Ladies and gentlemen, thank you for holding. Welcome to Magazine Luiza second quarter earnings conference call. We would like to inform you that all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a Q&A session when further instructions will be provided. Should any participant need assistance during this call, please press star zero to reach the operator. Now I would like to turn the floor over to Mr. Frederico Trajano, CEO of Magazine Luiza. Please, Mr. Trajano, you may proceed.
Good morning, everyone, and thank you very much for participating in our results conference call for the second quarter of 2016. We have here Roberto Galicia, Fabrício Garcia, Eduardo Galanternick, Marcelo Ferreira, and Edison Pujada. They will all be available to answer your questions after this conference call.
Speaking about figures, there is no need to say that the second half of 2016 had one of the most turbulent landscapes in our country, and this negatively impacted two of the most important indicators related to our country: consumer confidence and unemployment. Our segment is highly influenced by these indicators and posted a drop of 10% according to IBGE in the first five months of 2015. The only thing that we cannot mention in this context is that we were taken by surprise because we knew exactly that we would face a very adverse scenario in 2016. Our team worked very diligently in four forms of work to put together a major plan to face the crisis of 2016.
That involved gains in market share without compromising our profitability, transforming our strategy into something digital, reducing admin and sales expenses, and also a control and improvement of our cash generation. I will elaborate more on each item, and then Roberto will give you more details about each information. In terms of the first item, which is market share gain with the maintenance of profitability, if the whole economic cake is shrinking, we have to try to get a bigger share of their package. The focus of the company was to gain market share. The challenge was to get market share without compromising our gross margin, which is not an easy task. We worked together with McKinsey consulting company, and we diligently raised all possible opportunities to gain more market share.
We looked at each category and each store location in order to map out where we could have micro or granular opportunities to gain share. Then we put together an activation plan to be able to capture all of these share gain opportunities by store and by category, by all of our marketing and pricing strategies and moves. In the second quarter, we gained market share in all relevant categories of our business. We gained market share in the white line, telephone, image, IT. All relevant categories were very important, and they posted significant gains of market share considering the current scenario. Certainly, the main highlight in terms of revenue in this quarter was e-commerce. We are the only store, the only operation, and we've been saying that for the past few years because we are the only multi-channel company in the market.
All of our market channels share the same operating platform of our brick-and-mortar stores, the same IT platform, logistics, and financial platforms. With that, our e-commerce operation has some advantages when compared to other models from other peers. We have some cost advantages and again, great price competitiveness because we can also practice good online prices, and we offer superior services because we can use the logistics of the brick-and-mortar stores to deliver at lower costs when compared to other players that do not have such a large grid of stores to use in logistics. This was aggravated with the crisis, because with the crisis and the consequent reduction of irrationality in the market, the market began to practice more sustainable prices in the long run, which was the rule of the game that we always applied.
Now there is more rationality on the online pricing, and with all of that, we were able to get important gains. In the first half of 2016, e-commerce posted a growth of 30% when compared to the numbers of the previous year, which is quite higher when compared to the growth of the general market. We also deployed many different actions with the main focus related to mobile. There was an important migration of people towards mobile. To that end, we made important investments together with our business team and Luiza Labs development lab. We deployed many improvements, especially regarding our new application, which is our new sales app. With that, as this accounts for more than 40% of the total public. We had a growth in terms of conversion rate, consumer traffic, and also sales during the period.
This really helped us to increase our e-commerce sales in the first and the second quarter of 2016. In addition, I would like to add that we also deployed important projects that will be important to support the sales growth in the second half of the year and in the next few years. Our marketplace operation is already in place, and it started last June. We are initiating the program with some retailers. They are already using this platform, and we are ready to escalate that platform. This is something that we can refer to later on during the Q&A. We also have the project, buy online and do the store pickup. We have many stores already operating with store pickup.
