Multilaser Industrial SA

BOVESPA:MLAS3

Earnings Call Analysis

Grupo Multi Reports Strong Revenue Growth and Positive EBITDA Shift

In the second quarter of 2024, Grupo Multi achieved a remarkable 21% net revenue growth from the first quarter, while EBITDA improved from a loss of approximately BRL 30 million to a positive BRL 30 million. Gross margin stabilized at 22%, with expectations of it climbing to 25% for continued products. Cash generation reached BRL 44 million, marking the sixth consecutive quarter of positive cash flow. However, challenges loom, including potential delays in supply chains due to external factors like the strengthening U.S. dollar and increased shipping costs, which may pressure future results.

Grupo Multi’s Growth Trajectory

In the second quarter of 2024, Grupo Multi experienced a promising growth trajectory, marked by a 21% increase in net revenue compared to the first quarter. This notable improvement reflects a collaborative enhancement across revenue, EBITDA, and cash metrics, a rare occurrence in the corporate landscape. Despite the positive results, the company acknowledges that it still has a considerable journey ahead to achieve robust financial health.

Financial Highlights: EBITDA and Cash Generation

The company reported a significant turnaround in its EBITDA, improving from approximately -BRL 30 million to a positive BRL 30 million, indicating a noteworthy recovery in operational performance. Interestingly, despite facing challenges from foreign exchange issues that impacted net income, the fundamental operations showed positive momentum. Moreover, Grupo Multi generated BRL 44 million in cash during the quarter, contributing to a total of approximately BRL 900 million in cash generated over the last 18 months, demonstrating the company's strong cash flow management.

Inventory Management Strategies

There was a notable improvement in inventory management, with BRL 153 million in inventory evolution during the quarter. The company aims to streamline its product mix, focusing on a small percentage of SKUs that generate a substantial share of profit. This strategic inventory reduction aims to enhance operational efficiency and leverage cash flows better. As a result, nearly half of the inventory is now held in-house, reducing excess inventory costs significantly.

Guidance on Margins and Revenue Growth

In terms of gross margins, Grupo Multi maintained a steady gross margin of 22% for the second quarter, with expectations to improve margins for continued products potentially reaching 25%. However, discontinued products reflected a margin near zero, emphasizing the need for a strategic focus on higher-margin items moving forward. Managers expressed optimism about ongoing projects aimed at optimizing revenue streams, particularly through low-risk options that promise guaranteed fixed margins.

Challenges on the Horizon

While the quarter demonstrated various progress indicators, executives expressed concerns about macroeconomic factors, including rising shipping costs (up by four to five times) and exchange rate volatility. These elements could affect the operational capacity and profit margins in the upcoming quarters, highlighting the uncertainty due to external economic pressures and local market conditions.

Commercial Policy Enhancements

The revised commercial policy has shown significant improvements, particularly in pricing consistency across their product range. Metrics highlighted an increase in appropriately priced products, from 30% to 75% in their gaming category alone. This strategic pricing initiative aims to boost gross margins and stabilize the market presence against competitors.

Future Plans and Strategic Directions

Looking forward, Grupo Multi's investment strategy focuses on replenishing stocks of high-demand items while cautiously managing cash flows. An emphasis is placed on refining operational efficiencies and capitalizing on partnerships with brands such as OPPO and Hisense to diversify their offerings and enhance profitability. This strategic focus positions Grupo Multi to grow its market share in a competitive landscape.

The Outlook: Balancing Caution with Optimism

As the company wraps up the earnings call, the tone reflected a balance of optimism about internal recovery and caution regarding external risks. Group executives committed to a continuous improvement strategy but acknowledged the uncertain impact that factors like exchange rates and supply chain dynamics may have in the next quarter. Moving forward, the company aims to ensure that operational improvements are not overshadowed by external challenges.

Earnings Call Transcript 2024-Q2

[Flavio Bongiovanni Lima, executive]

Good morning. Thank you for holding, and welcome to Grupo Multi's Second Quarter 2024 Earnings Conference Call. If you need simultaneous translation, the tool is available on the platform. Simply click on the interpretation button on the globe icon at the bottom of your screen and choose the language of your choice. If you're listening to the conference call in English, you also have the option of muting original audio. We inform you that this conference call is being recorded and will be available in our RI website, ri.multilaser.com.br, where you also find all of the materials on the earnings conference call. You can also download the presentation on the chat here on the platform in Portuguese and English. [Operator Instructions]

Note that the information contained in this presentation and any statements that may be made during this conference call are based on the business perspective, target for Grupo Multi and are based on the company's prospects and assumptions that may or may not materialize in the future. The legal disclaimer is available on our presentation.

Today, we have Ale, our CEO; Eder Grande, CFO; Eduardo Belelas, Controller; and myself, Investor Relations Director. I'll turn the floor to Ale to begin the presentation. Thank you.

[Alexandre Ostrowiecki, executive]

Good morning, everyone. Welcome to our conference call for the second quarter of 2024 for Grupo Multi's earnings conference call. Anything you like or dislike on Grupo Multi, you must admit that we're probably one of or the most punctual company in Brazil, 9:00 sharp. Starting our call, let's move on to the results.

