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

Good afternoon, ladies and gentlemen. Welcome to Portobello Group's conference call to discuss the results for the third quarter 2025. This conference is being recorded, and a replay will be available at the company's website, ri.portobello.com.br. The presentation is also available for download. [Operator Instructions] The presentation will be conducted in Portuguese with simultaneous translation into English. Before proceeding, please bear in mind that forward-looking statements made herein are based on the beliefs and assumptions of Portobello Group management and on information currently available to the company. Such statements involve risks and uncertainties as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should be aware that factors related to macroeconomic environment and others may differ materially from those expressed in the forward-looking statements. Participating in today's conference are Mr. John Suzuki, the Chief Executive Officer; Mr. Caio Goncalves de Moraes, Executive VP of Finance and Investor Relations; and [ Ms. Suela Antonian Jaimez ], Investor Relations Coordinator. I will now turn the floor over to Mr. John Suzuki.

Good afternoon to all of you. I would like to thank all the people participating today. It's a pleasure to speak about another quarter, the third quarter 2025. I'm going to begin by stating that once again, we present a quarter that shows the consistency of the strategy the group has adopted for some years, as well as the consistency of results in each of our business units, especially when we look at the market that we had in the third quarter. we are living in a market that globally, and specifically in the U.S.A. and Brazil, has been losing its power, and it begins to point towards drops when compared with the same quarter last year. In Brazil, we have the wet-installation segment where we see negative figures here as well as in the U.S.A. And because of the market effect, we have that tariff shock in the U.S.A., which, of course, has a significant impact, and we will share more of that information. It has a relative impact, not only in the Brazilian market that exports to the U.S.A., but also in the results of our business in units more connected to Portobello America. Despite all of this, we present consistent results, be it from the viewpoint of revenue, growth, and market share, as well as from the viewpoint of profitability. We have been repeating this in our financial management with our free cash flow because of the moment that we are undergoing with a higher leverage and with an increase in financial expenses. Caio will speak about this in greater detail. For successive quarters, we have a good level of free cash flow, and this is the direction we are following. Now all of this permits a good outlook for the company, although we see a harsher market looking forward because of the macroeconomic scenario. I'll give the floor to Caio to share those details with you.

Good afternoon to all. Thank you, John. Here, we see the North American market. In the ceramic tiles consumption, we had a drop of 5% in the second quarter. But this is not the only important data. What is more relevant and that is not very simple is that the North American market is 70% importer. Now what happened with that tariff shock? When the U.S. government announced the tariffs in April, they announced a tariff for all countries. Brazil at that moment had 10% of tariffs. In this movement, there was a term of 90 days for importers to adjust to this. What happened? There was this raise to anticipate purchases from countries impacted by the higher tariffs. This led to a higher stock in the chain, hampering countries like Brazil -- specifically, Brazil that had an increase in tariffs after this had happened. So in the short term, Brazil started to work with logistic chains, thinking about stock, but we also thought of other strategies to export products to the U.S.A. And in the long term as well as in the short term, it reinforces our decision of having a plant in the U.S.A. This gives us greater ability to continue on with this strategy to implement and localize our products. In the next slide, we speak about Brazil. In the case of Brazil, we see a market that is segmented, dry-installation, wet-installation. Now the sales are also dropping here in the quarter, a drop of 1.7% for wet production, 2.7% for dry production. Now an indicator that is very important when the market presents an idleness of 25% in Brazil, we're working at full capacity. Now this is a differential that will be maintained vis-a-vis the market. Now if we move on to the company's operational performance, as mentioned previously, the business environment continues to be very challenging in the U.S.A. and Brazil. Now disregarding this, we have increased the revenues 3.5% vis-a-vis the third quarter '24. All business lines grew compared to the third quarter '24. Now were it not for these tariffs, the growth would be 9% and the revenue coming from these exports would have represented 26% of total revenue, a slight drop compared to the previous quarter, but this is the level we have observed in the last quarters. As mentioned before, all of our business units presented growth. Now Portobello itself grows 3.6% versus the third quarter '24 with a highlight for exports that grew 12%. Portobello Shop with a growth of 1.7% because of the brand strength and the premium portfolio. Now a slight drop for Pointer, a reduction of 3.3%, sustained by works of greater added value where we're not very present. In Portobello America, as mentioned, the situation is stable in terms of revenues vis-a-vis the third quarter '24. If we exclude the tariff impact, growth would reach approximately 40%. In the next slide, we will speak about our solid gross profit and gross margin. Despite this difficult harsh scenario, we preserve our gross margin similar to previous quarters, and we reached 14.3%, 8.9 percentage points growth in the U.S. operating margin. This shows that that operation was also impacted by the import tariffs. Well, let's speak about EBITDA margin that demonstrates consistency vis-a-vis previous quarters. There's a trade-off here between greater aggressiveness in our different business units, offset by significant industrial production and the expenses we're carrying out in the company. We have been able to preserve our EBITDA at a level of 14%. When it comes to the net result, we are in a situation of loss, reflecting the high financial cost environment. The average Selic in the third quarter was 10.5%. Presently, it has reached 15%. And in the second quarter, we have optimized our working capital. We focus on cash generation for the company as a whole. Let's speak about our financial performance. This is the highlight of the quarter once again. Solid and disciplined cash management. We generated a free cash flow of almost BRL 70 million, BRL 268 million for the year as a whole, 18-day reduction in the working capital cycle and once again, disciplined CapEx. We have improved our days in inventory and working with suppliers even with the impacts caused by the U.S.A. tariffs. With all of this, we are able to preserve leverage at a comfortable level, 2.4x over net debt over EBITDA. And we have enhanced the debt level. We had a shorter-term debt, a challenge in the third quarter '24 with maturities in the short term. In the third quarter '25, our cash will cover the next 2 years and part of 2027 with a longer debt profile, duration of 5.7 years. And this is the priority to improve our debt profile and to begin to obtain debt from promotion banks. Now if you have read the release, we did this with a bank for a 7 year period in the amount of BRL 35 million. This is not included here. It's a subsequent event. And the development bank loans is something we will increase through the coming quarters. I'll turn the floor back to John to speak about the overall outlook.

