Good morning, ladies and gentlemen, thank you for waiting. Welcome to Magazine Luiza conference call referring to the fourth quarter of 2017 results. At this time, all participants are connected in listen only mode. Afterwards, we will have a question and answer session when further instructions for you to participate will be given. Should you need assistance during the call, please press star zero to reach the operator. Now we would like to turn the floor over to Mr. Frederico Trajano, CEO of Magazine Luiza. Mr. Trajano, you may proceed.
Good morning, everyone, and thank you for participating in our call. Together with the investor relations team and part of our executive committee, we will be available to answer any questions that you might have. I would like to start my presentation saying that 2017 was a very special year for Magazine Luiza, 60 years of age.
With our main characteristics, which are the capacity to change, to reinvent ourselves. The only motto that we have is nothing changes but our changing every time. We opened our first store, then internet, our website in 1999, the first direct sales model with over 200 people in 2011. Luiza Labs created a new area of technology development in 2011, we continue to implement many innovations over the last few years in digital evolution where traditional companies, relevant companies all of a sudden become irrelevant overnight. This characteristic that we have in our company of not fearing change and embracing change and innovation has never been as relevant as it is today.
Thanks to this and our investments in technology innovation and our culture focused on people, our people and our clients as well, we were able to overcome the three worst years in the history of Brazil. With the results of the last quarter, it was the best ever result in the history of Magazine Luiza. Afterwards, Roberto Bellissimo will talk in detail about our figures. I would like to highlight a few things about our results, starting with the growth of sales, e-commerce growing 60%, including for the first time ever, Marketplace 60% over a comparison basis that was very tough already, which was the last quarter of 2016 because we had already grown 42%. Also our physical stores, 20% growth, being 15% same store sales and also very strong basis for 7% in the last quarter of 2016 on this basis.
Fantastic growth on a very tough basis. We are very happy with these figures specifically. I usually say that there are two ways of growing in your business, and both are valid. The first one is to grow a lot, very strongly, to the detriment of your margins and a lot of investment in marketing. That is to say, detriment of cash flow. The second one is with growing with a superior service level based on sustainability. Magalu has always chosen the second option, growing with a very good service level on a sustainable model. We are achieving something very rare, which is grow very quickly and at the same time delivering profits. We're doing this, not increasing our prices. In fact, we are reducing our prices, our gross margin for the year and for the quarter roughly that we launched year.
Also, investment in free freight also increased. Also, 50% of what we sell online has free shipping. That is to say, no shipping fees. We are able to increase our operating margin because of the major operating leverage that we have stemming from our model of multi-channel. We have been placing our bets on this model for over 17 years. The multi-channel model gives us a lot of leverage. The more we grow, the more our fixed expenses are diluted. Because of that, in our economic model, we are able to offset the lower gross margin with a very strong dilution of our SG&A. This is the eighth quarter that we dilute these expenses in a row. We improve our value proposal for our clients, and at the same time, we deliver profits.
More than that, there is one thing that I consider very important, and no digital revolution is going to change. It is cash flow. The company has. We generated BRL 1 billion in cash, over BRL 1 billion. The company that don't do that will not survive. Together with over BRL 1 billion of cash injection that we had with the capital increase that we had in September last year, we closed the year with a very sound position of net cash. Roberto will be talking in detail about that, which gives us a lot of muscle, so to say, in order to accelerate our investments without any risks for our long-term business. We usually think, well, we want to grow, but of course, we don't want to risk our sustainability in the long run.
Our cash position today gives us a lot of comfort in order to make investments and not to the detriment of our future. I would also like to mention that although the short-term result was very good, what makes me even more optimistic is that even with this result, we planted many seeds that we are going to reap the fruit in the future. There were many seeds that we planted. Evolution of Marketplace is one of them, from BRL 3 million in 2016 to BRL 120 million in the fourth quarter of 2017, reaching almost 10% of GMV of the website in less than one year. Finally, a very important assumption that we highlighted in our letter to shareholders. We are extremely selective in terms of our sellers to our platform.