So there is no doubt that the second quarter was a quarter of evolution. We are pleased with the results. Looking back, it's a positive release if you expect a company that is taking step by step to improve its numbers. Both the tripod of revenue, EBITDA and cash have all improved together. It's rare to have a scenario where all three things improve at the same time. There's still a long way to go to get to healthy numbers, but definitely, we're making progress.

I'll talk a little bit about this quarter that went through the perspective that what we're looking at for the future. Net revenue, as you saw, went up 21% compared to the first quarter. Gross profit also went up and EBITDA turned from approximately minus 30 to plus 30, so I'm very happy to see at least the operating EBITDA in the blue, when net income impacted exclusively because of exchange rate variation below 0, but it's 100% based on the exchange rate. And if it weren't for that, we would also be at positive levels.

Inventories with another evolution, continuing with this movement and cash generation of BRL 44 million. So we're speaking of approximately BRL 900 million in cash generated in 1.5 years. A very long cash-generating cycle. And I believe that now it's closed, we're rebuying a lot of products to grow, and we start to consume the cash, but it is without a doubt positive. So I'm very happy with these three indicators, the evolution of them to talk about. So there's no signs, and I said it very clearly in our CO, but that's a mystery and something that's been coming forward, what force is going to be stronger. The internal recovery at Multi, that's very good and some movement generally on the market, and the exchange rate, freight and the Amazonas river, so it's not very clear which force will be stronger in the next quarter.

Inventories, again, you see another inventory fund and evolution of BRL 153 million in the quarter. And the number in blue here is going back to the historical low levels of 49%. So slightly over or under half our inventory is in-house. It's the extensive inventory that doesn't -- that pays rent and so on and has a higher financial cost. 15% is in transit, so a lot of great things are coming in that drive our gross margin up and a lot of things are already purchased. So there's a reduction of mix. We're working on a radical reduction of mix.

If you look at our Pareto curves, we saw that a small portion of SKUs generate a large portion of profit. So historically, we're always talking about 20-80, 20% of items, it's normal to generate 80% of portfolio -- profits. But in our case, 6% of the items would generate 80% of the profit. So look at the size of the opportunity to reduce our inventory. So it was something that was not in the company's radar as much. But in this agenda, what we've been working on for 1.5 years, all of the boards and business units have to have proposals for a mix reduction to bring more volume of key items to reduce complexity, operating cost and all of that. So it's a good source of operating leverage for us.

So we're reducing our product mix being more assertive and rebuying -- buy and again, you're going to see the cash burn in terms of net debt, use it for the suppliers as well. So this is going to come up in the next quarter. This cycle will simply generating cash. I think now is the time to start investing again.

In terms of revenue and margin here, you see there was an improvement compared to the first quarter, but below last year that was highly impacted by the government. Last year, the second quarter gross government margin was spectacular, concentrating a lot of deals that occurred in the second quarter. And last year, the whole year was a year of accounting loss, the first quarter, the third quarter and the fourth quarter and the second quarter that had a drop in concentrated sales, but it was a good quarter. I was excited the market was -- everyone was. And the fourth quarter of last year was a great loss. We implemented the SAP system. We're burning inventory. And the second with huge government sales, we could catch our breath, but it did not continue in the third and fourth quarters.

And now if you compare it with the second quarter, we're below slightly, but the continued products are growing. We're going to see a little bit of growth margin here. We did 22% in the third quarter, 22.6%, 22% now in gross margin for the second quarter. If we look at the continued product items, it would be 25%. Discontinued products that are on sale, we have a gross margin close to 0, and the new projects coming in for plant optimization to complement revenue, have a small margin, but it's also a low-risk business with simply a guaranteed fixed margin that help us dilute and optimize factory costs. These projects are coming in and they contribute to reduce costs. So it's a moderate margin, but it's a guaranteed margin. So these are the three blocks for us to understand the second quarter.

EBITDA as mentioned, we had some room for breathing last year, but the first quarter reduced the loss from last year. So we went from almost minus BRL 300 million to minus BRL 20 million to BRL 27 million, and now BRL 30 million positive EBITDA starting to see the operation in blue again as far from the healthy levels, double-digit numbers, low double digits would be healthy for Multi were from it, but it's a building block to get there. So the EBITDA margin is improving greatly compared to the first quarter. Driven by that small sales increase, that helped reduce costs, the maintenance of gross margin and the reduction of expenses. So we're working strongly on reducing expenses.

And income, as I mentioned, still low, but there was more than BRL 90 million of exchange rate variation results. So we repriced all of our liabilities in U.S. dollars, and that impacts the bottom line. The dollar going up again in the coming quarters, the results will go back again. So I think it's a net number that's very relevant, but we need to look at the operational to understand. So it's critical for the operation. We want to see this in blue urgently, but it's 100% exchange rate variation impact was 80% due to the exchange rate. Otherwise, net profit would be the same as the EBITDA.

In terms of cash, we generated BRL 44 million in the quarter. It was the sixth sequential quarter with strong cash generation. That makes us very comfortable, everybody knows. I don't need to teach investors about the fact that cash is king, cash generation is critical. But today, we're at more than BRL 1 million in cash and amortization is BRL 300 million for this year, BRL 80 million next year and BRL 305 million after '25 so we are at a net cash position of BRL 313 million. We should have significant consumption this quarter, 100% to pay off suppliers. So we'll swap debt with the bank, with the debt with suppliers. But there's a net effect on everything we own. It's not to bloat our inventories. It's to reduce amortization for suppliers. And our belief is to bring good products affordable, good looking, nice, so with good margins so that we can start growing again.

