabricio Garcia

Good morning, Irma. This is Fabricio. I’ll respond, answer the first part, and then I’ll turn to Fred. In categories, we have excellent performance in white goods, both in the 1P and doors, displays and screens as well performing well. Portable appliances and furniture. These categories stand out. The market that’s struggling a little bit more is telephony. Throughout Brazil, we’ve been gaining share, but it’s a category that is a little bit more difficult because of the cycle of product replacement, but it’s offset by the growth in white goods especially. I think in terms of categories, that’s the scenario, both for bricks-and-mortar stores and online. It’s similar.

I’ll turn to Frederico to talk about cloud.

Frederico Trajano

Good morning, Irma and everyone. Thank you for the question. Just to put it into context, on the cloud side, first, I’d like to say that, the global market, the number of what’s expected by 2025, it’s BRL5 trillion, $1 trillion in CAGR. It’s around 24% for 2025. When we look to the Brazilian market, in 2025, the market is of approximately BRL91 billion with a CAGR that would be around 22% from 2022 to 2025. Brazil and Latin America, in general, have a gap in the adoption of cloud in all layers from SaaS to infrastructure. There’s a long road ahead for the digital transformation of companies. Within cloud, after we had made the public announcement in December, it has been quite interesting. The journey thus far, and a few things made us very happy.

For example, one week later, we already had 1500 customers with leads generated by Magalu Cloud’s website, and we started to work and understand their needs and start on the onboarding process for some of them. Remember that, we announced cloud and said that, we would still be doing a private preview for those customers. It’s something that is not open to the public to join and get a self-service on onboarding process. We started making adjustments. Fred talked about 52, but we had an evolution. And there’s already 74 customers that we already have on the cloud. We are creating a lot.

We talked a lot about the focus on small and medium size customers, and we saw that the choice of products have been working great for them. But we’ve already been looked at, we had enterprise customers coming to us. Enterprise for us, we say, they’re select accounts with more than BRL1 million of cloud expenditure per year. So, some of them we’ve already started to onboard and depends on serving all depending on their needs, and it’s also a way for us to give a direction to our evolution road map.

Now in the coming month of April, we will launch the first three products to make them available for everyone to hire those products on the portal that we will rent happen in the web summit event in Rio de Janeiro. We’ll demonstrate and have a lot of content about the cloud and we have another nine products that will be launched by the end of the year that will be available for the market.

So, what we expect to happen in this first product will start to grow greatly in the customer base. They’re very specific in terms of use. But as soon as we evolve to the second half already releasing the team for VMs and database, that’s when we believe we’re going to see the highest number of customers onboarding into our cloud. And we expect to be at a maturity level considerably high from what we’ve built at around the half of 2025 and beginning early ’26 will be more mature and operating at a larger scale.

Operator

Next question, Eric, Santander.

Eric Huang

Good morning. Thank you for taking my questions. I think on our side, there are two. First, if you can talk a little bit about working capital. I mean, you talked about on the fourth quarter, you had a little bit more of advancement with suppliers that will be beneficial first quarter. So, we can think that this is a new pattern for the working capital dynamic for you, thinking about the seasonal cycles. And also, if you can get into more details where you see opportunities in the working capital line. The other point looking at the focus for 2024, you talk about the enchantment.

To understand how we can see that in practice in terms of changes maybe, I think you talked a little bit about at most maybe to understand in practice what we can look at this year to keep track or to monitor the evolution of this initiative and what we can expect in terms of evolution, either in the sense of sales or conversion. It would be interesting to get an overview. Thank you.

Unidentified Company Representative

Good morning. Eric, thank you for your question. I will start talking about working capital. So first, we highlighted the reduction of inventory in this quarter. We reduced BRL400 million. For the year, we reduced BRL200 million or BRL300 million in inventories. We had already reduced inventories in 2022. So, since 2021, we reduced pretty much BRL1.5 billion, almost BRL2 billion in inventories. And it’s an important point of this inventory reduction is that we’ve been able to do that by increasing the gross margin of goods as well in a very healthy manner, very sustainable.

This year, we believe that we’ll continue to improve inventory turnover. We don’t provide a guidance but on average we expect to improve inventory turnover in at least five days on the average for the year, maybe improving the turnover even more. We look more at inventory turnover rather than the nominal balance of inventories because it depends on growth as well. And the best way to improve turnaround will be as sales accelerate and start to grow again.