We refuse over 30% of the ones that submit their requests. We also disconnect some others that really didn't deliver up to our standards. We can do this in a scalable manner. We will have a lot of fruits in the future. We will keep a high growth rate for the next few years. I would like to mention specifically in terms of the outlook for the next year. You have to remember that our comparison basis will be very tough, very high. The biggest competitor of Magazine Luiza in 2018 will be Magazine Luiza of 2017. It's a very tough competition because we delivered quite a lot of results during the whole year. We maintain our optimism mainly because of the recovery of the economy. We will have tailwind and also the World Cup.
Whenever there is a World Cup, we have results in the previous quarters regarding growth in sales online and offline. I keep our optimism, although we have a very tough comparison basis. I would like to reinforce this message. We will have 2 major focuses in 2018. Accelerated growth in the active base of our clients, this is a major focus. We want to have a bigger penetration in clients that buy both online and offline, this is a major focus for growth. It will be on the active client base that we have. The second focus is even more relevant, a significant increase in satisfaction, NPS, and reduction in the delivery deadlines, and improvement in our after-sales process.
Many initiatives will be taken here at the company, we will be making significant investment this year in order to improve and to reach the best rates of consumer satisfaction in Brazil. I'm not talking about one indicator, but many, both regarding our investment in cash and in energy and in efforts being made by everybody in Magazine Luiza. Lastly, I would like to make a special thanks to all our employees that had an extraordinary performance in 2017 when we celebrated 60 years of age, we also conquered the award of the best retail company to work for. Thank you very much. Now Roberto Bellissimo will talk about our figures.
Good morning, everyone. Thank you for participating in our call. I would like to start on slide number four, talking about our results.
Once again, we grew 31%, including here Marketplace, it was the highest growth rate in the last five years. The market grew about 8% according to IBGE. It was our highest gain, market share gain. In our physical stores, same store, 15% growth. The contribution of new stores, five points in our growth. 60 stores that we opened over last year. A very good performance from these stores. Growth of e-commerce as well, with a very tough comparison basis online. Overall 3%, we gained 60%, it was an extremely high gain. In gross profit, the growth of e-commerce was very high. Gross margin, helping operating expenses dilution, such as was the case during the whole year. We diluted expenses to one of the lowest levels ever in our history at G&A, 21%, which is one of the lowest in retail overall.
EBITDA growing 38% in the fourth quarter. Margin eight to 8.6 increase. A record margin for us in the fourth quarter since our IPO. We reduced our financial expenses as well, we increased our net income to 160% in the fourth quarter. Margin of 4.6%. Our highest net margin. Cash generation was very strong, BRL 1 billion in the year, with a very important contribution in working capital. We improved it by BRL 300 million in the year, we also had improvement in our capital structure, BRL 1.8 billion. The BRL 1.1 billion from the follow-on and BRL 700 million from cash generation from the company's operations over the last 12 months. On the next slide. A little bit about our year. Almost BRL 15 billion, growing 28%, much higher than the market overall. Our EBITDA, BRL 1 billion for the first time ever.
Net income BRL 389 million, growing 3.5 times. Cash position and receivables BRL 2.5 billion. We reduced our indebtedness, our gross indebtedness as well, practically BRL 800 million. We closed the year with a net cash position of BRL 1.7 billion. Our best capital structure since our IPO. Here we have the evolution of our stores. 28 stores opened in the last quarter. It is very fast-paced in the opening of stores. We inaugurated in the year over 20 virtual stores. We inaugurated over 20 stores in the Northeast over the year. The stores, as we said, have been helping us grow and also dilute our SG&A. In investments, we increased our investments by almost 40% over the last year.
The highlight here is the investment in new stores, BRL 39 million to open 60 stores, which is an average of BRL 650,000 per store, which shows the company's capital discipline in terms of going for very good locations and not expensive locations. We also increased our investments in technology mainly. Together with logistics, should represent most of the investments by the company in the future. On the next slide, we show the evolution of our sales, you can see that the growth rate was increasingly higher, accelerating the pace. Total growth, e-commerce growing very strongly. On the next slide, you can see the trend regarding our gross margin, SG&A. It is very clear that our gross margin in the quarter went from 29.6% to 29.2%, we lost 0.4.
