Good morning. Welcome to Multi's earnings conference call on the third quarter of 2023. I'm Juliane, Investor Relations Director. I'm here with Eder, our CFO, and Ale, our CEO. Before turning over to Ale, I'd like to give you those messages to please refer to the disclaimer and representation on the last slide. If you want to ask a question, you have two options. You can ask for us to open your microphone to ask the question live, or you can write it down on the Q&A icon and we'll answer. Ale, you have the floor.
Good morning, everyone. Let's go through the information of the third quarter of 2023. It was a very challenging quarter, so we have not such great news, but with some positive points in terms of perspective, though.
We'll go through everything, and then we can answer all the questions that you may have. In the main highlights, it was a quarter of very difficult sales. Normally, the third quarter for our industry warms up, and as we always do, we projected a small growth in sales. However, you can see there that net revenue didn't come. We had 10.5% drop on revenue, which is very atypical. Normally, from the second to the third quarter, we see strong growth, and it was very difficult both for retail and government, which made some delays, some postponement. We'll see that the government was the main drop. These are businesses that are settled. They will happen, but they ended up taking longer with the red tape and all the procedures. It is not a concern in terms of revenue, but it kind of misfits with the quarter.
On retail, the feedback we have is very bad throughout Brazil. Empty stores, difficulties making sales, the customers are worried and avoiding the purchase of volumes. Despite campaigns, promotions, price actions, commission actions, it was very tough to be able to get the figure this quarter. So that was of great concern, and it's the first point of attention. We've been talking about that a lot, looking at the sales and earnings of retailers and other companies in the area, except for some specific niche that are doing well. For example, air conditioning, fans, because the heat is big. But in general, the electronics retail is struggling. Gross profit was very low, basically impacted by the villain here the last quarters, the mobile devices line, more specifically smartphone. So we had to lower prices even further. We talked about it in the last quarter.
These devices are being the bad guys in terms of margin throughout the year. When we look at the gross margin breakdown by category, this will be very clear. We see relatively normalized margins throughout the company, and one family with - 50 gross margin that drags everything down. We also had provisions last quarter. You ask, oh, do you think smartphones are done? Yes, we lowered the price at a negative margin. We made provisions, and we plan to sell until the end of the year, about 100,000 devices per month, 90,000- 100,000, to close until the end of the year on that price that we had. The sales did not happen. We started to sell 30,000, 35,000 devices. We lowered prices further to try and drive it, but it's still not selling.
It is the villain that at least it's not recurring because it's going to be removed from the portfolio. In terms of inventory, you can see that there's still a lot of inventory in this category, BRL 600 million , and one-third of it is smartphones. The problem is around BRL 200 million in smartphones that will continue to be sold at a negative margin. And the other 2/3 are tablets that are healthy and basically PCs focusing on government. That's also a balanced sales with an okay margin. It's not a negative growth margin, but it is falling behind for the government. EBITDA for the quarter was strongly negative at BRL 116 million . Basically, two problems. The sales not happening and gross margin being pressured leads to this EBITDA despite the significant cost reductions.
Today, for example, we have a payroll 26% lower, 23% lower than we had in January. We cut expenses. There's still room for savings, to find savings. But even with all that, the EBITDA is negative. It's a very disheartening result. We were excited the second quarter was blue. We talked about a slight improvement for the third quarter, believing that the sales would come, that there would be a small growth in sales as there always is. But the market didn't follow suit and with this possibility, those lower sales, squeezed margins, more discounts for sales, negative EBITDA, very bad. But on the other hand, as we always talk about the supreme importance of cash, we had another reduction in debt. We closed the quarter with BRL 40 million in net debt, a reduction of more than 80% for the quarter.
And I'm pleased to inform you that today we are with a net cash position. Our group is a company with net cash, and we hope to maintain that to the end of the year. We're working for it, and this net cash was obtained without any abrupt change in the policy of payments or anything. There's no cheating, no turning, going around things. It's simply more discipline in expenses, purchases and letting the inventory sales do their work. Without a doubt, the investors will be happy to see that we're net cash now. At the end of the day, the company generated about BRL 600 million in cash. Despite bad sales in terms of sales and EBITDA, the company did generate hundreds of millions of cash throughout the year. And the reason, of course, is inventory reduction. There's no miracle negative EBITDA.
And to generate cash and the working capital, we had a reduction of BRL 470 million in inventory this quarter, a lot of it with a negative margin. The BRL 470 million, to great extent, generate less revenue, especially mobile devices. But we are selling out the bad inventory, so to speak. And notice that the blue part, that's the in-home inventory, the less healthy part of our business, has been going down, and we went back to the levels of last year. We'd like to take that down to about 50%. If you ask me about what would be healthy for Multi, it would not be the 40% in the beginning of this historical series that we were understocked, but it's not 70% of the peak. 50%, 50/50. 50% of the inventory at in-house and half of it in transit would be the optimum point for our business.