By the end of the year, we will have more than 50% of our stores operating under that, buy online and pickup in the store model. These two projects are helping us with sales, to increase sales, and also it's helping us to reduce expenses, especially logistics, because we take advantage of the truck that is going to the store without having an additional cost. Sales growth would not be enough to generate increases in EBITDA, because with inflation in two digits and an indexed economy whereby all of our costs like rental and working contracts, everything is indexed or patched to the inflation. Therefore, the company had to do a lot of work, very detailed and disciplined work, to control expenses.
We worked with Galeazzi & Associados, another consulting company, and with them, we launched two projects, ZBB or zero-based budget, and also a GMD matrix management of expenses. When we also focus on rental, power or utilities bills like power, we worked on several lines of expenses. This was a combined effort, including many areas of the company. All of the teams together led us to, despite 10% inflation, we had a nominal drop of 3% in our expenses in the quarter. Therefore, we had a dilution of SG&A, which makes us very proud because this was the result of some very diligent work. Finally, we worked hard to improve our cash management. We look at all of the purchasing or procurement terms, and we are also very conservative in terms of our CapEx. Now I'll give the floor to Roberto to elaborate further on the financial aspects.
Good morning, everyone. Thank you very much for joining us this morning in our conference call. I would like to start on page two, where we mention the first highlights of the quarter. Starting with sales, we grew 5%, with an increase in gross margin of 1.2 percentage points, in keeping with our expectation to grow while at the same time keeping our profitable margins. E-commerce grew 34%, reaching more than BRL 580 million in sales, 23% of total sales. This is indeed a very relevant operation for the company. Operating expenses, we were able to reduce them by 2% in nominal terms. Despite inflation and payroll, et cetera, we were able to lower expenses in percentage and nominal terms. In percentage terms, we were able to post a reduction of 0.8%.
With all of that, we were able to grow EBITDA in 29%, reaching BRL 163 million, which gives us a margin of 7.6% and a net income of BRL 10 million or a margin of 0.5%. Now, speaking about our capital structure, one big highlight was a reduction in our adjusted net debt by BRL 350 million in 12 months. That indeed is a significant reduction when you look at June of this year and June of 2015. With the growth of EBITDA, we were able to lower net debt over adjusted EBITDA ratio to 1.5 times. Another important aspect related to the indebtedness reduction was the improvement in working capital. We managed to operate with significant working capital levels since the beginning of last year.
When we compare the current working capital performance with the performance of the year before, we also see a significant improvement, which directly is reflected into our indebtedness level. In cash generation, with EBITDA growth and improvements in working capital, our operating cash flow was BRL 100 million in the quarter, which is much higher than the level of investment. Finally, I would like to highlight Luizacred. In the quarter, we had BRL 25 million in net income and with ROE of 18%. All of that also shows improvement in the short and long-term non-performing loan indicators. On page three, we talk about the evolution of the number of stores. In the last 12 months, we inaugurated 25 new stores.
In this half year, we inaugurated one, but we still have 24 more stores to be inaugurated along the year until the end of the year, most of them in the Northeast. When we look at our investment level, we invested BRL 50 million in the first half of the year. That was lower CapEx when compared to the year before. Our investment was mainly geared towards new stores, which should be emphasized in the second half of the year, and also refurbishing. When we look at technology and logistics, all of the investments were in keeping with our strategic planning. Turning to the next page four, we talk about our gross revenue evolution. We grew for the second quarter in a row.
We grew slightly above the first quarter, almost 15%, and in the whole year, the growth is almost 4% in the first half of the year, which can be compared to the numbers from IBGE, which has anticipated a growth of 4%. If you look at a growth of 4% compared with a drop in the market of 10% of the IBGE figures, they also include e-commerce. Therefore, this means that our market share gain was quite significant, and it was more significant in e-commerce, where we are able to grow 30% in the quarter when compared to data from E-Bit in the quarter of about 5% in the half year. In terms of brick-and-mortar stores or physical stores, there was a drop of 4% in the same-store sales line, but we also gained market share in the physical stores.