SG&A dropped one percentage point at the same time, which means that we gained 0.6 percentage point in the EBITDA margin. Equity income, very consistent over the whole year. The highlight here is the result from Luizacred and Luizaseg in the last quarter. Those grew quite extensively and giving a very good contribution to our total EBITDA. On the next slide, you can see our EBITDA on a quarterly basis going from a level of BRL 700 million in 2016 to BRL 1 billion in 2017. Margin going up every single quarter, growing 44% in the year, mainly due to the expense dilution, as we mentioned. We were able to dilute our expenses with payroll and also our rental expenses. Our rental account grew very little over the year, in fact, in spite of these additional 60 stores.
Many other fixed expenses as well were diluted over the year. Talking about our financial results, we show here on the slide, dropping from 4.5% to 1.6% of the net revenue, almost three percentage points drop in our financial expenses. Net of the prepayment of receivables, we had a positive net revenue already. Expenses were basically only prepayment of receivables that dropped in the quarter as well. The account as a whole, or this line, reflected the drop in the CDI, mainly our improvement in our capital structure, cash generation, and our offering. In our working capital account, we improved again. Working capital as a whole for the year, BRL 300 million. Mentioning that we improved inventory turnover, which is even better when the gain from working capital comes from the inventory turnover and not from the average term.
As our inventories are totally integrated as e-commerce grows, we tend to further dilute or further improve our inventory turnover, such as has been the case in the last few years. When we look at our adjusted cash flow, we went from a debt of BRL 136 million to a positive BRL 1.7 billion net cash. On the next slide, we show how we got to this cash result, starting with the cash flow from operations of BRL 1 billion. CapEx BRL 170 million, debt payment BRL 944 million. As we said during the last call, we prepaid a lot of our debt in the last quarter, reducing our gross indebtedness. We paid interest and we issued stock, BRL 2.5 billion.
When we look at the capital structure, we see that we went from BRL 1.8 billion debt to BRL 800 million, further reducing our interest expenses from now on. On page 18, you can see the evolution of net income on a quarterly basis. Every quarter we have been growing. In the last quarter, three percentage points increase in our margin, went from 1.6% to 4.6% of the net revenue. For the year, going from 1% to 3%, very high growth as well. Lastly, talking about Luizacred, also a very good growth in the quarter and in the year. You can see that the total billing grew by 29% for Luizacred. The participation of Luizacred in our sales is at the highest level ever. The LuizaCard in our stores grew 52% in the quarter.
Our loan portfolio of Luizacred also grew, reaching BRL 5.7 billion. The total card base also grew, 3.4 million clients. Also we had a significant reduction in the delinquency rate in the year, two points NPL90 decreased. If we go back 1 year, last year, we had already reduced three points. The last couple of years, we were able to reduce by five points our NPL90, growing sales and increasing our portfolio and increasing the profitability of Luizacred as well. On the next slide, we show the quarterly net income of Luizacred. All the quarters this year were better than last year's, mainly due to the improvement in the delinquency levels and the reduction in the funding costs. Reaching the last quarter, a ROE of over 20%, 23% in fact.
These were the main financial highlights, now we would like to open for questions from you.
Thank you. Ladies and gentlemen, we will start now the question and answer session. In order to ask a question, please press star 1. In order to remove your question from the queue, please press star 2. Our first question comes from Luiz Felipe, BTG Pactual.
Good morning, everyone. Thank you for the question. My question had to do with fulfillment. You said, Fred, that the focus of the company, well, we have been seeing this over the years, this focus on service level and the improvement in the shopping experience for the consumer. How do you see the evolution of the fulfillment platform in Marketplace, not only for 2018, but also the next few years?
Thank you very much for your question. Good morning.
The focus for 2017 in fulfillment was very much on our 1P. We had many initiatives being carried out, among them the improvement in the shopping experience for the click and collect mode and increase in volumes as well. With a significant increase in volume and the delivery terms of click and collect, most of the deliveries were made in less than 48 hours and some even in 24 hours. This will continue to be our focus. Another important point is our migration of our delivery network. That is to say the carriers, the big ones going to the Luiza network, carrier network. We were able to get over 80% penetration of the Luiza network regarding small carriers last year.