There is still room to reduce the inventory. We have BRL 200 million smartphones to sell, generate cash, and get it out of the way.
We have these inventories of BRL 400 million for government to finalize. On the other hand, we need to replenish and buy products that are selling well. There are a lot of purchases to be made, and there is also a lot of room to lever the business in terms of suppliers. Remember that over the last year, Multi paid off more than BRL 1 billion of suppliers that were to be paid. We reduced this bill in BRL 1 billion. That was also an important disbursement of cash, but that was already done. We are at the historical lowest level of suppliers to be paid. As we release the sales, there will be more room to clear this inventory in transit without a high cash cost.
Here in revenue and margin, looking at the last 12 months, we see a drop in revenue of 17%. The big villain, that is the crushing of the company's growth margin from 26.5%. I am sorry, I think there is something.
His microphone was off.
Just one second. 17%. Just confirming my audio. Can you all hear me well? Because it went mute for a while. There was a power off here. Anyway, 12% of growth margin. Again, on mobile devices, and then we will see the margin by segment later. Looking at the quarterly, it is from 30% to 27% last quarter that it had a lot of government involvement. Mobile devices were less diluted. Now we did not have government in this quarter, so there was a slight decrease in revenue when it should have gone up, and this squeezed margin. This slide is extremely important.
Looking at it by segment, what we see is that office and IT has a margin of 20%, slightly lower than last year. The biggest fight now in the supplier market, providers market, there is a fight of prices at this time. So it is a slightly lower margin.
Home electric products, led by television sets and electrical appliances. It is a more saturated market. It is tough to sell. There are more discounts. That is not a bad margin, but it is below what it was last year. Kids and sports is doing quite healthy, at 38%. Notice these two bars here. The first two have tax incentives. If you look at it, you will see that kids and sports is a lot better than the other two, but there is also the math of that return of taxes, the tax credit that forms the growth margin, and that is about 7%.
You would have to compare apples and apples. You would have to add 7% here and 7% here. This would be 27% of margin in office and IT, 30% in home products. Kids and sports are imported products. The majority of them do not have incentives for technology. So that is the right margin. So it is 30%- 38%. That would be the fair comparison. Mobile devices, we see here - 47%. It really is very bad. But tablets are healthy. PCs for government are healthy, but it did not occur this quarter. There were very low sales. Everything was delayed to December, November and December this year. The final margin here. This is just an intellectual exercise, but to compare margin ex mobile devices, 27% in the same quarter of last year compared to 24%.
We lost 2.5% of margin from this quarter here of 2023 compared to the same quarter last year. This 2.5% reflects this slower market that we see right now, which is basically TV sets, home product, and internet providers. That was a less difficult market last year. Here with the EBITDA results that we talked about. EBITDA last year was 12%, noting that we have been for 15 years, the company has been running an EBITDA between 12% and 15%. That is the EBITDA that we see on the last 12 months of 2022. It is the normal EBITDA level that Multi always delivers.
Now we are going through this year, and this quarter completes one year of very squeezed EBITDA levels that started at Black Friday last week, continue with the turn of the SAP system in the beginning of the year, second quarter with a very small EBITDA, and the third with big losses as well. A question that is made clear is that, is that a structural issue or conjuncture? I believe that from everything that I see in the industry, if the business fundamentals remain the same as always, we are the best suppliers, we bring parts, and produce at the best cost, the best logistics, and we sell in Brazilian retail consumer products. Nothing structural changed. I am very welcome to be challenged in the Q&A session. It happens in this type of meeting.
To review these assumptions, but Multi continues to be a formidable platform to launch products and deliver to the market, and there are not more efficient paths today that we could do. We are going through huge expenses with SAP that brought huge losses in the system migration. In this post-pandemic scenario, inventory is being sold very slowly at bad margin. I am very open if you want to challenge that. I can hear the, I want to know where we are at very well. Looking at the quarters, we are talking about -1 3%. We saw that. Profit, basically, it affects the variation. The BRL 116 million loss, we had about BRL 70 million of exchange variation, depreciation, some financial expenses. This profit, except for FX variation, there is not a lot of explanation. Some quarters are better, sometimes they are worse.