On the supplier side, last year, we had a significant increase in the average time of purchases comparing ’23 to ’22, it was quite significant. And if we look at all the quarters, at the end of the year, in a tactical way, we decided to anticipate to advance it for suppliers. So, the accounting average term started reduces a little bit. But if we look at the average term of the order, it was a lot greater than the end of the year, the beginning of ’20 or the end of ’22. And this decision to advance for suppliers was very positive for our own results for 2022. I mean, you saw that for ’23, it went down and financial expenses for the beginning of ’24, we can see it at a very low level, much lower than the beginning of last year, and the trend for financial expenses this year is very positive to see it dropping.

And that’s closely related to the management of working capital and related to the fact that in this first quarter, we will pay a lot less supplier than we paid in the first quarter of last year. Remember, the first quarter last year, we had to discount an additional BRL2 billion of receivables to pay BRL2 billion of suppliers more that were expiring in the first quarter. We will not have this effect in the first quarter of ’24. So, we’re seeing working capital doing a lot better in the beginning of ’24 and financial expenses and cash position a lot better as well in the beginning of ’24.

So, this is all the result of some work that we’ve been doing together with the commercial department and throughout the whole year, improving the inventory turnover, average time of purchases, and an observation that I didn’t mention earlier. For us, confirming is not that, but you know that. But some people consider that the confirming balance last year was BRL1.5 billion from BRL3.8 billion to BRL2.3 billion or something like that. So, we dropped BRL1.5 billion.

We reduced the confirming balance greatly, passing through some of the cost increase somehow repricing that product. And that also led to more financial revenues with suppliers that we account within the financial results. So, in inventories and suppliers, just to highlight the tax account that I already mentioned in the last quarter, we offset more than BRL300 million net between generation accumulation and off padding and compensation. That should be a very positive trend for 2024.

Again, as the margins get higher and services grow and so on, it becomes easier to offset taxes. So, this is an actual trend for 2024. So that overall, we expect working capital to contribute very positively to cash generation for the year as a whole.

Unidentified Company Representative

Good morning. Thank you for your question. About the year for the customer, we had Simplifica Magalu, and this year is Encanto Magalu, Enchant Magalu. We had an agenda the last two years, as I said in the beginning of the presentation, that was completely focused on results, income. A lot of internal work focused on efficiency. We had reduction of expenses, increase in margin and we felt the need to resume this year, the focus that is historically a part of the company in service level and what we call user experience. That’s the art to enchant our consumers at each interaction.

This agenda is simple, but at the same time, it’s very broad. As you say, to enchant them at each interaction, we are talking about hundreds or even thousands of interactions that are possible with consumers. In these journeys, we have a number of opportunities to improve from password recovery to the return of their money once they cancel a purchase, reduction of cancellations, increased service level that’s meeting the term of delivery within what was promised, service level, as we say, improvement of seaside at call centers.

We mapped here more than 40 [Indiscernible] specific goals in terms of service level with our customers and conversion. And we’re going to put a lot of focus for Fatale’s teams and product teams, business teams in the improvement of service level. This period, we entered with approximately 80% of NPS two years ago.

At that time, almost all of the questions were answered for customers, who made purchases on 1P in stores. We still have very high NPS on 1P and stores, but 3P’s NPS historically is around 60. It didn’t get worse, but since 3P’s share and the company’s total increased, the total NPS went down. We have a huge challenge there to improve overall NPS. We want to resume our NPS of around 80, which is a worldwide benchmark. For that, we’ll need to improve in a lot of aspects related to searches, checkout, post sales and all of those items that I mentioned during my answer.

It’s a very broad agenda, but very pragmatic. We know exactly what we have to do. I am very optimistic that, it will generate an improvement in our NPS, which is the main indicator to validate this. But it will also help in our conversion rate and the increase of frequency of purchases that also end up reflecting in sustainable growth of results, irrespective of us giving a discount or not. I think that’s the agenda. I can’t summarize it in one answer. It’s a very complete agenda. That is the focus for the whole entire company. All of Magalu employees will be thinking about user experience with great focus, but not exclusively in the improvement of our technology platform.

Unidentified Analyst

Excellent. Thank you for the answers.

Operator

Thank you for the questions. Next question from Gustavo Senday with XP Investimentos. Gustavo, go ahead.

Gustavo Senday

Good morning. Thank you for the opportunity for questions. My first one is about Cloud. You said that 30% of Magalu’s digital operation is in your proprietary every Cloud and that this should continue to increase. I just want to understand if there is any level of savings or reduced costs through this expansion, it will reduce your reliance on external providers. So, is there any savings expected in this avenue?

And my other questions are kind of short-term. First regarding closing of stores. In Q1, you closed 23 stores. Should we expect more stores being closed along the year? And my second point, understand that default was totally passed through, but we see some states increasing their ICMS tax rate, has this an impact? Has this been passed on to prices?