Our comparison base was still relatively high when compared to physical stores because despite a drop in 15% in the second quarter of last year, that reduction was based on the growth of 2014, which was over 20%. In 2014, we took advantage of the World Cup of the game. We were able to grow same-store sales by over 20%. Therefore, the base for the second quarter in terms of physical stores was quite high, and despite this drop of 4%, we were still able to grow our market share in the physical stores. Now, going over to the next slide and talking about gross profit, we were able to raise our gross margin once again by 1.2 percentage points. It's worth mentioning that we are comparing oranges with oranges. We reclassified the numbers of last year.
I mean, the reduction of the payroll from taxes to expenses in order to facilitate this comparison. We reclassify from payroll taxes to selling expenses. There is this effect when we compare the payroll of last year, and we were able to reduce the gross profit. I mean, we were to reduce that expense by 1.2%. We also have a greater market share coming from smartphones. Now we are now charging for shipping and assembly, which was something that was introduced in the midst of last year, and this applies to the white line and furniture. As Frederico said, the environment is less irrational, and this favors the evolution in our e-commerce sales. That's why we see now a consistent growth in margin in all categories, in all channels.
Speaking about operating expenses, we were able to post a nominal reduction of SG&A as a whole by approximately 2%, this accounted for 0.8% of dilution over net revenue, this was achieved despite the fact that the payroll had increased in terms of social contribution and with inflation around 10%. High inflation, when you compare a base of fixed cost in the retail industry, as you know, this in the retail industry is quite high. In order to increase sales and reduce expenses, we certainly did a lot. We worked very hard, and we probably achieved good numbers because of ZBB and GMD. In terms of equity income, Luizacred and LuizaSeg net income were a bit lower when compared to the figures of the year before, but they still accounted for 0.7% of our net revenue.
We post a positive result, we see a positive trend when we compare the numbers with the second half of 2015. Further on, we will elaborate more on that when we speak about Luizacred. Going to the next page, speaking about EBITDA. Our recurring EBITDA margin was 7.8%, one of the largest adjusted EBITDA margins posted in the last few years. That means that we grew approximately 27% year-on-year, this was once again supported by a small sales growth, also higher gross margins and tight expense controls. Next slide, we refer to our financial results. Here, we still see growth in financial expenses, but totally linked to growth of CDI and sales growth. Share of Luiza Card increased even though we had a reduction in physical stores. Luiza Card increased, this means that our customers are becoming more loyal.
This also had a slight impact in anticipation costs. With the growth of e-commerce, the growth coming from third-party credit cards also increased in our total mix, that's why the level of receivable discounts is a bit better, it's a bit higher, also CDI quarter-on-quarter. The good thing is that this trend towards reducing CDI becomes clearer to the entire market. As CDI begins to fall, also these lines should also directly benefit from those reductions. Speaking about net debt, here we have a significant decrease from BRL 1.2 billion to BRL 353 million. It's a reduction of BRL 350 million in the last 12 months. We've been reducing it quite a lot, we've been maintaining that reduction steady since the end of last year.
The adjusted net over EBITDA ratio was down from 2 to 1.5 times, this was mostly related to reductions in working capital. In this quarter, we were able to keep inventory turn in keeping with the numbers of the previous year, we were able to increase our average procurement term, this was due to some diligent work where we evaluated risk per category, per vendor, with that, we were able to increase our income coming from suppliers because they finance our inventory. Working capital and all of these other factors were crucial to lead to this improvement. Finally, in our next slide, we talk about net income. We see here a growth of BRL 5 million in the first quarter and BRL 10 million in the second quarter. Still low considering financial expenses and also considering the current level of interest rates in Brazil.
At least we see a positive trend when compared to the numbers of the year before, we also anticipate drops in interest rates in the future. Speaking about Luizacred, I would like to mention the growth in our total revenue. Cartão Luiza Card grew both in Magazine stores and also in other stores. There was a larger number of activation of our cards, and we increased our card base. Direct consumer credit decreased by 58% due to a more conservative credit policy. A large part of that was also due to the growth of [Lozango], who is responsible for 5% of the growth in the physical stores. Then we have overdue payments. Usually in the first quarter, we see an upward trend. Last year we had a change from 10.4% to 11%, so it was an increase of 70 basis points.