EBITDA is also always more significant for the variation of the operation. In terms of debt and cash, we have about BRL 900 million in cash. Our timeline for debt amortization schedule is very comfortable. Hypothetically, even if we do not raise a cent in new debt, if the company decides to do that, we will be able to pay off everything by 2025 very comfortably. The company's cash situation makes us comfortable to work on the turnaround of our business. Basically, short-term is equated, long-term is equated, and here we see our current leverage that is - 0.08%. We are net cash right now, so there is no leverage at this time. That also makes us comfortable to operate. Now looking at sales per channel, we can start in this comparison with the second quarter because this is important.
Note that small and medium retailers should have gone up 20% in the sales in the third quarter. That's what happens traditionally, and we only increased 0.6%. National retail that should also have leverage pre-Black Friday, supplying for this big holiday season, it went down 8% in the third quarter. This is very atypical, but it's consistent with the news that we're hearing from big retailers of losses, of struggles, excess inventory, and they're being very conservative. On the other hand, when we talk about retail, I'm very happy to see that our direct- to- consumer, despite system issues, logistics that's impacted, evolved 6% up. So today we have a smooth operation. It became smoother towards the end of the quarter. Our ratings went up in October drastically. If you buy a product today, in 24 hours, it's delivered in the Greater São Paulo area with Multi's own logistic system.
There's a lot of positive feedback. And we see D2C going up in the midst of all this generalized drop. ISP, as I said, the market is weak with a drop of 20%. Corporate is not so big for us in terms of size. And government, that's very important, is down 34% in the quarter. So those delays were the worst impact in this quarter. It was government. And looking at the earnings per segment, we see a drop in all areas except for kids and sports. Fortunately, it's the area with the highest margins, but it's still the one that has a smaller share of our revenue. You'll see that at 15%, it's already growing compared to last year. It was 9%, now it's 15%, showing that our group is capable of running smooth operations when there's no national manufacturing as well.
So that would be a question from investors. So you put a business together and get incentives. Is that all the business is? No. What's growing the most today, has the best margin, are imported products that we're a marketing and sales company. Toys are growing, babies growing, pet shop growing, sport growing. All of that with imported products that we distribute and which are generating excellent margin results and sales increases. Of course, the others going down. Home electric products that I mentioned, with TVs and home appliances. There's a lot of struggles in the retail. There's also some understocking in this case. We have few products with a good margin. Office and IT supplies, the biggest pain is the provider business, and mobile devices that we talked about, led by government, and the difficulty to sell smartphones.
Just bringing more color per segment, you can see here the gross margin that we talked about, - 47%. There was a little bit more government last quarter, so there was a less weight of smartphones as well. There's a lot of difficulty. We had a provision of BRL 61 million this quarter, already expecting the price drop. We're only giving you more color. We're talking about products. For example, the biggest inventory that we have, it's our Multilaser G Max 2 product. It was imported to be sold for BRL 899 in 2021. And this product, with a series of issues and strike, and the custom service and turnkey of the system, weak sales, was being left behind. And today it's sold for BRL 350.
If you go on the internet and look at Multilaser G Max 2 smartphone, it should be sold for BRL 900, but it is BRL 350, and it is still weak turnover. It explains the numbers a little bit. We need to clear this inventory, get this out of the way, and get our business to a healthier place.
Office and IT supplies, note that there is a slight drop in margin compared to last year, but it is almost irrelevant, from 19.9% to 19.7%. But a drop compared to the previous quarter, led by a biggest fight in terms of prices for internet providers. In this case, networks is the main line of this family. Security is also important to mention. We are not producing security cameras and DVRs. We are going to streamline this and work only with imported product, because the ticket went down significantly and now we are studying the viability.
It is cheaper to import those products than to produce them in Manaus. Here there are some good things. For example, computer accessories, office supplies. It is even better even than kids and sports. There are a lot of good things here. Home electric products, this was concerning because of the drop in margin, but we are talking about very specific scenarios. Some TV models didn't sell well, some portable appliances didn't sell well. A lot of products are being replenished with margin, so I believe it is a promising line for us. Screens, we have a small share of the market yet, about 23%, but there is room for growth. We have a very good partnership with Hisense. That is the second and the largest in the world. Speakers, we are doing quite well with Pulse. It is very well-positioned, and the market likes the brand.
Portable appliances, we are selling out the fans that were made last year without plastic injection in-house, so it is a specific margin villain. A lot of volume, big volume of fans that last year were produced, and the parts were injected abroad, so there is additional freight, additional injection costs.
Today the fans are produced 100% in-house and the cost is a lot better. The trend is for it to improve. Healthcare is doing well. Automotive, we are getting it out of the line, so it is an irrelevant sector. Finally, kids and sports toys did great. They are growing. Sports and leisure, we are streamlining the product here. Baby is doing well. Pets, there is room for improvements in terms of margin. We are replacing obsolete production lines to a new line that is going to have a positive impact. Wellness is on target for gym equipment and so on, making pretty much the same as accessories.
