Good morning, everyone. Welcome to Multi's first quarter of 2023's results call. My name is Juliane. We're here with Eder, our CFO, and Alexandre, our CEO. Before turning the floor to Ale, I have those messages. First, you should refer to our disclaimer in our earnings presentation on the last page. Second is, if you have a question during the call, you can ask for us to open your mic on the chat, or you can write your questions, and we'll read and answer them. Ale, you have the floor.
Good morning, everyone. Welcome to our call. Thank you all for your attention. We're going to convey the most important information of the first quarter of 2023. The financial highlights. Revenue closing just under BRL 800 million , with a lot of cutover coming from 2022.
As we announced on our last call, at the end of the call, everyone even said, oh, Ale, you went down kind of heavy describing the problems of the migration and system implementation. But we always prefer that in our calls and all communications to be transparent and very direct. The last call happened in the middle of the migration for the implementation of the SAP system, and we were really facing a lot of system and operational issues, and that had an impact on the first quarter on the earnings that we're going to see in terms of gross margin due to production stop-over, increase of manufacturing costs, and specifically, EBITDA and net profit. The result was quite negative for us in the first quarter. You'll see that we have a negative gross margin of BRL 52 million, but this problem is almost exclusively in the mobile line.
As everybody knows, we have four top pillars of business that are divided or broken down into 14 subdivisions, under those 14 blocks. All the other blocks have improved in terms of gross margin compared to the previous quarter. But on mobile, that had a great impact of the plant and system migration and market conditions. The margin was really squeezed, and it's quite concerning to have such a negative gross margin. I'm sorry. To put it a little further from okay. Let's see if my sound gets better. He said. EBITDA, due to high costs of the migration and multiple issues, was also squeezed at around BRL -295 million . We were coming from a bad result in the previous quarter, but with no system operational issue.
Now, with the market condition, in addition to the system issue, it built up and the EBITDA is very negative. I think we set the tone on the last call. We were expecting a bad quarter. That's what we talked about. The feedback that I got was that the call was even too negative. But we were expecting, considering this non-recurring factor, that we would have bad news in this quarter. Net income as well, we're going to see in a minute. That was very bad. But the good news, in my opinion, is the cash generation. That's that famous quote that nobody knows who said it for the first time, but it's attributed to the CEO of Volvo in the 1980s, that revenue is vanity, profit is opinion, and cash is the reality. We did a strong work for reducing inventory, and we delivered.
I'll show the last two quarters reducing inventory, especially the expensive inventory with inflated pandemic cost. And working on cash, even with the SAP migration, the additional cost, the severance pay of hundreds of workers, we generated strong operating cash of BRL 171 million. If you exclude CapEx, we have a reduction on net debt of approximately BRL 150 million. Our net debt now is around BRL 400 million. That's less than half the net debt we had in 2021. The historic peak of the company net debt was around BRL 900 million in 2021, and we're now at under half that amount. Cleaning inventory, generating cash, minding expenses. It's never bad to see cash improving.
As much as EBITDA and profit are very negative, essentially due to very specific factors as we're going to see next, we had two big issues that we need to solve, SAP and the mobile line, and we'll see it in more detail. Cash improving is a good sign, and we're working to have a slight improvement in the second quarter. Not as big as this, but a slight improve in terms of cash for the second quarter. Just a little bit more color on the ERP issue, a little bit of what happened and the perspective we have from now on. Basically, despite we had two years of projects and tests and integrated cycle runs, things work in theory, but in practice, when we turn key, there's a series of locks that come up.
When we switched ERP on on January 10, there were a series of very severe impacts of things that we thought would work and didn't work. Basically, the entry of goods is locked. You can't receive, inventory is full. You can't receive goods, and goods accumulate in the port at higher cost. Storage at the port is 4x or 5x more expensive than storage in-house. Production at a standstill because we can't get raw materials. That generate very high customs costs in tens of millions. A slowdown in production. I had the opportunity to be there every other week, right next to the production line, and we can't read barcodes on the products. You have a production line producing at high speed in a time of 10 seconds between products.