This year, in our long-term indicator, there was a drop of 100 basis points from 11.7% to 12.7%, this reflects the better mix of the portfolio and in keeping with a more conservative policy. In terms of short-term, we only have 3.9% coverage ratio, this coverage ratio is also a reflection of the delinquency levels. Finally, we speak about Luizacred net income. We have two charts. One we show net income and the other chart shows operating income. When we look at the operating income throughout 2015, there was a drop quarter-on-quarter, especially due to increases in delinquency levels. Now we see a change in that scenario.
The operating profit on both quarters was about close to BRL 50 million, very similar to the second quarter of last year, but not yet in the same level of the first quarter of 2015, which was slightly higher, but we see a positive trend now. I would also like to mention that there was an increase in the tax burden from 40% to 45% on this operating profit. Even with increases in unemployment and a very difficult economic landscape, Luizacred has been very resilient. It went from BRL 170 million profit in 2014, at the peak of its operation, to BRL 120 net income early this year, and now BRL 50 million in profits with a positive trend and with a positive delinquency profile. ROE was close to 9%. These are my main financial highlights, now I'd like to give the floor to Luiza.
Thank you, Roberto.
To conclude, we believe that even though the trend is very incipient, we see a slight recovery of the economy, that's why we see a pickup in consumption. I would also like to emphasize that lower exchange rate may reflect in higher consumption. Despite all that, we will maintain our focus in all of the projects mentioned before, also in the continuation of our strategy because we want to become a digital company with physical stores and a lot of human warmth. With that, I conclude, and we go to the Q&A.
Thank you very much. We go to our Q&A session. In case you have questions, please press star one. Mr. Guilherme Assis from Brasil Plural has the first question.
Good morning, Fred. Good morning, Berto, thank you very much for taking my question. I have two questions.
First, on the excellent e-commerce performance of the company, and we've been monitoring the competition as well. I would like to hear from you, what is your opinion in terms of the outlook? There is a competitor which is going through some disruption, and there was a management turnover. They also had fraud problems, and they are trying to stand up again, even making changes in their capital structure. There is another competitor that had problems with suppliers. We've heard in the first quarter results, and I think that still affects the company. Therefore, what we see now is an environment where two of the main competitors or maybe two of your largest competitors had problems this half year.
I would just like to hear from you about what has been your approach considering all of those facts, whether you believe that now there is an easing in this pricing policy and whether this growth that you posted can be sustainable in the mid and long range. The market grew 5%, as you said, and you grew 30%. Do you believe it's possible to maintain this growth, or you think that competitive environment will become more challenging in the future? This is my first question. My second question, you also posted a very high gross margin. You explained some of your gains, and that includes charging for shipping and handling and delivery and assembly. You didn't talk much about the MP do Bem of some that 120 basis points that you gained. What was the impact in the final numbers?
Could you say that about 30% of sales comes from smartphones and IT products that were benefited by the program, MP do Bem? Rounding up to 10% of the revenue, this would cause an impact of 3 percentage points in your margins. I would just like to know whether this is a fair assumption and whether I'm right. What is the outlook for this MP do Bem? We looked at the results last week, and they say that they expect to get an injunction for that as well. Is there a trend that everybody will be benefited by the injunction, or people will lose that benefit from that temporary measure?
Thank you. I will try to answer your question. About your first question, as you know, I don't really like to talk about the competition. Everybody has their own particular situation.
I would rather speak about our own operation and also about something that I keep talking about, and that refers to the rationality of the management of companies. There used to be a situation in the market that persisted for some time that most competitors that operate online, they were operating at very low margins, and these margins were not enough to pay out for capital or to pay out for expenses. They were growing, but at a cost, and that was a hard cost. What I keep saying to you is that was a situation that in the long run could not be sustainable. Internet can help us a lot, but when shareholders invest in a share, they want to get dividends, they want to make money, and this cannot happen if the operation is destroying the cash of the company.