If we look at Multi, using a little bit of this cash, there's no need to remain BRL 213 million net cash forever, but we're in the future, either distribute something or to start growing again with the profitability, everything is great. So that's the point here.

Now saying that we built a small share buyback program. So this cash is already discounting the expense we had with share buyback. So here, the breakdown per channel we'll see 2 important things. The first is the light blue, that's the project side, doubling in size. This is partnerships. We have OPPO, Hisense. We have a partnership with Memory. So the three strong partnerships. There are those deals that I explained. We manufacture for third-party products that we already know. We dilute the factories costs, reduce the unit cost of Multilaser lines. Thanks to this project, we get a lot of technology input to improve our lines, and we have a small guaranteed margin that's part of the whole, but it does offend gross profit, but it does not cannibalize the sale of other products. So I believe it's a positive contribution.

When I was asked earlier, all of these partnerships are the game changers in terms of profitability for Multi. No, as I said at the time, it's a complement. It's interesting for our portfolio. There are nonfinancial advantages, as I mentioned, and learnings and quality improvement, but it's not a game changer. Game changer for us is to strengthen our four or five major businesses that we still have a small share, but we have a competitive edge. That's the core. But we'll talk about it in a minute.

So you see here the growth in partnerships and you see government, everybody's sick of hearing every quarter, they are delaying on it and delaying on it. You can see the brutal difference from 19% government in purple here last year to 4.9% now. So it's tripping. There's a healthy margin. There's a pipeline.

People are saying, oh, but every time you say that, but it is really a lot of delays coming from the government. I believe that they should resume about 10% of the revenue recurrently, that would be normal. There's business for that, that's already hired, contracted. But orders take a long time, the imported logistics chain is with a 60-day delay. So this keeps being postponed. These are things that are going on in the supply chain. And for the entire market, everyone will be talking about it.

In large retailers, everything else is pretty much in line, the percentage of the share. Our DTC has doubled in size compared to last year, a little bit less than double, but it's double digit, and the trend is from this level up, and this is important to us.

Breakdown by segment, you're going to see here basically mobile devices, as we mentioned, it went from 26% to 13%. You see the drop in mobile devices share. And this is basically the end of the smartphone lines, the sales that ended the inventory, there's a very small volume of smartphones now that, amazingly, everything went up, the dollar, the price and so on. So it's no longer turning such a huge loss. We're breaking even with this remainder of smartphones. It's a product that I was working with a minus 30 contribution managerial margin turned into minus 5 to really sell out the remainder of smartphones.

So we're taking -- it used to be good, but it's not. So it's important to get rid of that. And government is also here in mobile devices with PC, tablets. The drop impacts this year. And the other lines proportionately growing their share. So basically, with the drop of mobile devices, we have a better division between providers and Internet, accessories. In dark blue, we have TVs and home electric products. And here, we're 13%, kids, sports and pharma. We have these new businesses that are all imported goods. That's the best margin we have today.

Mobile devices, we talked about the drop in revenue. And the margin slowly going up from 15% to 18% to 20%. If you look at past quarters, this was the line that were with minus 50%, minus 100% of margin, we have Eder here as well. Mobile devices when it was only smartphones was really heavy on the portfolio. So you look -- now it's a lot healthier. Removing those remaining items that haven't been sold out, but the portfolio will remain with 27% of margin above the company's average.

So when we say that the agenda is to sell out these lines and work with healthy products, this is evident that we are capable of doing that. So once we sell out the product that's already at 20%, it will go to 27% and will be completely within our -- what we need. 27% is a line that requires a tax credit. It doesn't affect the gross margin. So it gets close to 30% with the credits we are entitled to for research and development as the one. So I believe this line can be worth operating at a healthy level with the portfolio, and that's already evidence of this.

The biggest pain in terms of margin is here. It's no longer mobile devices. It's office and IT. For accessories, it's a wonderful margin. OEM is good. Pen drives, good. Security, the margins bad. Office supplies is great and gamer with a bad margin. So we have three margin for gamers bad because we have products that have been stuck since the pandemic and all the new portfolios coming in with gross margins of 30% and the average is above zero. So it's addressed. Gamer it's simply a matter of crossing this line, getting the new products that are starting to be delivered. Security is the same thing.

Security, we have an outdated inventory from the pandemic that is ending. This month, we already have a positive margin. The entire new line is turning 32% of gross margin for security. So that's the movement. It's a new world coming in at 30, 30-plus and the old world being sold out and ending.

So the issue here is networks. You see that the continued portfolio is getting at 14%. It's not good, not good yet. And the reason is that there's a replacement of technology in terms of networks. We have a large inventory at the AC line and this line is being sold at a discount, not at a loss, but a very tight because everything is being replaced by AX. So we have 4.5 months of AC lines in-house. And we will see this margin suffering. It's going to climb up slowly by -- until we get everything on AX with a healthy margin. That's why the continued portfolio is not turning a good result.