The products are coming every 10 seconds, a new product comes down, and the system takes almost two minutes to read and record the barcode. Things that you test and work in theory, but in practice, it slowed down. We were only able to solve this definitely in mid-March. So three months of the plant with thousands of workers with their arms crossed, waiting for the barcode to be read by the system. And you open the line. For example, we have a line with 20 people. Okay, now let's run five lines of four people so that everyone has their computer terminal. But you have many more lines, and the system slows down again. This type of issue, just to give you some color and get you to understand the real impact on the day-to-day of the business. Today, this has been equated.
There's no slowdown in production anymore, but this happened until about mid-March. Locks and invoicing. The goods cannot be sent off. There are systemic problems, barcodes, tax issues that don't match, and goods that go to the client with wrong tax attribution, comes back, goes again, comes back again. Lines of orders canceled, which is very bad. The difficulty to separate problems. You have an order with 20 items. You can find five in the system. The rest, the barcodes don't match, and the detail of the box, or the position, what you need for the SAP to work properly. Then you need to break it down in different shipments. So an order with 20 items, instead of sending it all at once in order to serve the customer, you'll send it in five or different shipments, increasing freight costs.
Additional budget granted to clients because you lose space, so you give more money to recover the space lost. Products with serial numbers are even more complex. Overtime at the factory and logistics. You need to buy system consulting services at the weekend to help you unlock and get the product to go out. So all of the BRL 300,000, BRL 400,000 per month for each one of these items to be able to turn the product. Exchange and warranty. You can't exchange product for customers because the invoicing system is not working, so you need to reimburse. Can you imagine you have a product, I don't know, a vacuum cleaner that you could spend BRL 20 to replace a part, but you need to reimburse BRL 200 . That's the price that the consumer paid.
We're talking about millions of BRL, BRL 4 million or BRL 5 million of additional reimbursements that we didn't have before. Problems with tax parameterization. Parameterization works, and then it stops working. You fix it goes back. Special regimes. Everybody knows the tech jungle that Brazil is, and you work on the previous system that's already used to that, and you have to change everything. Basically, hundreds of invoices stopped per day. Not related to the SAP, we had a reduction in personnel in February, and the severance pay was all due this quarter. So it's a combination of non-recurring issues. Of course, the question that remains is, okay, so now is the problem solved? So today, our situation with the SAP today is in Manaus, it's 90% running normally. Logistics operation, or actually rather, the other areas of the company are running 90%.
There's no severe SAP problem that's costing money to the company. The logistics operation at Extrema is at 70%. So being very transparent, it was zero in the first quarter. We got to 50%, and now it's around 70% running. The line is moderate. There's a four to five day. There's still some system errors and some profit errors. People are working very hard on it, very intensive work throughout the company to solve it. In the middle of the night, on weekends, everything. Today it's getting better. It's no longer a critical problem, the system migration, as it was in the first quarter. But as you can see, I'm just giving you an overview of the main items that we face. But all departments had some migration issues, so that really impacted our operations.
Also growth margin because when you see the production cost, you have to produce 1,000 mobile phones, throughout the month you produce only 200. You absorb that cost and labor and factory efficiency that really blows up the cost. I consider that the good news is inventory evolution. This is the managerial inventory separated by gray that is in transit. I am sorry. Gray is at the supplier abroad. Purple is in transit, so already coming to Brazil. Blue is the inventory we have in-house. You can see that the total row dropped a little bit in the fourth quarter and dropped a little bit more in the first quarter. This drop is still happening on those products that are in transit, that are the most premium products.
Once the blue starts to go down, that is where we are going to see cash effect and cost reduction because blue is the villain, so to speak, in terms of inventory. When the product is in Asia, we probably still have not paid for it. We did not have to pay customs, storage, and blue is the villain that costs inventory every month. The storage costs, working capital, there is a series of costs. So we are quite hopeful that now that the inventory in transit is going down, the trend is to also see a drop in in-house inventory to turn it over faster, then that will help in terms of cash and reduction of the company's operating costs. You see that we still have a lot of goods that are outside and inside. In the first quarter, of course, we had a strong loss of sales.