What I see is that there is a trend all over the world and as well in Brazil, even if you look at the internet outside, everybody's being pressured to generate profits. People are saying, "Okay, we didn't have a good result in the last quarter." There is that concern all over the world because online operations have to post profits now. To that end, they have to play the rules of the game, which is selling at the right price. You cannot provide free delivery or free shipping when that's not possible. This is a trend that is here to stay, and so I hope that the market does not pursue a path of destroying their cash the way they were doing. We've always favored rationality, and we are now benefiting from this model.
I would also like to highlight that we have a structural benefit in our e-commerce operation because of our multi-channel approach. The fact that our operation shares all the fixed costs, as I described at the beginning, in terms of logistics, IT, and even back office. We do not have many CFOs or CEOs. We have just one for everything. To have lower margins, it's very favorable, and it's a good competitive advantage, and also this gives us some strategic leverage. I am very comfortable, and I'm sure that we will continue to grow above market levels. If you look at the past five years, we've been growing above market rates. The base of the first half of the year of last year, it was low, but the base of the second half of the year for e-commerce was higher.
Probably, I don't know whether we will be able to keep that 30% growth going forward, but that's what we will aim at. We are doing quite well. July was a good month as well, and we believe that it will be the same in the coming months. I must emphasize that the basis of last year was better than this year. Physical stores, the base last year was more favorable, so we have to balance this growth, but in general, we will continue to grow. Go ahead.
I understand the fact that you don't want to talk about the competition, but I would like to understand how the dynamics of this market work.
You talked a lot about trends and trends abroad, but now if you try to see what's happening in Brazil, I can see a disruption in terms of the competitors in the first half of the year. After the half year, and by looking at your results and also looking at not every competitor with a magnifying lens, but you see that in the market as a whole, there is a trend towards lower pricing. Do you think it's this sustainable? How do you see that?
As I said, there is an irreversible trend towards becoming more rational. Competitors will no longer apply below-cost prices. They can't afford to sell below cost, and I think this is a change that is here to stay. Maybe we will see some changes here and there in terms of policy, but the trend in the medium long range is irreversible.
It's good not only for Magazine to be more rational but it's good for everyone. All of our competitors want to have sustainable and profitable companies. Speaking about your second question, I will give the floor to Beto. We do not disclose information about our mix or market share. Therefore, I'm not going to elaborate further in terms of our share in telephony or the mix in general. What I can say to that end is that Brazil is a country that has one of the largest tax burdens in the world. We had last year, and there were still more increases from last year to this year, and I think managers have a fiduciary obligation to advocating favor of shareholders and clients. We are tackling that two ways, legally and institutionally. Legally, we are questioning increases that are not constitutional.
We hire top legal offices, we also go to class entities. We have to fight absurd increases, we have to demand more balanced increases. We had several tax increases this year, the end of PIS and COFINS from this temporary measure called Lei do Bem. There were also changes in mobile charges. There is no legal basis to support these increases, that's why we are fighting hard against it. When there is some legal basis or technical basis to justify the increases, then it's okay, but it has to go through a series of approvals. We work with the best legal firms. That's what we've been doing. Particularly in that specific case, we were successful at first. Several other companies were also successful in this first instance. I'm not going to mention companies per se.
I can only mention Abinee, which is an association, for all the members of the association, we benefited, they are now applying these benefits to their operations. I'm not going to disclose the amount. I did not do that before, I'm not going to do it now. What I wanted was just to explain the rationale behind that. I must say that we are now exercising a more stringent control in our company.
Good morning, Guilherme. I would also like to add that the margins that we published is comparable to the gross margin of 2015. Last year, there was no PIS or COFINS, not even this year, we had to make adjustments in terms of the payroll. This increase of margin of 1.2 percentage points does not have any effect of PIS and COFINS, which are excise taxes.
This is just a result of better mix, shipping, assembly charges, our multi-channel approach. As Fred said, we do not comment on the mix and the amounts related to PIS and COFINS. We didn't comment on that last year as well. The outlook is favorable, as I said, we also said that the opinion from our legal advisors, both in-house and external, they are positive. There is a possibility that we will lose the injunction, we are looking on the positive side. We will continue to monitor that very closely informing the market about it.