Just as a curiosity, as trivia, different though from our company, if you think about Multi, a lot of people will think about mouse and keyboards and so on. But this quarter, our sales of gym equipment was 80% of our PT accessories sale. It is interesting that the company is reinventing itself, entering new niche market with a margin, doing good businesses in areas where we weren't as big before. We are making BRL 27 million per month with gym equipment, so we are doing well. Gamer, we had a lot of older inventory. We renewed the line, so the margin is initially not good, but it is recovering to a good margin. Drones and cameras, the big surprise, with a sales volume that is very significant. Finally, to close the news, net cash, as we mentioned, is extremely important.
The inventory reduction side, with a reduction of fixed costs, we cut down twice, once in February and another round in October to cut costs. Today, there are still big opportunities, especially in operating costs for systems and logistics that still remains there from the ERP migration. There is a lot of external consultancy services that are high investment to continue to stabilize ERP. It was bigger. It is no longer such a big impact on the operation, but there is still a lot of work to be done to gain logistic efficiency. So we are still operating with a lot of redundancy, with external inventory and leases for logistics. As we reduce inventory and get the ERP running smoothly, we can bring a lot of production, especially with external partners.
A lot of IT external partners, hundreds of thousands of BRLs that we have to spend per month should go down to close to zero, as well as warehousing logistics partners that we will be able to bring down. So there are savings on the table of some dozens of millions per year in these two areas. It will not happen overnight. It is a long process, but it is coming. Finally, a very important point is the review of the commercial policy. Today, we had three months of discussions with the commercial department, product department, clients, and sellers, and we understood that we need to break down our portfolio and separate what will be D2C, what will be for retail, what price exactly will be charged for each customer to get the right margin and preserve the price.
Now that we have less inventory, there is not such a big pressure for sales. We want to bring the price at the end a little bit higher, preserve the price so that everybody can work at healthier, fair market prices, and get to the right margin so that all of our partners can work and also improve our profitability. As much as there is a lot of fixed cost to reduce, the majority, the bulk of the change for the company turnaround is based on growth margin. If we have 12 growth margin in the last 12 months and we want to go to 25%, 26%, 27%, we need to work on the price at the end, cost. That is where the money is. So this review of our commercial policy has a lot of developments and impact in the process with our customers and so on.
But I think it is the main change that we have in the commercial logic. So that is what we had to present to you today. I will remove the screen sharing and move on to the Q&A. Thank you. Well, as always, I will just enter the order of the questions received, and if you want to open your microphone, just write it down. I will go through the questions that are on the chat. Andre, good morning. Thank you for this opportunity. I think he wants to open the microphone, right? Can we get Andre Sales' microphone up, please?
Good morning, Ale, everyone. Thank you for this opportunity. I have two points. You already talked a little bit during the presentation about them, but if you could get into more details. First is the network line.
You were able to deliver a sequential recovery, but it ended up dropping in the last quarter year-on-year. Could you tell us a little bit more about the dynamics and what you expect for this segment, if there was any one-off event last year, any price adjustment that you had this quarter? My second question is about screens or displays and video. We saw that the margin went down a little bit quarter-on-quarter. You talked about the policy of a more competitive price dynamics, but was there any logistics impact due to the manufacturing in Amazonas or this line?
Excellent. Well, Andre, this drought in the river in the Amazon scared everyone, and initially increased the freight costs in the highway system because they had to migrate from ships to trucks, but it did not interrupt supply.
We can't really blame it on the drought and the river, this reduction of the displays, the TV margin. The market is very competitive with price drops and big international brands that did that. As for the provider side, what we feel is that the high interest rates and less increases or expansion of networks, the companies are investing less now in new connections, decreased the demand for equipment. What offsets that a little bit is that technology now is changing from AC to AX. A lot of the providers will start to upgrade their routers for the AX1800 product. Although the park is not increasing, there is a market to replace the current park to the AX model. That increases average price a little bit, and we have new sales, but it is not a very busy quarter for providers. Move to Gabriela's question, please. Thank you.
Gabriela from Itaú BBA. Hi. Good morning. Can you hear me? Thank you for taking our question. Congratulations on this opportunity to get into the net cash position. That's very important. We have two questions here on our side. One of the main points that caught our attention in these results on the more negative side was the margin of mobile that you talked about due to the smartphone family. We had that perception from previous conversations that it would take about six to nine months to kind of digest this segment. Considering the current scenario and the macro situation, do you believe this timeline still makes sense? Can we expect to see an improvement in this side of inventory in this timeline looking forward?