If we did not have the non-recurring event of the system turnkey, the blue would have dropped much more, and we would be a lot better. This has a straight connection to cash. In terms of the earnings, we had a small drop in revenue looking over the last 12 months of around 9%. Margin, as you see, was a lot lower. It was a squeeze on the growth margin led by these last two quarters. Looking here quater-on-quarter, we were coming on the fourth quarter, I am sorry, the first quarter of 2022 with a healthy margin. Everything around 30%, 25% to 30% is the company's normal margin levels. Fourth quarter was really tight at 18%, and now driven specifically by mobile, we are at - 7%.
The other families have all improved in terms of margin, and we are going to see that, and revenue also going down. This number here still benefited by a strong cutover, so the effect of the system was greater than that. There was a drop in revenue of 20% from the first quarter of 2022 and the current quarter. You can ask, well, 20% is not that much considering the scenario and everything you talked about of not being able to invoice. January was stopped the entire month almost. This was benefited in hundreds of millions of cutover that come from the fourth quarter. I understand that this slide is very important because it answers questions about the feasibility of the business. Looking at the numbers as a shareholder, as a CEO, I ask myself, as the investors do, oh, maybe this is not viable.
Where's Multi that I know? Where's the company with 30 years of healthy margins? If you look at it by segment, if we were to analyze ex-mobile, excluding the mobile segment, we would see that our margin went from 16% in the fourth quarter to 25%. This is in line with the promises that we made. The same things I tell you that I have to deliver as a CEO. When I wear my shareholder hat, I also want to know where the deliveries are, and the fourth quarter was a quarter of stock sale, Black Friday, and the plans, and bringing down red dots and black dots. Where's the margin? We see here that the margin did appear in the first quarter. Excluding mobile that we're going to talk about next, the computer line went from 7% to 19%.
Home electric products, home appliances, TVs, speakers, went from 20% to 27%. Kids and sports, that includes toys and baby items, went from 25% to 36%. The margins were getting healthy in our different businesses despite SAP and all those issues. That showed us that our business have good viability. But we did have a very serious problem in mobile devices that combined products that had a steep drop of price in the market. Smartphones, we mentioned in the last quarter, I think someone asked about it, Alexandre, what's the problem with the inventory today? You'll remember that I answered that our main issue was smartphones. Smartphone is our biggest pain because this product has a huge obsolescence. The product's market price is melting. Over time, the price never goes up, it only drops.
For example, we have a Nokia product that was bought to sell at BRL 1,700 in our mat. It was a top-of-line, wonderful product. Over time, this price went down, and now we're selling this at a markdown price at BRL 799. That's almost 50% of rebate in this item. Not all items are that radical, but you can have an idea, and smartphones are an issue. The number you see here has all of the plant's inefficiency during the system implementation period. Almost all of the production was in this family with the E2 smartphones, tablets, PCs. There was production of other items, but much lower and less affected by the system slowdown. For example, a TV, the production time is much longer, so you don't have to keep stopping the line to wait for the system to catch up.
Even if the system is slower, although it's in Manaus and it's faster there, you still don't have the same impact as we see in smartphones. In addition, we also had provisions here, about BRL 80 million of provisions for products that we already know we're going to have to sell. This number reflects the quarter, the SAP, the market price meltdown, and the provisions of BRL 80 million. Of course, that demands the question, so the provision is done now. Will smartphones be rounded up? No, it won't be. This quarter, we turned over 50% of inventory, which is good news. So we took 50% of it out of the way. But I believe that this line is a line that's still going to struggle for some time, not at this level of margin, but it will struggle.
I am happy to see the other lines with a good gross margin giving us an interesting future perspective. I took a little bit longer here because I think this is a very important slide to see the different parts of the company separated. SAP is an issue that affected everything. Smartphones and mobile devices in general is the one that suffers more due to the market and the production. Here we see our EBITDA margin, that is negative, driven by those villains of the fourth quarter of 2022 and this first quarter. We also see in the quarter a very negative margin, as we mentioned, BRL -295 million. Income following the EBITDA line. It is quite negative here, very negative in the first quarter. Sales per channel. Basically what we see here is the drops that we had.