AC is not discontinued. It wouldn't be fair for us to market as discontinued the old technology. So I believe it's a line that has a squeezed margin, but everything is addressed, everybody is confident. Once we sell AC, AX will come in with a good margin. Gamers addressed, purity is addressed and we're going to see much better gross margins in coming quarters. You can call me on it for this line.

Home electric products is working well. We're in line. There's few discontinued items. Automotive, we sold everything at a loss. It's over. The other four are with a good fit, screens and displays, audio, portable appliances and health care. You see that the gross margin was 31%, 29%, 29%. So it's fluctuating at a healthy level. That's normal. And the continued portfolio is pretty much the same as the current portfolio. There's a low impact of inventory burns here. Gross margin is good. It's a matter of gaining share and bottom line.

And the imported products, kids and sports, it's doing great a margin of 40%, 37%, 39%, continued products at 39%, little impact of discontinued lines. Toys are going well. Sports was sold out, 90%. It's a discontinued line. We sold out at a loss, but it's not really relevant. Baby is doing great. Pet is -- we're selling out accessories to remain only with the mats. Wellness going well, drones is well, and mobility with a good growth margin and we need to ramp up.

So you see a company that has these four blocks. Out of the four blocks, three are at a healthy gross margin. One is with a bad gross margin of 11% with three villains, but they have all been addressed. I'm not one to give the pill, but I think in terms of gross margin, the path for us is very clear. The share buyback program that I mentioned, we have this 18-month project. We already did 1/3 of it with a slight share buyback, showing that our confidence in the company's projects. So we'll continue slowly to buy back shares.

A few recent events that we went through. We received the award, Consumidor Moderno for modern consumers. We're growing in social engagement. We worked on the Yellow May with the leading stroller brand. We have ambassadors with Cauã Reymond as the main ambassador. He is a huge Brazilian actor and there's already ad campaigns to be released. We also have a campaign with Edson Celulari and we're going to have 1 year with him. Targus, we're also launching in social media, embracing the brand. We are Targus distributors in Brazil as we are a distributor of Razer for games and DJI for drones. So the model is going well with strong brands that have returns in Brazil for us to run.

Historically, we do not take a lot of brands to distribute. That was a lesson we launched. Whenever we had a company that didn't have a strong name in Brazil, we lost money. So when we take a business that have a good name with an operation and demand, we do well because we add all of our local expertise, logistics, production, whatever needs to be produced in Brazil, post-sales, service, everything that needs to happen in Brazil with sales and promoters with a brand that already has its own demand. So that's been good.

All of the business are turning gross margins above 30%, all of the distributions. Wellness brands for gym equipment, Razer, Targus, DJI, so this is a winning model. We have our own brands for the entry-level audience, C, D and B minus classes and bringing A, B products to complement. So today, we have advanced conversations with three new brands. If everything goes well, we will announce in the coming days. I believe that the chance of this deal going through is 90%. We're finalizing agreements now.

So if all goes well, we'll bring three new small businesses that will contribute. Their distribution deals was a healthy gross margin with a captive demand in Brazil. Business Week and all the trade shows we are getting involved. Here, you see the actor, Cauã Reymond, who's recording with us were advertising TVs, portables, accessories, PCs. So always with that feel that an essential pillar for Multi are reason to exist.

Multi believes in one thing, outside of starting our call on time, but one thing that we really do believe in is that technology makes people's lives better. So we can get to the Brazilian population. The mass of consumers that always have that tight income or the money to pay the installments and we are able to bring good, affordable, nice, cool technology for them, that's new that they can buy, they can afford with quality. And we put this in consumers -- Brazilian consumers' hands. And that's our reason to be, and that's what makes me believe in the model.

Very integrated resilience against disintermediation. We take products at the factory door in Asia when it's imported, and we take the components and assemble and put it at the consumer's door. So it's door to door, end-to-end with great efficiency. So this business is very resilient.

Of course, we had specific issues with the pandemic. They bought a lot. Inventory was expensive, needed to sell out. We had the SAP disastrous implementation. We had really serious events, but I don't see any structural problems. If you want to get into more detail on the questions, I really do like our model. It's a winning model, and I believe we have great potential. So Cauã is the soul of this message to convey this message to all of our consumers.

Now talking about marketing, we have Carlos Soares, an entrepreneur who put together a very successful e-commerce company, and we brought him here to run our e-commerce for three years. And he turned the business of BRL 30 million a year into BRL 500 million a year and with good margins, great operation with excellent indicators, with the support of all of the other departments and the team we already had. Leo Castilho, who is seeing this program from the beginning. And it's a winning model. And now with unified marketing.

So Carlos is the VP of Marketing. He took in institutional marketing and the business unit's marketing and his agenda is to value the product, how can we streamline portfolio, choose the best product to improve the price at the end and gross margin? It's an important agenda to improve results we need to bring the cost down and increase revenue or do both at the same time. Increasing revenue is the mission that Carlos is starting to work on. He already did it greatly for the e-commerce and now he's doing that for Multi as a whole.

A lot of people asked about the commercial policy. We are celebrating five months of the new commercial policy, I announced it on the previous conference call that we had just implemented it and it was too soon to talk about it. But today, I can tell you that it is a huge success.