When this operation becomes very smooth, when we said during our message to our shareholders, we have to start to pilot, so to say, the availability of this model to the sellers. We started on the basic level, that is to say, the standard in the market, but afterwards we will be giving you some figures about that. Now we want to include mainly this network and the stores in the process for this year. We will have some pilots with some sellers, and as we see that this experience is okay, we're going to roll it out. Our focus will always be quality. We will have pilots this year with some sellers and probably roll this out over 2019.
Our focus will continue to be on quality, on our platform, a good shopping experience for our clients, and we are not rushing anything. Our main focus for the Marketplace is not even GP, it's an additional take rate or an additional take rate. Our main focus of our delivery platform available to consumers is to guarantee the level of service to our customers at the same level that we have in 1P. One of the assumptions is to have the 3P service level equal to the 1P service level. This is a big challenge, and we believe that this is the only way to do it. This is Eduardo. In the last quarter, we have about 10% of our seller base already participating in this product.
They have been able to reduce the cost at about 15%-20%, both the delivery terms and the cost. Thank you very much. Just a follow-up regarding this, Eduardo. You talked about penetration of Magalu Delivery. Do you have any data that you could share about conversion or recurrence of purchases and delivered via Magalu Delivery vis-a-vis those who are delivered by other logistic platforms? Well, not in relation to the frequency. What I can say is that the main conversion rate is the cost or the shipping cost and the delivery term. As these sellers have been seeing that their conversion has been improving. This is all we can say for the time being. Thank you.
Robert Ford, Bank of America. Thank you. Good morning. Congratulations for the excellent quarter. What could we think about margin?
The competition will probably copy your structure, will emulate your structure.
Thank you, Bob. Thank you for your remark and for your question. Bob, our focus here at the company is not guided by competition, and this is something that we also expressed in our letter to our shareholders. Our guideline is our strategy and mainly our clients. As I said at the end of my initial remarks, we will be focusing this year on two things. The increase in our active client base. We will be making intelligent investments to increase our base with calculation FLV and looking at the long-term value, both investments, both in marketing and other investments in order to acquire more clients. Marketplace has been helping us a lot. I told you that we grew 60% our GMV last quarter in e-commerce.
If we look at the items sold, almost 90% in items sold. Marketplace makes us sell with a higher ticket and with a higher active base, client base. This is very relevant in this context. The second focus that we will have, and that will require investments as well, is the improvement in our service level. This could sound as a platitude maybe, but this is a true fact. We are placing very high targets both for the stores NPS and websites and the delivery terms, and this will involve investments by the company in the frequency of deliveries and the increase in the overall cargo and general investments by the company. Looking ahead, it will have some impact, maybe not on cash margin, but on percentage margin.
We cannot give you a guidance for margin, of course, but we will be making our model more and more efficient in terms of improving service level. I say this with the same consistency that I have been repeating since 2001. We have never waived profitability to grow significantly. We do this with a lot of consistency. When we established e-commerce in 2000, ever since that, we have been repeating this to you. This year we will have some kind of investment being made. This potential gain that we would have will come from investments both in active clients and to improve the level of service. As we do not give guidance, so I cannot quantify this to you. Thank you, Fred. What about your conversion into sellable distribution centers? Well, we have just started to do this in some stores.
We will be starting in March, and we will start the pilot now. We have a high number of stores that we intend to convert into this model, about 100 stores that we intend to convert to the model that you mentioned, but very carefully to see whether this is going well or not, if the numbers should be kept lower or higher, and not to mention the new stores that will be opened already in the new format. From the viewpoint of impact, it should be positive in the medium and the long run. Today, some stores are already having structural problems because of the amount of products in the store pickup model. So, in the back office structure, sometimes it's not prepared for that, for instance, in the Black Friday, so other categories as well. We will have sellers delivering to the stores as well.
We have to prepare all that for this gigantic number of store pickup that we have. We have a separate NPS for the store pickup model. So far things are going very well, but we have to anticipate that. If you look at companies abroad, you will see that some have 40%, 50% of the total that is sold in the store pickup model. This is a possible number. We have to prepare our stores to deliver a very good level of service for our consumers and also having a very good structure for our team. Of course, I'm worried about the team that does that. I have to give them all the equipment, all the infrastructure, everything that is necessary so that they can really deliver and give our clients the best experience.