The second point, Ale, you also talked about how we should see an improvement both in the EBITDA and ROIC and the balance and looking forward. Do you think it makes sense for us to expect a capital reduction or maybe an extraordinary dividend payout for shareholders? Just to get some more color. Thank you.
Thank you for your question. Smartphones, when we got to September and we're monitoring this problem year-round with a lot of concern. In September, we developed a war plan to sell within four or five months to end it in this year. We need to sell 100,000 per month. Let's bring the price down, get a provision, work on miraculous prices, and 100,000 pieces will be sold per month. Starting at the end of July, we made this decision, and then in four months, we'll sell out everything.
We did not get people on board. We have 32 salespeople specialized in smartphones, commercial managers, the product art, and the business unit, but the market did not come. We had orders for 1,000 pieces here, 2,000 there.
Even bringing the prices down, we sold 30,000- 35,000 per month. I do not have the exact figure now, but I think we have from 400,000, we have 250,000 smartphones today, and if we go at 30,000 per month, it will go to the beginning of next year. Of course, if we are turning healthier inventory, these 30,000 pieces have a smaller weight. It will offend results next year, but with government coming back in and everything else getting their margins normalized, it is going to wait on less until it gets out of our hands and stops being an offender. As for the capital reduction, we did not close anything yet.
It could be a path with this cash generation and the resumption of profitability and the company going back to healthier margins of inventory composition, inventory in transit and in-house. It would not be a problem for us to think about it, but we need to deliver ROIC. It is very clear for us. There is no way. At negative earnings even not. Even if the results are positive, we need to deliver healthy ROIC compatible with our risk level. We must do that by improving EBITDA and reducing the capital dispersed, or both at the same time. With the capital base that we have today, with BRL 3.5 billion, there is room. We are closing the budget for next year and everything. Understanding that we will be with a net cash position, the ideal is that we produce this capital.
It could be a dividend distribution, a payout, and we will see whatever is more efficient for shareholders. At this time, the company's agenda does not project great growth, but getting the business to run in a healthy level. Healthy business, if we can reduce that capital and return some of the capital to investors, we see that with great eyes, and we will seek that as long as it is responsible. At this point, with the negative EBITDA, it seems irresponsible to make any announcements in that sense. Once EBITDA is stabilized and if we see that there will be cash, that will be a good thing to do.
Excellent, Ale. Thank you.
A question from Raul here. Good morning. How do you evaluate the continuity of smartphones? Will the company continue to invest in this sector?
Unless there is anything new coming up that is different, the idea is to close this sector. Remove it from our bases.
From Mateus. New questions. To talk a little bit about the new commercial policy. Multiplik program, will it cease to exist?
Let us go one by one. The Multiplik program is a very successful program for more than 15 years, where we have more than 160,000 sellers. These sellers are working on retail, and we encourage the sale of Multi products, and we want to continue investing on Multiplik. There is no plan to drop it. The new commercial policy basically is based on three pillars. The first is to define the price at the end in a more assertive and, so to speak, sacred form. For example, you have a price at the end for the product that you sell. Price for sale, you say BRL 399.
If the market is complying or not, we don't take it as strictly. What's the work we have to do? What's the real market price of that product? It's BRL 349. Okay, so let's set those BRL 349 and take it very seriously and try to preserve it as much as possible to have everybody selling at that price. Then we have a second pillar, which is to not give discounts and open sales conditions according to the size of the customer. The customer can buy a lot of products, and they don't need to change the margin. Maybe it's an e-commerce customer that buys and sells and trade products. Then if they buy at the highest discount because they buy a high volume, what they're going to do, they'll buy it from Multi and sell it at a very discounted price.
Instead of BRL 349, the price is going to be BRL 319, BRL 299. The market tries to keep up and depreciates the product. So the first is to define the product price. The second pillar is to give to each customer the margin they need. The third is to reduce the scopes. Today, our sellers have a lot of autonomy. We have a seller discount, then you get the manager discount, the director's discount, the quantity discount. They can take a budget and put it for the product to bring the price further down. Prices oscillate too much, and we're going to be stricter. What's going to happen? On one hand, it's bad, because when we implement this policy, we will certainly have some months of a drop in sales. If your investor is seeing the revenue going down, he's going to see it go further down.
Everybody needs to be prepared for that. But the history tells us that after two, three months, the market starts to run out and see that it's a serious business, and the customer cannot get all the discount they want, but they can sell for more, and they start to make money. It starts to become healthier. So that's what our policy is. We will be very disciplined. The IT department already parameterizing controls and approvals. The scope for discount is tiny. If they go through that, it's going to come either to me or the Commercial VP. Only two people will be able to approve discount requests below that scope. So with that, we expect to get the market more disciplined with the price at the end at healthier levels. Of course, you cannot charge whatever you want. If it's BRL 399, it's not BRL 599.