The new Grupo Multi's commercial policy worked great to defend our gross margin in this market where the U.S. dollar is going up and shipping costs because the commercial policy is to guarantee a healthy price at the end and fight for that price to make retail market all the sellers to be able to maintain that price so that everybody can tell. And the most important KPI here is the percentage of the portfolio that we can find on the Internet in that price at the end. So the numbers here show the improvement of our products that didn't fit.

Gamer, I don't have the base here, but we can say Gamer was at 30% of products rightly priced. And now it improved 45 percentage points. So we went from 30% to 75% of the product. Accessories, 53%. Toys, 46%. The overall improvement is up 18 percentage points. So if our portfolio was 50% of the price and 50% off the price mark, we went from 50% to 68%. I'll take the numbers later to tell you the before and after scenarios, but it's very significant improvements that impact a lot of things, imagine for gamers.

You have a combo of mouse and keyboards. For example, my mouse pad here is with our Warrior gaming brand. If the price at the end is BRL 199, and you have a lot of sellers selling it for BRL 120, BRL 130, that's chaos because the major clients, the major players will not want to buy it. They want to rebate to either give them a rebate and burn my margin or they send the product back. So that is terrible for the market.

This is critical for the company's bottom line. I believe that at least 2% of the bottom line, clean, can be improved simply by having the well-calibrated price at the end. So I'm happy that the commercial policy is evolving.

So that's what we had to discuss in earnings. I think it was a good quarter. I'll talk, looking forward, on the macro factors and more somber note. We don't know the impact it may have. U.S. dollar, there was an FX effect of tenants here. Shipping went up four or five times. We had expensive shipping in the past, but now it's very expensive and suffering a lot of delays, and the drought in the Amazonas river, it should anticipate. The drought period is coming up 20, 30 days ahead of expectations, and this will impact the supply of displays. That is a perspective of reducing supply in the market. So maybe competition won't be as pressured, but it will be more difficult to supply retailers.

So we're getting a complicated quarter in terms of price negotiation and that fight to increase the prices, there are delays, there is shortness in supply when our inventories are streamlined. So all of these factors, I mean, some aspects will improve gross margin. Other things will offend gross margin. So the goal here is to say, I'd love to tell you that we've made progress everywhere, improving revenue, EBITDA and cash. And now let's be happy, take another step forward.

But the fact is that the next quarter is uncertain. Whatever is going to happen is uncertain because there will be this macro event. And at this point, in August, we don't know what's going to be stronger. Internal recovery for Multi, the atmosphere is better. People are excited looking up versus the macro events that are expected in the short term.

With that said, let's move on to the Q&A.

[Flavio Bongiovanni Lima, executive]

[Operator Instructions] Gustavo, you can go ahead, please. Can you enable Gustavo's microphone, please? Gustavo Santos. Operator, if you can. I'll continue with another one, and then we'll turn to Gustavo as soon as it's ample.

[Unknown Analyst]

Fernando, buy-side analyst. The market's been very good for the third quarter. You're expecting a loss of revenue and margin. We're worried about that.

[Alexandre Ostrowiecki, executive]

I'm also worried about that. I rather name my concerns now then have a negative surprise in the third quarter. It's too early. That's what I said. I mean, there's an internal movement in terms of improvement of gross margin. Every month, more bad things are going out, good things coming in. So there's a positive inertia in gross margin. So if it wasn't for the U.S. dollars and shipping costs and climate events, I could tell you, next quarter will be another evolution. But how much is that going to impact us? We don't know.

Manaus now is manufacturing at full blast. The factory is great and we're selling well. TVs are selling well, and we have an alternative operation of ways to continue with the supply. It's not that we're going to have zero supply, but road shipping is almost 50% more expensive now. Everything is going to take a little longer.

So it's not a break. We're not expecting a disaster in sales or anything critical, but just the logistics chain becoming more expensive and some delays. We're also getting a lot of products cleared. There's a lot of great things coming on. There's good headwind or tailwind, rather, but it's more in terms of uncertainty. The impact will not necessarily be negative. And the U.S. dollar, we've renegotiated a lot of things. It went up 10%. Will pass through 5% now, 5% next month. The market is transferring these costs, but it takes a while to unfold, but you're worried. I'm worried as well. It's a legitimate concern.

[Flavio Bongiovanni Lima, executive]

Question from [ Tales ].

[Unknown Analyst]

Gross margin, 6%, tends to grow? Or is it recurring?

[Alexandre Ostrowiecki, executive]

It's recurring. Maybe 6% to 8%, maybe, but it's not going to be a huge margin. Our P&A calculates it on the bit. With 6%, we cannot make mistakes, right? You need to make sure the 6% is dripping every month without increasing fixed cost to make sure it's a good business.

[Flavio Bongiovanni Lima, executive]

So operator, can we turn back to Gustavo, please?

[Unknown Analyst]

I have two. One about the new projects of this revenue coming from Hisense and OPPO. I'd like to understand the size you expect this deal to get for the company. And a follow-up on that question. Looking at possible future partnerships, the factors, what factors would you take into account to make this decision? It's a partnership on the same model as Hisense or Toshiba, for example?