You have many software engineers involved in market integration and stores and everything. Could you talk about how you hire and how you retain good engineers?
Well, André will be answering your question. This is Fatala. Regarding our development team. Since last year, we have integrated Luiza Labs, and they are in charge of the whole IT part of the company. We organized the way we divided the teams, and we started to change the profile in order to have more and more developers, in order to cater to the demand that we have in development. Now in 2018, we are working in the expansion of the teams.
We're going from 41 to 48, and we will be focusing on the expansion of the team that we will be working in Marketplace and also in the support of this change or digitalization of the stores and transforming them into sellable DCs. About retention, we have been doing quite a lot of work in Luiza Labs, and the culture is very strong. Last year we had over 400 people and only less than 10 left. Our focus was on these developers and the international companies and building this culture in which these people are contributing to face these challenges that we face. Our engineers want to stay here, and they want to build national technology. They don't want to go abroad. Just to give an idea, Bob, we mentioned this number in our letter. About 30% of our whole payroll is in Luiza Labs.
The proportion of Luiza Labs vis-à-vis the total administrative team, I'm not considering the store personnel or the DC operators. I'm talking about the administrative people. You can see that the company is becoming a tech company, in fact. Thank you very much, and congratulations again. Joseph Giordano, JP Morgan. Good morning, everyone. I would like to ask about the investments to be made in fulfillment, and when you look at your Marketplace today, what would be a feature that is still lacking and that should be your focus? What do you see as the major challenge in order to make this platform soar or take off? We saw digitalization of the company, and I would like to know if you have any projects, something that will help your seller. The focus of Marketplace this year, I'm going to split it into two large groups.
The first one is what we call findability. Many SKUs being put inside the platform, from 40,000 items to over 1 million SKUs. The change that you have the whole tree of the company and the search algorithms is brutal. It's a very significant change. The process of finding a product, both for the consumer and for our team in order to have this structure, it becomes more and more complex, of course. Working with this complexity and simplify it, because we do not want to waste simplicity in our shopping process and the ease of finding a product. It requires a huge effort on the part of the business people with others people and [Uschi] and Fatala, the IT and all the algorithms in order to make things work. That the shopping experience at the website continues to be simple and straightforward.
Also finding the best offering. If the offer of the seller is better, then it has to be shown as a priority in the search. I would say that the main endeavor from the viewpoint of the consumer is this one. From the seller viewpoint, we have already acquired Integra and the integration of the team, everything that has been done already. We have already improved the onboard process of the seller. We integrated many platforms and VTEX and Tray and the ease for the seller to upload the catalog. Magalu is already very good in spite of all the steps and all the filters that we have, because we are much more demanding in terms of documentation than most of the market that are not as concerned as we are vis-à-vis the onboard process.
I see that we still have room for improvement in the process in terms of integration and also some difficulties with some platform that is integrated and the NPS for the client and the seller. Because as far as we are concerned, the seller is also a client. We have to give a very good service. We have to be very agile and respond very quickly. If we have any cancellations, we have to solve it very quickly. We talk a lot about Magalu Delivery, but there are some basic things in our daily routine that we have to improve. We have very high targets and very specific targets for that. Would you like to add something?
With focus of market. One point that is important is the consumer model or the consumer service level that we have to deliver.
I think we still have to innovate there and not follow the same model of client service. This is a big investment that we will be making in our platform to improve that in 3P. In terms of scale, as Fred said, our main challenge is to scale. We launch a new onboard process at the end of the year, a platform that will further accelerate all this process. It has many steps, but this will ultimately reduce the inclusion of a new seller or the time for the inclusion of new seller, and also increase the participation of Marketplace in all the channels of the company.
Besides everything that Fred said about the challenges in the platform, we launched the sale of these products in our physical stores, 17 already, and we are closing the cycle because you have to sell and then the after-sale. It's a cycle. We already have 30 sellers there, and in the small universe, we are projecting this. Without wanting to make this happen everywhere, but anyway, we see a major opportunity in this regard. We launched the Magazine Você as well. Some sellers are already selling there, and there is a commission paid on each sale. We have to capture all the selling channels that we have to our sellers with quality. About FinTech. Good morning, and thank you for your question.