Thank you. Berto and Fred, I think that what I was trying to understand is whether today you have an advantage that not all competitors have. In a way, this helps to boost your margins.
I did a quick price survey, you are charging for a mobile phone, for a smartphone, the same thing that your competitor charges. This is just a very empirical survey that I did. If you're not paying taxes, you get a better margin for that product. What is important for us to understand, as I see that you are very comfortable with your lawyers and you are certain that you will be able to keep the benefits, I think it would also be correct for me to say that this benefit should be extended to the other companies. Once you lose that advantage, that may have an impact on your numbers in the future. I'm just trying to understand the situation as it is today. There is a difference when you compare your company to other players in the market, this may not be sustainable.
I would think that either everyone loses or everyone wins it, this should have an impact on your margins. I would like to know whether this is the way you see it as well.
Guilherme, adding to what I said before, the fact is, as I said before, Magazine gained market share in all categories, white line, imaging, IT, furniture, and also telephony. We gain market share in all categories. E-commerce performed very well. As you said it, our pricing policy is not different from the market policy. We still have other things that are currently being evaluated. We can't do anything until we have a final outcome of the process. As we've been gaining market share in all categories, the performance in the first half of the year is due to the management approach of the company.
Still speaking about the first half of the year, we also posted decreases in expenses, that's not related to tax benefits. I'm not familiar with all of the tax leases available in the market. There may be other benefits that are not available in other states, like Rio, Bahia. There are competitors in the Northeast that have enormous benefit in certain taxes, even more significant than ICMS. It doesn't mean that in the future we won't be able to have that as well. Therefore, it's difficult to predict what can happen. Each retailer have their own tax planning, their accounting leases. They have some advantages, when compared to others. I believe that the entire market will benefit from this benefit. This is good for the entire market. It's good to all consumers.
I honestly hope that all the other peers can also benefit from this, once they go through all of the legal proceedings. I cannot predict what will happen tomorrow, I cannot answer that now. I cannot tell you what will happen to the market, I honestly hope that everyone is able to legally host good results.
Thank you very much.
Mrs. Maria Paula Cantusio from BB Investimentos has the next question.
Good morning, everyone. Good morning, thank you for getting my question. I would like to elaborate more on the growth of e-commerce. In your release, you said that you inaugurated the marketplace operation with good results this quarter.
What we've seen, I don't know whether it's just a coincidence, the operations that already have a more evolved marketplace, they haven't been able to post such high growth as you were able to do it. The filtered tools are not maybe so efficient, maybe they still have to be adjusted. The delivery terms increased as well, this has been something mentioned by all retailers. They want to try to reduce shipping time, maybe some products may take up to 60 days to be delivered today. Assembly also changed. Do you believe that maybe part of the e-commerce growth came from some kind of migration from other websites into Magazine Luiza's website, because other websites were not so efficient because of marketplace?
How are you dealing with the bottlenecks from that marketplace operation that so much so that your e-commerce operation will not be affected? Basically, this is what I had. Thank you.
Hello, Maria. This is Eduardo speaking. Thank you for your question. We believe that the marketplace strategy is just an additional strategy. It's complementary. We do not believe that we will see a deterioration in our sales growth because we are including partners in our sales base. Once we maintain our competitive conditions and industry conditions, our multi-channel strategy will add up, bring up more benefits. Therefore, we believe that we will continue to post a very sound growth in terms of sales of our own goods. Marketplace is just here to be an additional tool to add up to our growth, it's here to add up to our business.
Even it's important because it gives us more pricing options and more assortment. We do not think that marketplace will damage our sales. I cannot tell you whether there is a migration coming from the competition or whether that is caused by that marketplace strategy. I cannot tell you that. In our view, we just think that marketplace is just an add-on. Thank you. How are you registering new players just to ensure quality and service and delivery time of Magazine Luiza? It's part of our strategy. We are always very concerned with our brand. We are very rigorous in choosing partners, both in terms of the documentation and the history of the company. There are situations that may involve some hybrid products. We have the same products that our partners have, our conditions will not worsen because of that.