[Alexandre Ostrowiecki, executive]

It's a big potential. It's hard to give you a number now because they're ambitious brands that want to grow and their lines were used to doing. OPPO, we're talking about smartphones. We have smartphone lines ready, assembled all the investment made. We have a few more equipment to serve them, some particularities, but there's a plant already ready. And TVs, we're manufacturing the Multi brand, Toshiba that belongs to Hisense, and Hisense brand as well.

So it's a play of gaining scale, reducing fixed cost, receiving technologies to improve our quality to raise the level of the plant and the gross margin contributes to the whole. It's a big business, a big deal. I don't have a forecast. It wouldn't be prudent to give you a forecast. But it's something that may potentially take one, two years but become one of Multi's top pillars in terms of business. So we need to see Multi -- there's a risk of business, safety inventories, non-selling, it's our problem and so on, and a different business that compose scale with a lower margin, but also has its benefit.

The other partnerships is a completely different story. That's not an industrial partnership. We're talking about importing a family of goods that have demand. They have a captive market. And within a business unit, we already know and add it. So there's one that's about to turn up where we already have a relevant market share with the top 5 in the market, entry level. And we're bringing in a premium brand that's a great leader with a great market share in the same vertical, and we're going to operate that brand. And then the gross margin is extremely healthy in line with the kids line.

The other partnership will not have that offense of the gross margin. But these are deals where we are responsible. We'll buy the container. And if it doesn't sell, it's our problem. So there is a business risk.

[Unknown Analyst]

Two questions here. First, I'd like to ask you, Alexandre, to get into more details about the performance of smartphones or how the partnerships have been going, if you intend to expand with new partners and the outlook in terms of growth would be interesting.

And the second question, related to your comment. In the beginning, you said that after a series of quarters generating cash, the short term doesn't seem to follow the same plan because you probably will invest a little bit more and some products replenishing inventory. Can you talk a little bit more about it? What products you're talking about, the level of investment?

[Alexandre Ostrowiecki, executive]

Okay. So smartphones, we had the Multi brand, the Nokia brand. Nokia was sold out and that the inventory, there's nothing left. Multi has a small balance that we were selling out. And we increased the price a little bit to sell out. There's so little remaining that we can sell it without such a big loss. And we're going to end it. We're going to have the feature phone cell phone that profitable is simply important distribution. There's still a market for it, and we'll focus on OPPO. There's no other partnerships inside. We want to be OPPO's excellent partner and get OPPO to be a great success in Brazil, working very hard so that they're highly efficient, and we can make that small margin turning in an OPPO gaming market. It's a huge potential. Smartphone is BRL 40 billion market potentially. So any share that we have there, you do the math, what's OPPO's share in other emerging markets, Mexico, Turkey, Eastern Europe. So any significant share is a great deal.

As for the inventory replenishment, low-turning items will be brought down. In other calls, we would say, oh, we have too much of this, too much of that. This is no longer relevant to Multi. The products that have a slow turnaround are some government products that have been delayed, was about BRL 170 million of this inventory that is already stamped for government projects that we're waiting and that was the concern, it's BRL 170 million. Everything else is just one item here and there, but they're not material. There are items that take a long time to turn over, but it's immaterial.

What we're doing now is buying the main items that are selling well. So drones, portable appliances, TV sets, speakers, computer accessories. We're replenishing Multi with that affordable line that we need that's good, and we need to turn around. That was bought. Purchased in coming months, and this quarter, we have to pay them out. So we need to start paying the suppliers, and that's the cash use we're going to make now. I think I answered both questions, right?

[Flavio Bongiovanni Lima, executive]

So continuing here in the written questions. We have Filipe.

[Unknown Analyst]

Relevant losses that you attribute to exchange rates, what is the company's hedging policy?

[Alexandre Ostrowiecki, executive]

Yes, we do hedging. And if we have a sales contracted in BRLs, we lock the exchange rate, for example, government and corporate projects. Everything that the sale is locked in BRL, we hedge, but it's in material form. And market products that fluctuate computer accessories and so on the inventory is a natural hedge because the dollar goes up and we pass through that.

[Eder da Silva Grande, executive]

In addition to the financial debt, all financial debt is hedged as well. We don't hedge products for retail because there's no national manufacturing. So Multi and the competition will pass through the increase or any loss of value in the currency exchange. As Ale said, inventory is the hedge itself in that case.

[Alexandre Ostrowiecki, executive]

And they reminded me here, I forgot to mention, and I apologize, we are also closing another partnership. I said that the three partnerships that we have are two important sale. Actually, in addition to these three, there's another one that's a manufacturing partnership in electric mobility. So we're about to close as well. Some documents have already been signed. So I'm talking about form grounds, but we'll sign soon to manufacture, and the Hisense/OPPO style of contract manufacturing with a guaranteed margin. A local brand that already has its market in mobility, okay. So there will be four new partnerships.

[Unknown Analyst]

Rodrigo. Congratulations on the results and improvements in efficiency. About the reduction of product mix, if you can detail it more if you can make -- are you going to make provisions for lots if there's a quantified metrics and then another about the dollar valuation.

[Alexandre Ostrowiecki, executive]

So every quarter, we have like a mini Board meeting to our meeting for each business that I sit down with the product VP and the key executives and everyone from the business units, and they present the current mix. and they say this is the line I'm working on today, how many items, 200. Okay, I want to go from 200 to 120. So instead of having four blenders, and I will have one. Instead of five air fryer models, I'll have two. That type of thing, but that does not imply a loss.