But you can, with the 5%-6% price improvement change, brings a huge impact to the bottom line. Then of course, it is going to be healthier and commissions will get better for the team. Everybody will be more motivated, the representative team and so on.
The second question here from Mateus about the inventory of BRL 400 million for government. What margin do you believe you'll get from this sales?
I don't have this information here, Mateus. It would not be a negative margin, but I would have to go after that information and send it to you. But it's nothing to do with the smartphone part. Do you have anything, Eder, that you could say?
It would be a margin close to 10%. It's not going to be spectacular margins, but it's going to be quite far from what we're seeing. There is already some provisions for this inventory, so it is balanced.
From Thiago then, Good morning. In your understanding, should Multi present relevant changes to the business model, or does the path seem to be small adjustments to the operation?
Thiago, I believe that the big change is the go-to market. We need to structure it very well, how we are going to coexist between D2C and retail. A company that has a big size of D2C with exclusive products that do not offend retail with a portfolio to sell direct- to- consumer and another portfolio, very disciplined for retail, that is the path to get the company in a healthy place. Of course, to finish stabilization of the ERP, there is still some leftover. Stop cleaning out the inventories purchased in 2020, 2021. That is already in the plan.
What we have in terms of new is the commercial policy of getting to the market, leveraging our traditional strength, the machine to launch products, the logistics of machine, of fast deliveries, affordable cost, affordable structure, get to the market accommodating this new D2C trend and making that a strength for us. Because today we have a logistics team for that. We already set aside 8,000- 10,000 orders per day with excellence. I keep track of the line every day. We are making or billing 99% of the products in the same day. You buy from Multi Monday morning, you get it in your house Tuesday afternoon if you are in the greater São Paulo area. So that is a strength we need to leverage without offending retail. Retail will always respond for more than half of our volume, and there is enough room for both.
You see around the world, e-commerce grew in the pandemics, and then it went back to normal levels. A lot of people want to go to shopping centers, and they want to see a pile of products in the storefront. They have that pleasure of buying it in brick-and-mortar stores, and that is very important. It is not even our electronics category.
In the United States, I read the last report, about 54% of electronic sales there still occur in brick-and-mortar stores, and this share increased. In the pandemic, it was at around 50/50, but now it is 54%. So there is room enough for both.
From Mateus, we have some questions. If there is room for a more substantial drop at Multi's inventory or minimum level, what about the expensive inventories, if they are being eliminated or if we will see pressure by other inventories?
Well, today, what do we have in-house today? Being quite honest as always, we have smartphones, these government products that are delayed, and a little bit for providers. It is three relevant inventories. Everything else is even below ideal. We are replenishing at a margin right now. So there is room for inventory drop a little bit, but not a lot. These three lines have to go down, but there are other good things coming. Are the inventory being eliminated? We will see pressure. We will see pressure from smartphones. There are those BRL 200 million. The problem today has a name. It is called 200 million smartphones that will be sell for less than BRL 200 million . That is what we have in terms of a serious problem right now. Tax contingencies, excessive contingencies. I [audio distortion] Eder.
So yes. Basically of this BRL 1.8 billion, I would say BRL 1.3 billion is three processes where we have a level of confidence, a high level of confidence that will succeed in lawsuits . I do not see that it is the same, that advisors do not see any change in prognosis in terms of loss.
Surprises may come up, but it is not in our plans, even for the legal advisors. Every quarter we have an update on these lawsuits. But again, of this BRL 1.8 billion, three of the processes represent BRL 1.3 billion.
Now from Marcelo, two questions, gross margin for PCs and tablets went abruptly down quarter-on-quarter. What explains this drop?
BRL 600 million in mobile inventory. We already mentioned that question of BRL 600 million. It is BRL 200 million of smartphones and BRL 400 million of PCs for the government. We talked about the mobile margin.
Why returns and rebates have increased so much this quarter compared to gross revenue?
It is a great question, Marcelo. The majority of these returns, there are two types of returns. There is the return that is an actual return. You sold the product, the customer does not like the product and wants to bring it back. In our case, this is a very small number. What we have is invoice cancellations. This quarter, it is also an important offender, and it is not pertinent to the quarter. In the first and second quarters, we had a lot of invoices in the ERP turn with invoice issues, with the numbers wrong. It went to the customer and came back. A lot of cases where we issue the invoice, it is there as planned, and then it was canceled now in the third quarter.
