PBG S.A. (PTBL3.SA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. We welcome you to the Portobello Group video conference to discuss the results for the second quarter 2025. This video conference is being recorded, and the replay can be accessed on the company's website, ir.portobello.com.br. The presentation is also available for download. [Operator Instructions] The presentation will be conducted in Portuguese with simultaneous translation into English. Please be advised that the forward-looking statements made herein are based on the beliefs and assumptions of the Portobello Group and current information available to the company. These forward-looking statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should bear in mind that events related to the macroeconomic environment, the segment and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this video conference are Mr. John Suzuki, Chief Executive Officer; Caio Gonçalves de Moraes, VP of Finance and Investor Relations Officer; and Sue Hames, Investor Relations Coordinator. I would now like to turn the floor over to Mr. Suzuki, who will begin the presentation. You may proceed, sir.

Good afternoon to all of you. It is a pleasure to once again refer to the results of the second quarter '25. I hope you enjoyed our opening video with our launches to speak about our capacity for innovation in products, which is one of our competitive edge and explains our results for the second quarter. These were very positive results and especially in the market context that we are undergoing and that we will discuss in the call. Now still speaking about the results very generally, you will observe that this was a quarter where we had a very good performance from the viewpoint of strategy execution operationally, economically, but also from the financial viewpoint. You will observe that we have progressed in our internationalization strategy. We have Portobello America. We also have exports. And you will also observe in this quarter growth at all of our units with a market share gain in all of our business units. I'm going to begin speaking about the market. And for the first time, accompanying me in this presentation and commenting on the financial results, we have our new CFO, Caio Moraes, who joined us very recently. We're going to speak about the market at large. As I mentioned, the market, and this is valid for Brazil and the rest of the world is undergoing a more difficult moment when it comes to construction material and finishing material because of the increase in the interest rate in Brazil, we were able to observe a quarter compared to the same quarters of 2024 with a drop, a drop of 2.3%. We were observing a very resilient market, considering the interest rates that we have until the second quarter. In the second quarter, nevertheless, demand was weakened -- despite this context, Portobello stands out and gains market share. We had a growth of 6%, while the market dropped 2.3% in the Brazilian market. Now when we look at the North American market, unfortunately, we still don't have the figures for the second quarter. But of course, we can work through a proxy. When we look at the first quarter, there was a drop of 2.1% in the market vis-a-vis PVA with a growth of 16.7% in the first quarter, and it grew even more in the second quarter, growing 19.4%. When we measure revenues in BRL, the growth was of more than 50% which means that we continue on with a very highlighted performance in our sector. I don't have this here, but the coverings market in Brazil is operating with a capacity occupation of approximately 75%. And going against this market, we're not only operating at 100% of our capacity in Brazil, but we're also adding volume that reaches 10% of our resale volume that comes from our outsourced operations. So this shows a strong performance of the second quarter. I will now turn the floor over to Caio.

We proceed very quickly. what is happening with our net revenue. Although the market is quite weak, the revenue increased 17% quarter-on-quarter. All of this driven by international markets. Of course, we highlight PBA with an increase quarter-on-quarter, expanding their share. And the growth was in all markets. If we look at the seasonality in the company, we expect that the second half of the year will have a more robust activity, which means that in coming quarters, we will see a continuity of our resilience. When we look at this per business unit, we observed the same. All of the business units had a growth. Portobello with a growth of 6.6% Portobello Shop, our retail arm growing 9.6% quarter-on-quarter. [indiscernible], which is our more democratic retail unit growing 12.7% and Portobello America, another highlight, growing 52.4% in BRL and 34.9% in U.S. dollars, a very robust growth. This also happens with our gross profit that grew 17.4% in the quarter. This because of the operations with an origin in Brazil, 3%. And in BRL, this is more expensive and the growth of PBA, it goes from a negative second quarter last year and goes to a positive performance of almost BRL 20 million. This is the second consistent gross profit growth, showing the consistency of our operations. And if we look at the margins, once again, they are at a consistent margin of almost 37%. The pro forma EBITDA growing 45%, a reflex of what we saw before, the performance of gross profit. but also due to our optimization actions that have been in place since last year and efficiency gains that we had in the last quarter. Now despite all of this, we have a net income that remains under the pressure of the high interest rates and financial expenses. It's important, therefore, to look at the details of our financial operations. I'm going to go on to the next slide for this. There's an important point to underscore here. When we see the evolution of financial expenses between the quarters of '24 and the second quarter of '25, we have higher revenues and exchange variation, which is normal. And we also have variations of our Selic rate with BRL 20 million in profitability. And we also have the impact of some instruments that we are using to enhance our working capital. We have the FIDCs and other actions on working capital that brought to the group a liquidity, a better cash generation and along with our strategy of reprofiling our debt that we were able to do successfully in the last 2 quarters, all of this has contributed to a certain financial comfort in the company. Beginning now, we can rebalance the profitability, financial expenses and recover our profitability going forward. When we look at cash generation, we see that we haven't stopped generating cash. We have a very robust cash generation this quarter. If we compare quarter-on-quarter, we have a BRL 57 million variation of cash among semesters and BRL 200 million of cash generation. Now because of the instruments that we are presently using. This has boosted the cash of the company that is doing very well. We were able to lengthen the payment term of suppliers. We have also been able to reduce the inventory levels. And we now are working with a different cash conversion cycle of 34 days last but not less important, the debt profile that we have since the end of last year. Well, the fourth quarter of '24 had a much worse for trait. Our cash was under greater pressure, of course, and the expectations for 2025 and 2026 were much better. Now everything we did since the end of last year up to present was a complete debt reprofiling. We have BRL 400 million in cash equivalent covering the years 2025, 2026 and part of the year 2027. So in terms of prudence, therefore, this has become less important because of the operations that are underway. We should continue to lengthen our debt. And of course, everything will be within our reach, and we can continuously decrease the leverage measured through pro forma we see a continuous reduction. We go from BRL 302 million in the second quarter of 2024 to BRL 230 million in the second quarter of 2025, an expressive reduction, therefore. Now with this, I would like to return the floor to John to speak about Portobello America.