There's no provision for inventory built in because it's not just selling out a product at, but taking five air fryers sell them slowly at a normal price, but you won't replenish the inventory of the five. You take the same volume of those five but bring only two brands, instead of bringing 1,000 parts of it, you bring 2,500 pieces of two models. It's the same volume. You didn't lose money in the five previous models, but you simplify the line. It's easier for registration or to explain to the customer the differences, PCP in simple. Logistics is simpler. So it's optimization.

I have no doubt that this paradigm will remove some of the long tail that doesn't represent a lot and focus on the bigger investments. About the dollar increase, if it can increase product margin. The products that we already have in-house that are paid for, the slow turnover product, it's good if the dollar gets more expensive because the entire market reprices and improves the margin. We are -- our inventory is resilient to FX. But we've seen it happen. So the last thing I want is to give you optimistic forecasts and then it doesn't materialize. So I'm trying to keep my feet on the ground.

2015, for example, FX went up 15%, and we had wonderful results in terms of EBITDA and growth, so this is a very dollarized market. The short term may face turbulence. That's why I'm more concerned with the third quarter, but the price will become regularized. It's the first prize. If the air fryer is BRL 250 to today, BRL 280 tomorrow, whatever. That's the most affordable air fryer in Brazil along with other brands. So there's no way around it. We may lose a little bit of revenue or delay it in a quarter, but it's not a structural issue. We have a series of cases where FX goes up or down and the business is resilient in that sense.

[Unknown Executive]

From Filipe, asking to explain the monitoring of trends and planning of inventory. It's looking at an outdated technology line inventory in 4.5 months in the AC line, what does this happen?

[Alexandre Ostrowiecki, executive]

Well, it's a good question. It depends on what you say, 4.5 months makes me happy. When things are severe here, smartphone, we're talking about 10 months. And then when the sales started to drop, it turns into 15 months, 4.5 months is not too bad. Basically, the logistics chains in our area are very long. So what's the structure? You have a purchasing PO and then you need to wait 60, 90 days to produce and change the components to ship it.

The shipping takes long. Freight, it was 1.5 months, it's taking 3 months now to receive it. Customs clearance is taking long. So everything is long. If I want to sell 10,000 pieces per month in March of next year. In my chain, I need to have 80,000 pieces bought. I need to have 7 to 9 months, and this SOP planned. Otherwise, I won't receive the product, or I will assume a stock out all the time.

If I want to have a good fee rate, if the client asks an Internet provider needs product. So we need to have a safety in the inventory, I need to buy 8 months ahead. The technology may change or they may surprise us. 10,000 pieces per month, turned down into 5,000 pieces. The 8 months that I had in the chain turned 16, I have 1.5 years at hand. So any slight mistake has a huge impact. We need to be on top of it always, trying to enhance these processes, but this 4.5 months is already with a lot of selling and promotions. It's not as fast smartphones, 4.5 months for AC line, I mean, it's selling 80,000, 100,000 pieces per month. By the end of the year, it's going to be all sold and we turn to AX. So for our history, this is not considered a severe.

And the U.S. dollar, in this case, actually saved us. It's helping us. All of the inventory is worth 10% more now. So that helps at least reduce the pressure of price drops.

The market as well, I mean, the entire mass market, AC1200 was wonderful. When we got into this industry, it was 54 Mbps then 128, AC300, 120. Now what's obsolete is AC1200 that is more than enough for a household. So it's a technology evolution, but I don't think it's a catastrophic issue. It's going to be at a low margin for some time, but that's it.

[Unknown Executive]

Filipe, again are talking about stabilization of results that you could increase capital distribution. What still needs to happen for this cash to be distributed?

[Alexandre Ostrowiecki, executive]

Sustained profit. Now we had the first EBITDA with the exchange rates and net income low. But if we have two solid quarters and we're consistently profitable, then you ask, is there anything on the table for strong profitable growth believable, conservative? Yes. Are we going to use that money? Yes. If no, then we'll still see about this distribution.

Any expectation for government purchases? Nothing. We don't know. We have the pipeline that's already -- we won BRL 200 million deal now for tablets. BRL 200 million is more than what we made the entire year, right, Eder? So one deal, BRL 200 million in tablets, it's more than the entire half year. So there's a huge pipeline of hundreds of millions. But have you heard about slowness when we talk about government deals? That's Brazil. I'd like to see that. But I much rather have the business slightly smaller than last year without depending on a huge sale to government.

If you look quarter-on-quarter, it was 30 EBITDA last year, 30 now, same income or similar. Second quarter of '23 with the second quarter of '24, but it can be compared at that time. I won't say it was cheating, but it's selling, but it went down hundreds of millions with a good margin that was sold since 2022, chaotic operations, SAP issues, everyone desperate. Now the operations smooth, key KPIs are working, things are working, retail, the business has grown. We didn't have the government sales really and it didn't drive.

If we had BRL 200 million governments in the quarter, everybody would be popping up a champagne. But I'd rather have normalized operations running our core business then depending on huge government sales. Government needs to be the cherry on top for our business, which should not depend on it.