In other cases where you send the invoice to the customer, they look at the invoice and there is a tax error, and you know that the tax scenario in Brazil is unreal. Any cent that is wrong in this parameterization generates the invoice to be turned down. A lot of things came up on the first and second quarters, and it was returned in the third quarter. I believe the trend is for this to drastically drop coming on. Marcelo also asked about the lawsuits not provisioned, the change in the CARF quality vote rules. Do you want to talk about that, Eder?
Despite this change, this BRL 1.8 billion, BRL 800 million generate lawsuits when we had the old rule of the quality vote. The fact that there was a window for taxpayers and now it came back, it does not change anything.
And BRL 1 billion, that is one specific process or procedure. It was recently CARF. We are waiting for it to be put into the schedule. It should take time, but it is very favorable to the company there. We understand that our advisors understand that the probability of success is, well, they say we have good arguments. It is not even a tax. Actually, this BRL 1 billion is a fine that in theory did not generate any physical law or loss. We have very strong arguments to bring it down. We understand that the fact that we eliminated the quality votes here should have no impact and no change in prognosis. Again, every quarter we update the more relevant procedures, and we get opinions from two or three law firms, and nothing indicates that there will be any change in the prognosis.
Great. From Fernando. Of the BRL 400 million of inventory, what is the margin level?
Eder already talked about an estimate of 10%. Thinking about PCs and tablets looking forward, what would be the level expected? We do not buy anything that will not give us at least 25% of expected gross margin. In the day-to-day, there may be some variation, but I imagine that the segment will not be different than home electric products or computer products. It is a very similar behavior. Government business gains at this level, or PCs and tablets and retail will also be at around this level.
From Cesar, the impact of the system migration, have they finalized or are we still going through problems?
Cesar, today what we have in terms of impact with our system is that we do not have all of the ideal efficiency and logistics. Some works are complicated.
If you place an order, we have two large warehouses in Extrema today, and if you place an order for a product that is there in the main warehouse, in the DC, you bill it, invoice it in one day, and ship it. But if you order something from the other deposit, we need to have a transfer, and this is done manually to take it to the main warehouse and bill it. It is a gap in the system today. We need to develop it so that the system understands automatically where the product is, so it is shipped from the right deposit or the distribution center. It is not critical. We bill it normally. Sometimes it takes one or two days more when it is not in the main DC, but it generates rework.
The impact today is rework, additional personnel, duplicated efforts, reminiscence, issues from impacts in clients in the market, but the system is not the big villain today anymore. There are impacts from the past, but it is not critical.
From Luis, considering Multilaser's historic assertiveness, some products not performing well in the last few months, what will be the new innovation and investment strategy? What can we expect? Innovating products, more competitive products?
Luis, we are always in conversations. We have two big conversations right now with potential new lines. Very early stages. Of course, I can only announce it when we have anything final and signed. I cannot make any promises right now. I think everybody needs to count on strong repurchase, assertive of Curve products, margin recomposition, removing products that are not performing from the lines, healthier gross margin, going back quarter-on-quarter.
That is what we need to deliver right now, and always looking at whatever is new. Yesterday, I was talking to the Commercial VP of a big brand abroad with a strong brand of an interesting vertical, talking about a potential partnership with us. I am always looking, but the agenda right now is to clean house rather than coming up with new things. Do not be surprised if we make an announcement in coming months, but I cannot rush into things, and everything would be considered an upside.
João from Auri Capital, good morning. How is your relationship with retail partners after a first half where they were not served at 100%?
João, I thought they would be more upset, but a lot of people saw ERP migration, SAP migration. They know it is a headache. Overall, we have a wonderful showroom here in Faria Lima.
I invite you investors to come and visit us. We're always getting clients, and they're all open to working with Multi today. There's no case, zero cases, from everybody I talked to that has closed doors for us. Nobody told me, oh, look, you really hindered me in the first half, so I'm going to look for other partners. No. We had people saying, look, guys, first quarter was very difficult, a lot of headaches, but let's move on. Let's resume it.
From João from AF, could you talk a little bit about how you see the income tax rate in the future if the investment subvention bill is approved?
Do you want to talk about this, Eder?
About the tax rate. It's hard to talk about it. I can talk more about the impacts that Multi would have.
Of course, on the way that it came in the early version of first being impacted, there would be an issue of judicialization because Multi subvention is recurring from presumed credit. So there's some opinions from the Supreme Federal Court about this already.
But in the way that it came in the first version, we would be impacted, and we would start having to pay. Although, as I said, there would be a judicialization issue of the presumed credit. But the tax rate is, you don't have any opinion, or it should be similar to what we have. Cesar's asking about the tax reform here, the potential impact. Our tax situation today is similar to the competition. If the reform applies the same rule to everyone, I don't see any major impact for us. Imported products that are sold don't change very much. It seems that it's going to be positive.