You can see that small and medium retailers, that was a very resilient channel. Historically, when there was ups and downs, small and medium retails didn't suffer as much. Here you see one of the steepest drop was precisely in small retail in the quarter because it was more difficult to serve them. If we compare the drop in small retail compared to nationwide retail, small retail went down 39% and national went down to 23%. We were able to rush a little bit more and deliver orders of larger customers. Government also went down. It was spread out, and that is mostly led by the system migration, not a lot related to the market here, as difficulty to invoice. It was very linear. In net revenue, we can see here that what suffered last, interestingly, was mobile devices.
Because we had a lot of obsolete inventory, orders are larger, so they are easier to do, so to speak. So we prioritize the larger revenues, so the invoices. If you have an order for 300 computer, et cetera, IT supplies items, and on the other side, you have one item for a national retail, that smartphone, that was prioritized. So we prioritize these products even if they have a worse margin. Minus one here compared to the first quarter, and minus three compared to the fourth quarter. It is surprising, because normally mobile devices, the fourth quarter is the largest of the year and the first quarter is the smallest. So it should be a bigger drop. But there is the cutover that relieved it some, and the prioritization of larger orders.
Everything else is pretty much in line except for kids and sports, that even with a drop in revenue in the quarter of billing in the quarter, we kept it close to what we had at the first quarter of last year because this line has been growing steadily. Here is the breakdown per family. More of what we already presented, but breaking it down by family, - 27% on mobile devices, basically PCs, tablets, and smartphone. These are the accessories, supplies, -9% . It depends a lot on small orders and broken down items. So the system needs to be operating well, running well. At home products, a small increase this year, but also in the quarter, struggling a lot. Kids and sports growing year-on-year, 30%, and a small drop in the quarter. Basically, that is the numbers you already saw, but broken down one slide per family.
Finally, for us to go to the Q&A, what is the company's agenda today? I am 100% focused, and the entire team is completely focused on fixing these problems. The team is resilient, and we have a very low turnover. There was no significant loss in the high levels of the company during this turbulence. We had a strong reduction in personnel in February that I think was adequate for the moment. It was a necessity. Now we are working to conclude the stabilization of the SAP system. The areas are already running normally, except for some specific on-point issues in the logistics in Extrema, still at 70%. We still have some work to do there to improve. Overall, I think the worst is behind us of this period. We are also reviewing the unprofitable product lines.
Officially, everything that is below a certain level of the MROI, that is our expected margin. We are not replenishing products. We are evaluating the lines, evaluating sales targets. We are going to close in June a new target for the year. The idea is to reduce the company's sales target to focus more on cash end results, earnings.
I cannot tell you exactly which lines will be cut, will be out, but we are suspending purchases and evaluating one by one the perspectives, which lines we should leave to focus on more profitable lines. That slide about gross margin shows that there are a lot of things that are doing well. There is very good business inside the company that we need to invest on, and some others that we were insisting over time, but that maybe it is time for us to leave. Of course, cash generation, that is the main focus, to generate cash.
We have been talking about this over the last two quarters. I think the first quarter was a good surprise. Without advancing any great receivables, nothing outside of the usual operations, being more disciplined in the purchases, delaying some investment, we were able to generate BRL 150 million in cash. We are committed now for the second quarter to improve our results even more and, of course, to generate more cash. In terms of investments, the only thing that we have that is important to mention is ZU and other investments as well. CapEx projects that were ongoing, that we are halfway through, that would be a loss to stop, we are continuing and concluding. We have warehouse six, warehouse 10 that we are halfway done. We are getting them finished. They generate very important operating savings in terms of lease. We had five warehouses in Minas Gerais.
Can you imagine, five satellite warehouses with goods coming and going, and inventory difficulties, logistics costs of products coming and going. We are migrating now to two warehouses. I believe in July we will be able to finally conclude and deliver the third warehouse, and we will only have two, the main plant and one external warehouse. That simplifies operation. Terminals G6, G10 that are now in May going to be delivered. The blender plant is ready, delivered. Watts motorcycle plant in Manaus is ready as well, delivered. There are no significant CapEx projects. We are going to hold on to that and say no to preserve cash. ZU was an investment of BRL 20 million, and I think it is very promising, noting that this is an investment in a technology startup. ZU is a company that leases gym equipment that has synergy with our wellness division.