In other products where we do not have in-house, the partner does, the longer terms sometimes affect the conversion of that sale, or they may not be converted into a sale, it does not eliminate our sale. It does not take away sales from us. Therefore, we want to have in the marketplace responsible and reliable partners that can also cater to the needs of our clients. These partners will have terms that will be competitive, maybe not as competitive as ours because of our own structure, but they have to be competitive.
Eduardo, do you want to grow your marketplace operation? At what pace? Do you have any target?
We cannot give you any specific target. We just concluded our first phase, which is the establishment of the platform. We're already operating. The website is totally integrated.
We already have our e-commerce platform. Now, as indicated in our release, we will enter the expansion phase. We want to do everything in a very consistent and sound way to get to some sellers by the end of the year.
Thank you, Eduardo.
Ms. Irma Sgarz from Goldman Sachs has the next question.
Good morning. Thank you and congratulations for your results. I have three very quick questions.
First, still talking about marketplace, I would like to understand whether your focus would be more in establishing partnerships with large chains or whether you're also looking at smaller companies that maybe even operate under the Simples regime or the simpler regime that may also have competitive prices as we see. Now, some companies are trying to engage in partnerships with just large retailers that do not have their own operations, or maybe they have their own operations, but they do not have such large traffic. We see some other marketplace companies that are trying to capture mid-size companies. My question is in terms of the focus of the commercial team. Could you please elaborate on the fee structure of the company for those sellers?
What is the rate that you will charge, whether you are also thinking about offering additional services that can also be integrated in the seller's offerings. My third question is that I want to understand what you think about investment needs, not only this year, but also in the mid-range. Once again, we see some different strategies from different companies. Some companies favor an asset-light model, whereas others favor a model whereby they are becoming more verticalized, and they are investing in IT platforms and in assets in the last mile delivery. These are my three questions. Thank you very much.
Good morning, Irma. Thank you very much for your questions. I will try to answer all of them, and if need be, my colleague will add up.
In terms of our strategic focus, we do not want to exclude anyone from Marketplace. The focus, in my view, I think the market of the future comes from the small ones, from the small companies. It's very difficult to convince a competitor to place products in your platform. Several have tried to place products in other existing platforms. We've never accepted because obviously everyone wants to be predominant in this market. In my view, the correct strategic approach is to focus on small companies. There are thousands of retailers that are already selling online in Brazil. They are becoming digital. The focus of Magazine Luiza will be directly in this market. I think we will see a large increase in the number of even offline companies that will migrate to the online market in the future. They are now initiating to operate online.
We were offline, we migrated to online. We know that there is a conversion in this process, we want to convey our experience and our knowledge to these smaller companies, we can certainly help these smaller companies to enter Marketplace. Even though we do not want to exclude anyone, our focus is on the small companies. Luiza Trajano was chosen as our advertising girl. For years, she's been talking to micro entrepreneurs. She gives lectures all over the country, she is our major advertiser for Magazine Luiza. We are very excited, she is also very excited with this Marketplace project. When you talk about fees, fee is something very complex. That's why it's very difficult for me to give you a very objective answer.
It depends on the category, it also depends on the service level that you expect to get from Marketplace. What we are trying to do is that, first of all, when we put together our Marketplace project, we were very careful. We tried to reduce all the costs along the process because we know as a retailer how difficult it is to make money online. We wanted our seller not to pay a very expensive fee. To that end, we did all we could to be more competitive and very competitive vis-à-vis the market, offering lower fees without compromising our margins. As with e-commerce, Marketplace has to bear profit because it has a greater potential. We'll try to be more competitive, lower fees when compared to the rest of the market. We already have a flexible fee approach. The seller can choose a simpler fee.