The new IBS, CBS, that's going to be simpler to calculate price than it is today. This tax rate that they're talking about, 27%, is not that different from what we pay today in the tax burden. And products that are manufactured with PPB, there's still a point of doubt of what the tax benefits are going to be. If Brazil wants people to continue to manufacture in the country, there will have to be some type of benefit for Zona Franca de Manaus, the Free Zone of Manaus, and that's what in the consensus. They all understand that there should be a tax balance as we have today. How that's going to be in practical terms, I don't know the details. Maybe the combination of taxes will have a presumed credit for Manaus, or maybe products manufactured in the Free Zone will have a lower tax rate.
Imported will pay 27.5% and the Free Zone will pay 10% or 12%. It's a possible way. It's a possible path. But we're seeing that understanding that the rules will be the same for everyone, and that in one way or another, the Free Zone of Manaus will have its benefits preserved. Otherwise, it will close its doors the next day. If they don't have a benefit, the entire Free Zone will close doors because everyone there will close. Well, the plants will close their doors. So I think we need to wait and see about the Free Zone specifically. João asked about the new law of the quality vote, a provision we talked about it. Our tax provisions came from before the rule that was in the Bolsonaro administration. I believe that the quality vote was for the taxpayer.
Historically, the tech service always had a quality vote, so we had provisions based on that. It does not change in terms of provisioning.
As Eder said, the biggest procedure that they have, it is almost 1 billion, in my opinion. It is completely absurd that there was no gains for the company and connected to one of our subsidiaries in Santa Catarina, so we are quite confident. Mateus, about the tax import for purchases of up to $50. Is the government going to close at a rate of 28%? Will that be sufficient to reach equity? I was not aware of the tax rate, Mateus. What I know is that the Congress already has a consensus from left, center, right wings. They all understand that this allowance for the $50 is unsustainable. When the government created Remessa Conforme, it was a great support.
The $50 threshold was already a success, and we see the Asian platforms already moving to increase their presence in Brazil with sellers in Brazil. Now with this tax rate lower for $50 will help them a lot. 28%, Mateus, is less than the national tax burden. But since we are talking about products that are shipped by air, if you add air freight and the longer wait that they need to receive a product from China to Brazil via Correios, + 28%, plus the value-added tax, it is already going to add or to help solve the problem. Raul, tax credits improved at around BRL 80 million. Do you have any plans to transform these values in cash? Account receivables went down BRL 400 million with the high cash generation in the quarter. Was there any influence of financial instruments in this line? Do you want to answer, Eder?
There was no difference of financial instruments in day-to-day operations. In tax credits, we had part of it influencing this number in this quarter, and there is an important expectation to see a reduction of this amount still due to that inventory reduction. There are some actions that the company adopted in the beginning of the year, that same model that is already bringing results, and it did in the past three quarters, and we had some reductions. But yes, we do have a plan to transform these values into cash, but the rhythm is not as fast as we would like. It is relatively slow. I look at this number in the yearly terms. Just to mention, over the last year, we reduced our tax credits by BRL 176 million in the last 12 months.
As a one-off this quarter, there was a slight increase to that recovery, but we brought it down in almost BRL 200 million. It is an excellent question because that has always been an investor concern. You noticed that three years ago, it was close to zero, and it started to grow extremely fast, including in 2020, 2021 with high profitability. This bill went up very fast, and investors were rightfully worried because this tax recovery bill was coming up. We talk about the plan to tame this and control it, and we brought it down significantly in the last year. The trajectory is going well. We had that one-off scenario where we recovered additional credit. But the idea was to bring these numbers down because that is money that needs to be transformed, and it is not corrected by the inflation.
The idea was to have it as low as possible.
Why distribution expenses went up, from Marcelo. Last question.
We are running out of time, so that would be the last question. Why distribution expenses went up even with smaller sales? That is an excellent question from Marcelo. Essentially, additional warehouses due to greater inventory. Of course, there was effect of gasoline and freight and some cost increases. There is an effect of the higher D2C. The expense cost is higher to sell a box of products one by one. The majority, it is a lot more than delivering a full truck. The majority, it is a prolonged additional deposit, warehouses with teams and employees, and to make do, and the trend is to bring this down, as well as the ERP change and more employees. Excellent, everyone. We have reached our time limit.
Just to wrap up, if you feel that we were not able to answer you and if there is any doubts missing, you can talk to Juliane and me. We are at your disposal to answer. Thank you all.