Andre Fatala

Gustavo, thank you. This is Fatala. I’ll speak about Cloud. Yes, there will be considerable savings with this migration that is underway. On average, we are able to reduce what we pay. We have a reduction of 30% to 35% depending on the workload. The idea is that we’ll continue to migrate. We’ll get close to 50% by next year and with that the OpEx will turn into CapEx.

Unidentified Company Representative

Speaking about the CMS of the states, this was being passed on. We were anticipating the effects of the tax reform. We’re okay about this. We can see the contribution margin by state and in practically all of the states. This has been passed on so there are no risks. We do pricing state-by-state, store-by-store in 1P and brick and mortar stores. So, we have a lot of granularity here. We focus for two years in the contribution margin.

So, we have a granular view of our results. We invested a lot in these systems and in this monitoring model. As regards to the stores, it is possible we’ll close some stores. If the store has a negative contribution margin with no expectation of improved results. Normally stores that are physically close to others or with rent that we were not able to negotiate with the property owners. If needed, we’ll close them, but this is not going to be material considering the total installed park.

For stores, our expectation is a lot more positive of profitability resumption as I have said. But if there is a one time of need to close a store here or there, we’ll do it because we want our units to contribute positively to our result, particularly with a positive contribution margin. This possibility exists, but I don’t think it’s going to be significant. And the expectation for the stores is a lot more positive than negative. At this point, it is to channel with the most positive expectation, which is already materializing in January and February.

Gustavo Senday

Perfect. Thank you, very much.

Operator

Next question from Nicholas with JPMorgan. Nicholas, go ahead.

Unidentified Analyst

I have two questions. One, building on what you’ve just said about the story spread. I want to understand how do you see the competitive environment in brick and mortar. If it makes sense to open some stores in some locations to perhaps gain an available market share considering the financial situation of some competitors. So, are you thinking about opening stores this year?

Fabricio Garcia

Hi, Nicholas. This is Fabricio speaking. You are correct regarding the competitive landscape, but we are living a very favorable moment for Magalu. We are a lot better prepared than our competitors in all senses, products, pricing. But I don’t think it makes sense to open new stores now because we recently opened new stores in many different regions. Also, when we face fierce competition, large markets like Rio and Brasilia.

We are working a lot in these regions where our market share is a lot lower. So, we have a lot of opportunity to capture market share in these new locations and where we established already, we’re gaining even more market share. We agree we have to gain market share, but we think we can do it with the existing stores. We are not planning to expand the store park too much.

Operator

Next question from Vinicius Strano with UBS. Vinicius, go ahead.

Vinicius Strano

Thank you, for taking my question. I have just one question regarding taxation. If you could comment on the company’s position in regarding a potential taxation. You’re talking about grants for investments. Do you see any opportunity to pass on price increases? And a second question and if you could talk about Luizacred, we saw an improvement in results perhaps you could give us more color regarding what you’re seeing in the credit environment in terms of demand and your take as a whole regarding Luizacred. Thank you.

Beto Bellissimo

I’ll start. This is Beto. Thank you for the question. Let me start talking about grants. What we say is that both Magalu and our main companies, Epoca, Netshoes, Kabum, all of them have incentives that are eligible for investment grants, and they will continue to have the deductibility in terms of income tax and social contribution.

We account a defect of the governmental grants of about a BRL160 million. BRL40 million per quarter give or take. We can say is that 40% to 50% of this is eligible as investment and that should continue. The other part most likely will stop existing because of that was extending this grant to other types of benefits. And according to the latest decision of STJ, they are not eligible anymore. But so, I should say 40% to 50% of these grants to investments should continue with a benefit for income tax and social contribution. We had some deferred IR and social contribution. So, we don’t expect any material impact on our result as well as on our cash.

We’ll continue to focus on improving profitability, like we’ve been saying until now, including all of the tax effects. And as Fred mentioned, the biggest impact in terms of passing on price increases, the biggest impact was a default and we proved our ability to pass-through more than BRL1 billion in one single year passing through to the end price. We don’t expect any passing through of grants to the end price.

I’ll turn the floor to Mauad to speak about Luisacred.

Carlos Mauad

Hello, Vinicius. Thank you for your question. We’re very excited with what we’ve been seeing in the last six months at Louisacred. When we look from a higher distance, when we look at the indicators in terms of performance by harvest, it’s been improving for a long time, but they’re not high enough to improve the company’s profitability. But once we were able to see the improvement of performances in the portfolio indicators that influence NPL and short-term results more directly, we started to see this switch and becoming net income in the fourth quarter.