Our wellness division imports and distributed gym equipment. ZU rents this type of equipment, so there's a lot of synergy. This money is already stamped. It's a mandatory investment money for research and development, so it's not the company's cash directly. We have a sale of technology products. There's a percentage that we must invest in research. Under research, the government allows us to invest in startup technology companies. So we used these BRL 20 millions that were already earmarked for that to invest on ZU. That's very promising. We already have other important invested companies with a lot of R&D funds. Watch, that's a subscription TV. Luby. Our investments are going well. To summarize, I think we have a negative result for the quarter. It's impossible to be happy. We can't really sugarcoat the pill, but cash generation is always very important.
These two non-recurring factors, this meltdown of the smartphone market generated a strong impact. The system migration is hundreds of millions, but this will be left behind us. I believe in the medium and long term, the business has great viability and it continues with the potential to deliver the margin it must deliver. It's more an issue of us focusing and taking a deep breath and follow on making the changes we must make and work on the good lines of the company. The majority of the company's lines are healthy. We'll go back to deliver the results that we expect. We'll now move on to the questions. Thank you all very much who stayed with us this far. I'll stop sharing my screen. We'll go on to the questions.
Andre has the first question. Andre, please go ahead.
Andre from UBS. Hi, Ale. Good morning. Thank you for this opportunity, and thank you for the presentation. I have two questions here on my side. First, you mentioned a difficulty that served a small retail panel. I would like to understand how this process is going, not to recover, but to contain or maintain this relationship with small retailers. My second question about leverage. Despite the company's liquidity, more than BRL 800 million in cash, I'd like to hear from you the need for cash generation or to use inventory to lower the company's leverage, considering the negative EBITDA in light of the covenant that the company has to meet by year-end.
First, about leverage. We have our covenants of 2.5 x the EBITDA. Even as the debt goes down, being very low compared to the capital structure, with this EBITDA level we have now, we're already running behind.
We need to generate at least BRL 450 million this year. That's a rough number. BRL 150 million per quarter, basically, to be able to remain within our covenant. It's going to be a challenge, Andre. I think we're going to have to work very hard to seek a net cash position and take this out of the way. That's the company's desire. But at least to bring this debt drastically down, generate EBITDA in the year at an EBITDA that makes us comfortably inside the covenant. The final scenario will be of a very low net debt considering the size of the company, capital structure, assets, and inventory, but with the difficulties on EBITDA because we're already starting behind in the first quarter. About the small clients, it was a very big pain. A lot of the clients were upset with the company. They understand the system migration issue.
They had that with other suppliers as well. But all of them say that, look, once you start delivering again or things are flowing again, the pain goes away. It's like when you have a post-sale problem, you have a lot of headache, but once that problem is solved, you buy a product, you didn't receive it, you complain, but once you get the product in your hand and it's solved, you're happier. We had a consumer that came here to the company. He bought a product. He wasn't receiving the product because of the billing product problems in the system. He came to our office, and he was furious. We took a manager who went there to Minas, picked the product up in person, took to the guy's house. Then I saw the consumer's pictures, and he loved us again. He was beaming, celebrating the product arrived.
The products are being shipped, and people are getting their products now. The situation is calmer, but there are still issues, and it will be a journey in this market. A lot of the clients will have to recover the space that we lost. There's an impact.
Thank you. That was very clear, Ale.
I'll continue with the list now. From Marcelo Alfonso, two questions. On the last conference call, you said that we should not see negative EBITDA for the second quarter. On the second quarter, we'll also want to deliver a greater reduction of debt. Is this still the company's expectation?
Yes, Marcelo. Yes, it is. That's my expectation. We're working hard to have a positive EBITDA in the second quarter and to reduce debt. What I expect from now on, it's a small debt reduction and a low but positive EBITDA. Yeah.
Now we're in May working very hard. We're halfway through the second quarter. I will only know when everything is closed. Two, the drop on the U.S. dollar this quarter produced a negative net impact in the financial results. The company hedged only the debt in dollar, not the supplier account. Apparently, this quarter, the hedge has more than covered the debt plus suppliers. Was there a change in the company's strategy regarding FX protection? What's the rationale considering inventory is also dollarized? Eder, do you want to answer that?