In this last part, I would like to once again highlight not only the good economic but financial performance, the enhancement in the leverage that we have and the low cash conversion cycle that we have much lower than that of last year. All of this was part of that financial equation to continue to move forward as a company. Let's speak about the viewpoint of strategy and highlight what is happening in Portobello America. This is part of our avenue for growth in terms of internationalization. Now internationalization is made up of our export operations coming from Brazil as well as United States. The operation in the U.S.A. has had a very robust growth, a 50% growth in dollars, a significant growth in volume. It also has evolved in terms of mix. The plant has already achieved stability. This is one of the topics that we discussed in previous calls. the special pieces and tiles lines have reached a situation of stability. It is no longer a matter of operation. What we have before us is an issue of commercial strategy. Now for the second consecutive quarter, we go beyond the EBITDA breakeven, not only go beyond, but we have been having an evolution quarter-on-quarter. And you can see that this is truly an operation that has been generating positive results from the viewpoint of EBITDA. And another highlight in terms of the results is that this was a quarter in which the operation generated not only a positive EBITDA, but also a positive FCO, important for the operation to have financial autonomy. Now this is a project that we have been remarking on and that maintains our brand positioning, one that we have been working on for decades in Brazil. It's a brand that is seeking a high-end positioning with products that distinguish themselves with innovation and the full solution. We have special pieces. And in the United States, what is even more important, very high levels of services has been well executed in the U.S.A. market. Without a doubt, you're following on the issue of tariffs, the tariffs for exports from Brazil to the U.S.A. Now luckily -- well, unfortunately, I'm sorry, the ceramic coating has not become part of the exemption list, and we will be paying almost 30% in terms of tariffs to export to the U.S.A. Now the most strategic impact of these tariffs also has a positive impact on our operations. We had already seen that we would have some competitive advantages in the U.S.A. simply because we have a plant and operation in the U.S.A. We can offer better service levels. We offer products made in U.S.A. and the products are geared to the local market. We're competitive in terms of cost. U.S.A. gained competitive prices simply because of the gas issue. Now all of this already existed. Now because of the tariff issues, I'm not speaking specifically of the tariff issues for Brazil. Now for the American market, of course, all of this will favor our project in the United States from the viewpoint of our operation there. Now when we think of the exports of Brazil to the United States, there is an impact, and I'm referring to that tariff of 15%. Now as a group, the volumes are not that relevant because of the demand that we have in Brazil presently, we can very easily gear this demand elsewhere with profitability in the domestic market or other export markets. This is not a relevant point. But for the operation in the U.S.A. perhaps in the very short term, there will be a slight impact on our operation. In the midterm, once again, this will end up being a favorable factor for our project in the United States. Very well. This is what we wanted to comment with you. We can now go on to the question-and-answer session, if you will.

[Operator Instructions] The first question is from Roberto.

He says, congratulations for your excellent results in this quarter. Could you speak about what has led you to this consolidated profitability and which are the expectations for leverage going forward?