In the first two months of the year here, we saw a positive balance in our operation financing for consumption, even though it’s a second quarter that seasonally is worse in terms of credit. When we talk about the return of credit results within the year, the first quarter tends to be the worst quarter and it tends to improve throughout the year. The fact that we’re actually in the blue seeing a consistent improvement in terms of portfolio and more recent vintages. As we showed here, we are very confident that, this year will be a year where Louisacred will be able to not only help with the results, with the earnings, but also, of course, to help build more GMV, both in the digital and bricks-and-mortar stores. I hope I’ve answered your question. Thank you.

Vinicius Strano

Perfect. Thank you.

Operator

Thank you, Vinicius. Next question, Zhuang. Ask your question, please.

Unidentified Analyst

Thank you, Vinicius. Two questions here. I think we talked a lot about growth and bricks-and-mortar stores seem to be doing well. I’d like to explore. And I apologize, Mauad, just a quick follow-up about this credit question. To understand when we should see a cost of the credit accelerating and driving GMV. I think the question is a little bit broader in the timeline where we see the switch on the trend either for whatever factor, whatever you have in your expectations. I just wanted to understand the timeline to see this growth coming in a more relevant way, considering that expenses has been greatly addressed in 2023. I’m guessing that, in the second half, maybe we’ll see faster growth.

And also, about 3P, we’d like to understand a little bit more of the dynamics of the seller base. You were seeking a very specific seller profile. Onboarding, I saw people like store managers. And so, once I’d like to understand more about the strategy, how we should see the growth of sale seller base and how the maturing of the existing base drive up 3P? Thank you.

Carlos Mauad

Thank you, for your question. This is Mauad. What should we see in terms of growth here? We should see our credit card structure that is more sensitive even to the environment that we have now growing in line with the market, and we should see high yielding products such as CDC accelerating more. So, when we talk about the brick and mortar store environment, the CDC is being seen very strong acceleration in the second half of 2023. And we expect to see this continuity in terms of growth, especially with the entry in the of the digital side. That’s 100% new volume. It’s a new tool for us to improve our conversion of pack out and the profitability of the business.

Going back quickly to credit cards, the economics of credit cards are more challenged after the pandemic. It’s a very broad portfolio that we have and we don’t want to run any sort of risk in terms of turning the results around again. So, we’re going to take one step after the other. We’re revisiting the value proposition, revisiting the acquisition channels, when you look at pricing the funding cycle for the customers with change a lot of things in the operation to make the adjustments to the current scenario, both in the macro point of view and in terms of product.

So, it will continue to be a very powerful tool to drive GMV, but the most significant growth should come from high yielding products that are easier to maneuver when you have a certain level of uncertainty still on your radar. I hope, I’ve answered your questions, Juan.

Frederico Trajano

I’ll answer this last question about the seller base. Of course, we’ll continue to grow our seller base. We have some differentials in our seller base. We have a lot of sellers from the top of the pyramid, which are brands that have Magalu as a reliable platform for them to sell products, and they’re not competing with a white label advertised product.

So, the major brands and Magalu is a priority channel. And at the base of the pyramid, we have sellers who are brick and mortar stores that we introduced as Magalu partners who also, I mean, they’re the ones that the store bring — the stores bring to our base, and they had a very good year in terms of cash margin and profitability. The contribution margin of sellers has improved greatly, and we continue to have a good offer for sellers at the top of the pyramid and the middle of the pyramid, which was the integrator of e-commerce platforms.

So, I think we have the opportunity to continue to increase our base. But the focus for us this year is not only to grow seller base, but grow the quality of the offer of our sellers and the service level of these sellers in that year of the consumer context, one of the most important agendas for the user team is to make sure we’re bringing sellers in that have a good service level, that bring good NPS to our platform, low cancellation rates, high service level in terms of their deliveries and especially bringing the best offers because in the same SKU, the same code, you can have 10, 30, 40 offers. And we want to make sure that we have a lot of offers that are competitive with low prices, low shipping and good service levels. So, we’re going to be qualifying the growth of seller base, focusing a lot on the quality of the offer and their service level.

Operator

We now conclude the question-and-answer session. I would like to turn the floor to Frederico Trajano for his final remarks. Please, Fred, you may go ahead.

Frederico Trajano

Exceptionally, this call, I would like to pay tribute to our founder, Luiza Trajano. I think the best way to pay tribute to her was to preserve her legacy. There’s a reason why we chose the year 2024 to make it the year of our customers. She was a person who introduced into our culture the focus of customer first. So, we would like to end this call. I apologize. I’m getting emotional with her picture here in our presentation and with her strong way, our strong work throughout the whole year to intent our customers as she always has when she was here with us at Magalu. So, thank you. Have a great week.

Operator

Magalu conference call is concluded. The Investor Relations team is available to answer any other questions and doubt. Thank you all for your participation. Have a great day.