The strategy remains unchanged as a policy. We hedge the bank debt and the debt with suppliers when it's focused on government. In this case here, we have the hedge of the bank debt, but the U.S. dollar went down, so we protect ourselves for the moment of the dollar.
When the dollar goes down, we have a penalty in the derivative account that affects financial results. We cannot affirm that the loss in derivatives. Well, that's due to the protection because the U.S. dollar went down. There was no change in policy.
From Mateus here, good morning. When we look at gross margin, mobile devices was the detractor, -58% . The breakdown by channel, the majority was for the government, a public auction. Do you have control of the price sold? What happened with the sales for government to have this gross margin?
I think there were three problems in mobile, Mateus. The first was the meltdown of the retail price. That's the other part that is not government. The second issue is that provision of BRL 80 million. The third, I didn't mention before, but it is relevant.
We had one item that was destined to government. It was earmarked for government, but ended up being canceled. It was a product for the government, a smartphone, that we should have sold more than 100,000 pieces along, and we had to bump it to retail as well. This item was a big detractor because this is already a long tail. But in sales for government, you have the issue with production cost as well. It really was inflated, not only because the plant was at a standstill with a triple labor force, but these products that were there for three, four months at customs. We had to block the goods in mid-December at customs warehouse because we couldn't have the entry before the system migration. It spent the whole quarter generating this additional storage that really increases the cost.
Also from Mateus, what's the situation of inventory now at the end of the first quarter of 2023? What's the percentage of inventory in-house still with a low turnover?
Well, Mateus, today, mobile devices, I think will still struggle. The other lines should not have a worsening of gross margin. The trend is to have stability of gross margin that was already a healthy gross margin. I'd like to first see the figures closed before making any forecast. I won't just speak of the actual numbers, but there's nothing too relevant except for mobile devices. That's basically the one model of laptops and smartphones in general. There's still a lot in-house. Amazingly, it's in line because if you look, on one hand, BRL -300 million of profit, everything's bad.
But if you open the breakdown by segment, what we said we were expecting for the fourth quarter ended up happening this quarter. That improvement in gross margin for me is a sign that the inventory clean out of the fourth quarter worked for the other segments, and now we're a lot more cautious. It's also important to mention that it's not that the company stopped at buying everything, and we're going to liquidate inventory to build CapEx at all costs and turn the lights off in six months. No. To give you an idea, this quarter, we already purchased $600 million in new orders. We reduced purchases that are more selective, but $600 million, that's 65% of the retail COGS.
Everything we bought in retail, we put 65% of this cost of goods, sales, on good products that are fresh, that will come at a freight of $1,500, not so high. We're very hopeful in the renewable inventory of all these families. The margins are already better, and it tends to be healthy for us, and we're replenishing. The 25% that we didn't buy, yes, we'll lower the inventory, improve profitability, rather improve capital use. But we're working on it, and the wheels are turning. Talking about retail, because we break inventory in two at Multi. We have retail, that we replenish what we sell, and of course, you have the coupled businesses like government, corporate, that's on demand. You know you have the sale. Sometimes the term is longer.
Sometimes you hold on to a product for six months because it's Brazil, paperwork, red tape, but you know it will be shipped. Let me see if I skipped something here. I answered about inventory to Mateus. The low turnover of inventory. I believe that aside from smartphones, nothing is significant in that sense in the company. That's very important considering the current sales, the current market scenario. If a product line will turn sour, I don't know, maybe TVs will stop selling in Brazil, then we'll talk again, but for now, it's turning well.
From Vinicius, good morning. Two questions. How do you think about the cell phone market? Do you think maybe it will make sense not to work in this category? How should we think about the current quality of inventory and the level of obsolete inventory?
Oh, Vinicius, that's a question. Smartphones will at least reduce our target and our activity. The mobile market is broken down in different parts. Tablets, for example. There's no discussion about leaving tablet. Tablet is a healthy business. We have historically good margins, high market share. The bar. Cell phones. The cell phone for grandpa, just for phone calls. It sells a lot. We have a lot of market share, so we do not consider leaving that. But smartphones, that's the bulk.