[Unknown Analyst]

[ Marcos ]. Congratulations on the improvement of results. Question about [ Watts ]. How is it evolving? Is it in line with the strategy?

[Alexandre Ostrowiecki, executive]

No. Watts is not doing well. It's of very little relevance in the whole. It doesn't really affect us much. It's 1% of the company's revenue, but it's selling little. The electric motorcycle market is swollen. It's 0.2% of the whole. So the initial gamble was that electric bikes would start to gain share. We put a plan together. It has complemented a clean, efficient plant in Manaus with all the licenses, everything.

We created a portfolio. There's four very good motorcycles. The first -- there has some room for improvement. We're getting the second generation now. There's the W125 entry level. We're getting the second generation. We have the rail bike 160. We have the scooter and of those products, clients like them, they are surprised by the product, but it's swollen, so to speak. Not only price, that's not the main offender, but autonomy for you to be a delivery guy using the electric bike all day, it doesn't work. So it's for urban mobility, for people who wanted for the environmental aspect.

The market actually dropped in the market. Last year, it was 0.3. This year, it's 0.2 for electric motorcycle. So there was a hype, but we are working on that, struggling with the volume. And that's why we're getting this partnership. It was the combustion engine. We're going to use our factory. That's why I'm happy to say.

How do you know it's a good factory? What do you understand? I understand that a multinational company who's already here visited our plant liked it, will take their production from their current third-party plants and transfer to us because they liked us more. So the business will increase greatly via combustion that we're going to manufacture for a third party. That's the solution for this business, to manufacture for third parties.

Order of greatness of the impact of delayed ships this quarter and if it's going to be bigger or smaller in coming quarters?

Marcelo, we have BRL 160 million in orders that without fulfillment, our order line is BRL 170 million. It's never zero. At the height of the pandemic, it got to BRL 700 million. I remember that in December 2020. We got to BRL 700 million in orders placed, but why did you buy that much? Would you imagine BRL 700 million of clients, screaming at us, bring products. We started to buy everything, paying in whatever price. It was the big mistake. It cost us a lot later, but today, it's BRL million. I would say that healthy would be BRL 50 million to BRL 60 million. It doesn't exist to have it lower than that, below BRL 50 million, but we're talking about BRL 100 million here of items delayed, especially TVs, audio and some portable appliances.

[ Elizeo ] is asking about Multi's vision for 10 years. I'd like to know about succession as well if there's a partnership model? So that's a long question. I will summarize it in 1 minute because we're running out of time. But there's a lot of questions in one here.

The long-term view, I like the model, as I said, I think we're very resilient to this intermediation. I see us advancing in the chain, DTC. I see Multi as a major platform, as I mentioned in the beginning. We identify what Brazilian middle class once in terms of technology that can make people's lives better. We find solutions abroad that serve as or meet that need. And we are a platform that goes from the beginning to the end. We pick up the product at the door of our supplier, produce it, deliver and get to the consumer to our DTC. We have the 3P. So I think it's very efficient.

The only thing that affects this intermediation would be cross-border if they don't pay tax. If you pay tax, that's it. There's no way of shipping a product by plane, cheaper than what we can get for 100 containers of a product. But this is well addressed. The government now is finally taxing them, charging them. So I don't think I see cross-border reducing.

I tell our sellers, the marketplaces are all trying to bring operations to Brazil. I no longer believe that cross-border is a threat for us in that sense. I think we're going to be more and more plugged into the big marketplaces. Mercado Livre, Amazon, Maga Lu, Americanas, all of them. We're already plugged into more than 40 marketplaces. So I like this model.

We don't have a partnership model. It's a listed company with the executive succession, we do have a process. We have designated successor. If God forbid I die tomorrow, there's -- the next CEO is already selected, who do a job even better than me with our VPs, so this is all mapped.

To Marcelo asking about the first days of the third quarter. Sales are weak. We have that issue with the break of the FX and we're fighting to close August well and September. Taxing on international purchases will have any material impact on Multi's results. What a huge impact, but a positive one. We see a reduction on the gray market. We're monitoring every month, for example, drones. The market share of gray market and drones went down. DJI, the big competitors are not other drones or other suppliers, it's Paraguay, and we're monitoring what's increasing our share.

There's a lot of questions. How are we on time? We're going to have to wrap up. Let me see if there's anything we haven't addressed. Logistics, cost generation, we talked a lot about that. The increase in freight, if it affects the gross margin, it does. The price increase dilutes SG&A.

Someone is asking here, if this increase in the shipping makes us increase price and increasing price reduces SG&A. It may offset a little bit of the gross margin, but it's not such a huge effect because a lot of the SG&A is connected to the price as well, commissions and so on. Our G&A is low. 3.5% G&A. So if I increase shipping in 10% or have 0.3% in G&A of gain and the price adjustment, portables. There's a lot of topics here. Multi is a company with a lot of areas. We won't be able to address everything.

How do you do, Flavio? IR remains available for more questions. So in order for us to stop on time, I follow the order of the questions, and I have to wrap up, but our IR department is available to answer and talk. Yes, we're open here. You can get in touch with us at our website or e-mail and we'll answer each and every one of you.

[Flavio Bongiovanni Lima, executive]

Excellent. So thank you very much for your attention and participation on our call. Thank you.