It can be 5%, 6%, depending on the category, up to 15% if they choose to include financing and 10 installments, non-interest bearing. If he wants media, we can acquire media for him. In the future, down the line, we may also talk about fulfillment. We can use our stores. They could deliver the goods to our stores, the consumers will go and pick it up in our stores. We want to be competitive with a lot of flexibility. This is the strategy of Marketplace. To address your last question, when speaking about CapEx, what we see now in this quarter is that the strategy is that in the future, great part of our CapEx will be geared to logistics and IT. When we talk about logistics, we are talking about technology applied to logistics.
Basically, the company will invest in platforms, automation, to deploy all of our digital projects. The bulk of the projects have great focus on technology. The trend in the future is that the business will be more asset-light. We will continue to open stores. When we continue opening stores, we still have that discipline of opening stores with a very low cost per square meter, strategically located. We believe that not only the store is a point of sale, but it's also a distribution site. The store can give us a competitive advantage even when you look at e-commerce, because we can buy online and have store pickup. 50% of the stores will have store pickup by the end of this year. More than 50% of our stores will be operating with store pickup approach.
It's important that we have the physical stores. But to give you a more objective answer, the answer is yes, the company tends to be more asset-light.
Thank you very much.
I would like to remind you that for questions, please press star one. For questions, please press star one. Mr. João Pedro Ribeiro from Banco Votorantim has the next question.
Good morning. In fact, I'm Luiz Cintra from Votorantim. I would like you to speak a bit more about expenses. We just know there's a very good evolution in this half year with all of the initiatives that you implemented with your partners. To that end, what margins can be expected, mostly in terms of additional gains?
Do you think we could continue to expect expenses to reach nominal levels close to what you posted in previous quarters until this is annualized, or you still see further margin improvements in the future? Could you elaborate more on that and what could we expect in the future in terms of additional expenses cuts?
Good morning, Luiz. Well, we cannot give you any expectations about expense evolution. The matrix management of expenses is working quite well. We are very disciplined in monitoring expenses, in being accountable. All of package managers and all BU managers in the Southeast, South, in e-commerce, and everything else, they've been very disciplined. This matrix management of expenses has proven to work well. Every month we stop to evaluate all of the expenses. We talk about all of our plans of action.
We correct all the possible deviations, and we evaluate not only looking at the average, but we look at the stores that are performing above average and stores that are not performing that well. We try to improve productivity in all of our stores and improve our expense approach. What I can say is that we will continue to focus on that. We are now operating with zero-based budget, and we are very much in keeping with that new plan, with that expectation, and we will continue to work to have further improvements and improve efficiency. In the year as a whole, we will decrease expenses. Also, our objective is to have nominal and percentage reductions in expenses. Out of the total expenses, I think those that were further reduced, I think I can say that we had gains in productivity.
We increased sales per sales rep. We deployed VBD. We had adjustments in our administrative expenses and also distribution center. There are several projects in the company to digitalize the physical stores. As we said, in more than half of our stores, our sales reps are serving customers through the mobile phone. In the past, we used to serve customers in 40 minutes. That time was shortened to five minutes, while at the same time, we're not compromising our service level. We changed our marketing strategy. Our marketing is now more regionally focused. We are also tackling social media. We are reducing marketing expenses. Our logistics is quite efficient. It's very much integrated between e-commerce and brick-and-mortar stores, but there are still many projects in our logistics approach to enhance synergies, lowering the cost of logistics. One approach is the store pickup program.
Right at first, this new approach has proven to be very successful. We are renegotiating rental contracts, logistics contracts, and all of the other expenses that are part of that matrix management of expenses like Frederico said, rental, credit card, power bill, turnover, et cetera. Without giving any guidance about our expense expectation in nominal terms, I can say that we are firmly focused on continuing on this process of efficiency gains without compromising sales and service, while at the same time we are gaining more efficiency because of the digitalization of physical stores.
Thank you, Beto, very much.
Thank you, Luiz.
We now conclude our Q&A session. I would like to give the floor back to Mr. Frederico Trajano for his final remarks.
I would just like to thank all of you for participating in this call. Thank you and have a very good day.
Magazine Luiza's conference call is now concluded. I would like to thank you very much for participating, and have a good day.