We will at least reduce our activity, maybe fewer models, maybe only entry-level models. That's a possibility. We're looking into that in June. But we will make a movement. We will not remain acting in unprofitable lines or lines that can cost us money. Multi until 2021 was a lot more aggressive in the sense of launching and feeling the markets, but now we're a lot more cautious.
From Mateus, another one. The percentage of ready inventory in-house is comprised of mobile devices.
I don't really have that number here. Eder, do you know exactly?
What I can tell you is that ready inventory is between 50%- 60% of mobile. So 50% of the total is mobile. Of the finished product, not the company's inventory. Okay. Not including raw material.
From Luciano. Talked about the reassessment of lines and products. We can see the diversification for the health of the margins. Is there the possibility of new products or maybe even new segment? About Watts. Are there sales and deliveries planned for the next quarter?
Yes, Luciano. We're renewing the current lines. We just closed a new partnership to sell. We already have Targus for the backpacks, DJI for drones. We have international partnerships for production and sale. And now we closed that partnership with Razer.
That's one of the leading games brands in the world, and it's an important product, relatively simple to operationalize, and it has good potential for cash generation. It generates a lot of tax to pay, and we have a balance and investing more in the current lines that are bringing margin.
From Marcus about Watts. Luciano also asked about Watts. Okay, so let me just read what Marcus asked about Watts. How is the evolution of the implementation of the dealership network you've delivered? Have you delivered W125 units already? About the issues reported by a competitor, do you believe it's an opportunity to expand or a risk for the overall image of the electric bike product?
That's a good question, Marcus. I was actually questioning this with our team recently. It's a double-edged sword. We had a competitor that is facing very serious financial difficulties.
It's a peer player, a startup that started with a lot of buzz. I don't know the details of what happened there, but they had some financial and technical issues, and today they have a big problem, missed deliveries, customer complaints. It's not looking good. On one hand, it's very good because we have the opportunity now of taking this share and becoming consolidated as the major brand or player for bikes. The risk is that that may taint the segment's image. Watts has a strategy unlike this competitor. This competitor took a down payment from consumers and then started production, and with the delays, they ended up not delivering. Watts's strategy is a lot more conservative. We only sell what we have at hand in-house, so we have zero stress issues with consumers. Opening of dealerships is going very well.
We already have a dealership network with dozens of dealers. We're opening new dealerships every month. The next call, I can bring you pictures. It's really nice to see the images of the Watts dealership. We're selling W125 already. People are enjoying them. We have a few hundred sold, and it's going very well so far. Products are still imported. The product manufactured here had a delay. We wanted to certify more the quality and parts, so we delayed the production in Manaus, even though the plant is ready to receive those parts. In the beginning of Q3, we believe we'll begin production. The business remains normally working with imported products. The margin's slightly smaller, but we're working with imported products right now. We're launching new models, the trail bike with higher power, more autonomy, electric bicycles as well with 1,000 W. We have the scooters.
An entire electric line that is very promising. I think it's more promising rather than negative if a competitor leaves the market. The fewer competitors we have, the better.
From Gustavo, do you believe the problem with Americanas may have contributed somehow to this drop in the smartphone price at retailers? It's natural to imagine that they sold at a marked down price the products with high tickets.
I believe so, Gustavo. I think the problem is wider. The biggest manufacturer in the world reported a drop in their profits last year as well. Smartphones in general are difficult. 15% drop in sales globally, or overall in Brazil. At Americanas, what we heard is that the manufacturers had volumes already allotted for Americanas, and since they weren't pulling, they had strong rebates to sell at other players, and then the entire price chain went down.
When you have an international brand bringing the price down, it also affects the entry-level brands like ours. We are forced to bring the prices down as well. That contributed. I don't know if it's only because Americanas brought down their price or because they didn't buy products and then the manufacturers brought down the prices at the other players. Excellent. I think we answered all the questions. Is there any last-minute questions, anyone? Anyone has anything to add? Great. We're working hard to meet the priorities that we mentioned, cash, better profitability, review of our portfolio. The last call, everybody heard that we would take a beating this past quarter, and it did, and you could see it, as everybody could follow. I think in the medium and long term, it will be a non-recurring storm, and we'll be able to recover our healthy business.
Thank you all very much. See you next time.