We are developing a new platform, which is called Magalu Pagamentos or Magalu Payments, and we will start the pilot momentarily, and this will allow the seller to discount their receivables in a very easy manner, in a digital manner with highly competitive rates. The service of prepayment of receivables today, we're not doing it. The seller can do this differently. It will be a new source of services and revenue for the Marketplace as a whole. That we will be launching in the short run and in the medium and the long run. This platform will evolve toward a digital portfolio where we will be able to deposit the seller money in his own account linked to Magazine Luiza and not directly in his account. Then we can have some other gains such as the float and also financial services, et cetera.
The second step will be the creation of this digital portfolio. The third step, a little bit more in the long run, will be to extend credit to the seller besides the receivables. That is to say, finance their working capital and their investments. This should be done when we already have a longer history about these transactions and sellers and very possibly with a partner from the financial sector. This is our goal.
Thank you very much. Thiago Macruz from Itaú. Good afternoon, everybody. In the last Magazine Luiza day, you mentioned that you will be starting free shipping for the clients that would use your app. What drew our attention at the time was the following. Is it live already?
Should we believe that this initiative is one of the most important to explain the very good performance that you had in the fourth quarter? If this is a source of upside that we should be seeing in the next few quarters. Hi, Thiago. Thank you for the question. This is Frederico. About the express delivery. This is only in the app. In the app, we already give free shipping. It had more to do with the 4 to 8-hour delivery than the free delivery. We're still testing in the cities that we mentioned during the Magazine Luiza day. We have a good participation already, but it's too early to extrapolate it for the future. In the last quarter, it didn't really represent a lot. More the other initiatives were more representative, but we wanted to deliver this service and in express delivery.
If you buy through the app, you know that we do not charge shipping for more cities and more categories all over Brazil. It's too early to say because we only have 10 cities included in this program, and it's too early to extrapolate this figure. We are certain that we will have a killer offer there for the future. Thank you. I would like to remind you that in order to ask a question, you should press star one. The next question comes from Guilherme Assis, Credit Suisse. Good morning, everyone. Thank you for the question. I think it's very clear that the major highlight here was the growth of e-commerce and Marketplace and all the initiatives that you have been putting in place and your operating leverage.
Now, shifting the focus a little bit, could you talk about your initiatives and your plans for the brick-and-mortar stores? Talk about the digital transformation in the brick-and-mortar stores and what is still lacking and what kind of gains do you believe you will have in your physical stores operations. Could you have additional efficiency gains in 2018? Could you talk about the opening of new stores? You opened 60 stores, if I'm not mistaken, in 2017. The objective, is it to keep the same pace for 2018 and for the foreseeable future? Thank you. This is Fabrício. Guilherme, good morning. About digital transformation, 93% of our sales are this way, and we mentioned this in the letter to shareholders. Our major opportunity in credit. We have to facilitate this and increase digitalization of credit, improving the shopping experience.
We have already digitalized part of our back office team, and we will end this by the end of this year, transforming the store in a mini DC. Roberto mentioned that selling Marketplace in the stores will also help us improve frequency and offering more categories. These are the initiatives that have to do with your question, and that will bring us additional benefits. For this year, we will intend to continue to gain share in all categories. We gain share in all categories, and in terms of white line and TV and smartphones, we gained more than one percentage point market share. This year, we will have the World Cup, which makes us very bullish. We will have a very high volume of smart TVs being sold. We will have a very good availability of products and also good promotions. We improved the management of this area being very successful.
We believe that we will be growing a lot this year as well and expanding the number of stores. I cannot tell you exactly the number of stores. We should be opening more stores than last year. That's all I can say about the number of stores. Thank you very much, Fabrício. We close our question and answer session, and we would like to give the floor back to Mr. Frederico Trajano for his closing remarks. Once again, thank you very much for participating in our call. I would like to congratulate all our team for the excellent results delivered in 2017. I reiterate our commitment to maintain our efforts to make traditional retail into digital and into a platform with physical presence as well and human warmth. Thank you very much.
Magazine Luiza's conference call is closed. We thank you for participating and wish you a very good afternoon.