Thank you for the question. A very good question, indeed. And it's the issue of profitability. Now the company has been doing very well in terms of its strategy, doing very well in all of its operations. We had a growth of almost 17% in the second quarter of this year. So all of the businesses have contributed for the evolution of our EBITDA operational results, especially in the United States, where we had the highest investment the company made in the last few years. There's still a great deal of room for USA to contribute to our results. And these results do not depend on operation. But we don't only have to evolve operationally. We also have to evolve from the financial viewpoint. But we have had a very constructive trajectory in terms of finances, in terms of our liquidity, our debt profile, the maturities in the midterm and from the viewpoint of cash generation.

So we've had a significant evolution since the end of last year up to present. And this has generated a new cycle for us. What we need to evolve in is the cost of our debt profile. We have a debt profile that is partially based on banks and even our international lines have a lower cost, but we need to evolve in this area. So the trajectory to regain profitability goes through operational results in the U.S.A., and it depends on our debt profile.

Well, let me comment on this and take advantage of the second question. That is the strategy. We are generating more operational cash. All of the operations are doing well. Now -- regarding our debt, we have chosen a strategy, which is liquidity for the company. And we are working with strategies carried out recently because they help us to create new cycles with a competitive background with bank debt that are at a lower cost. Now we're going to continue with this strategy, generate greater cash. We will be able to work with funding at lower cost, as you mentioned. And therefore, we can work better with term and cost. And even with a longer term, we can lower the marginal cost for the company.

Our next question comes from Daniel from Invest.

Could you give us more color regarding the cost that refers to FIDC and which has been the absolute impact of that on the financial results of the company?

Well, thank you, Daniel. The cost of FIDC is very compatible with the bank lines that we work within the company. The FIDC operates at the best level when it has a large number of clients. Well, this isn't a cost, it's a revenue for the company. It's very close to CDI plus 2%. And the impact on our financial results is negative. However, it's a strategy for the company that enhances the liquidity of our operations. The information that I showed you, the BRL 2 million are part of that strategy of FIDC strategy.

[Operator Instructions] Our next question comes from [indiscernible] .

Which are the Portobello America plants going forward regarding the tariffs?

Well, let me respond in the following way. From the strategic viewpoint of our project, this tariff is very favorable for imports in the United States. It brings about competitiveness and speeds up our project. Now all of this will happen through time. Now because of the level of uncertainty that we are still facing, there has to be a period of accommodation. And this will help us not only in the sales volume of our operation in the U.S. with the local production, but it will help us with the migration of products where we still work with outsourcing coming from our operations in Brazil. Brazil exports to the U.S. and we will transfer the production from Brazil to the U.S. We were doing this gradually. And of course, we can increase the pace of this trajectory of our portfolio. So there are some positive points in this moment of high tariffs. And in the very short term, there will be an accommodation of volume in the operation of the U.S.A. The volume that comes from Brazil is relevant for the operation in the U.S.A. From the viewpoint of the business, the trajectory remains the same. We're conquering the market. We're improving the product mix, the mix of channels. And well, we still have a very long trajectory for this project.

Our next question comes from Daniel Chaves.

How do you think that leverage will behave until the end of the year, which is a healthy level that you're working with as a goal?

Thank you for the question, Daniel. As we have shown you here for some consecutive quarters, we have generated more cash. We also have the impact of seasonality that is more favorable. So our strategy is to continue deleveraging, something that we have been doing. We reduced leverage more than 1 point between the last quarter 2024 up to present. And of course, we will continue to deleverage now which is a healthy figure, a level that would be at or below 2x. Now allow me to complement what you said, Tao, the level of interest rates that we are facing here at present it should be at 1.5 or 2x for the leverage during moments of more normal interest rates, interest rates of a single digit, then we would operate at 2x or 2.5x of leverage. That would be quite comfortable. But at this moment, 1.5 to 2x is more comfortable. And we will gradually reduce the level of leverage we have at present.

Our next question comes from Mr. Roberto Vallarino.

Can you show us an update on the production of Portobello America? When can we expect them to operate at 100% capacity?

Well, that question in a certain way is connected to a previous one that I have already answered. There is the impact of the tariffs that will speed everything up. But we have been growing at a very fast pace in the U.S.A. And this issue of tariffs will accelerate the sales, especially of our local production. So we will quickly reach that level of 100%. I would say that we're presently operating at 80% capacity. But in practice, we're at 100% in the operation. Of course, we have efficiency gains, and we can enhance our capacity in the U.S.A. But presently, we're almost at 100% capacity.