As I said at the beginning, we have shown consistency in the results of each of our businesses because of the impact of the tariff shock described by Caio. It's worthwhile underscoring that this tariff initially had a negative impact on the group. But we will be growing not at a level of 3%, but 10% in the third quarter were it not for the impact of the tariff. This difference is a difference between the volumes we had projected before the tariffs and what we truly realized in the quarter. Now it opens up a very positive outlook for the medium term for the operation of the U.S.A. The local production gains competitiveness because of these tariffs regardless of their origin. With the -- well, of course, Brazil suffered a much greater tariff. So the outlook there is positive. We don't observe this in the short term because of the increase in inventory mentioned by Caio. We estimate that the stocks will be regularized in the chain in the United States, and that this should happen at the end of this half of year or beginning of 2026, which makes the year 2026 positive for local production. In Brazil, we lose part of the exports, an important part of our business with the U.S.A., but we gain in terms of the local production. There is an interesting movement that happened. We were producing several products in Brazil that we could have produced in the U.S.A., of course. But because of operational issues of our customers, we maintain these in Brazil. The tariff shock accelerated this and ended up taking this project to the U.S.A. In terms of the market, removing the impact of U.S.A., what we see in Brazil should be repeated until the end of the year and in the coming year. We don't foresee growth for the coming year. There are some surveys that point towards an increase, but we believe that we will remain at the consumption levels we have at present in the dry production that might grow somewhat in the coming year. We're not counting with growth in the market in the fourth quarter, nor in 2026. We'll continue with the growth we have presented, gaining market share in the markets where we are active. In Brazil, yes, we maintain growth, but with a higher pace in the U.S.A., following the strategy we have pursued in the last few years, internationalization, particularly to the U.S.A. In Brazil, we have a growth of 12%. We have had higher growth, and we will continue to grow the coming year in our exports as well. So there is consistency in our business, consistency in our strategy if we maintain this discipline. The third quarter, as you might have observed, is the first quarter where we were not able to reduce our leverage since we took the commitment of gradually deleveraging. This happened because of the features, the tariff shock, the exchange of EBITDA that we had, and we already can see a more accentuated drop in the level of leverage at the end of the year. And the commitment, of course, remains for a reduction in 2026. We will do this maintaining our financial discipline with low investments, good levels of working capital and a focus on free cash flow as we did this quarter. What I would like to especially underscore is that a month ago, we began a project to seek our efficiency in expenses quarter-on-quarter, month-after-month. You have seen that we maintain a discipline in expense management, SG&A costs and other expenses, so that they are kept at an adequate level according to our revenue. And we are doing this month-after-month through our management tools. In 2026, we have detected the opportunity of having a more structured efficiency gain. And we have contracted a consultancy integration that has been working with us for a month, working on this more structured approach, looking at our expense structure in the company, pursuing efficiency all the way from simplification, elimination of nonessential activities and especially automation, reducing expenses in automation much lower than those we have at present. And this is an important movement in creating our results for 2026, not quarter-on-quarter. We're halfway through this work. We cannot estimate the amount of savings that we will attain but this is work carried out by the consultancy. It's a benchmark. Don't consider this guidance. Similar projects have been carried out in the market, allowing for savings of 7% to 12%. I'll reiterate, this is not guidance. It's simply a benchmark that we're using in-house as reference to defend our goal in terms of efficiency gains. It is an important movement. We will continue to grow throughout the fourth quarter and throughout 2026, maintaining that winning strategy, maintaining the profitability that we have observed, but including the efficiency gains in the company. The outlook is positive, although from the market view, perhaps not so positive. From the business viewpoint, it is positive because of our track record in previous quarters.

We will now go on to our Q&A session

[Operator Instructions] Our first question comes from [ Mr. Matheus Escardo ].

Now the expenses are a key factor with an impact on profitability. There's a need to reprofile your debt at lower interest rates. This is an imperative. If you could please comment on your present-day strategy and the strides you have made in liability management, those $35 million mentioned. Was this funding granted by the BNDES at which interest rate? And how much do you expect to obtain from development banks? And which is your vision of the ideal composition of debt between commercial institutions and development banks?

Now this strategy, and we have already mentioned it previously that it is precisely what we mentioned. We have been able to lengthen the debt profile. We went to market. And this is a time to work with development banks, which will enable us to reduce the cost of debt, besides lengthening our debt considerably. These are debts that we obtained in the first 2 quarters for a 5 to 7 year term. It is not with the BNDES, it's with a regional bank. The interest rate is a CDI and conditions very similar to the market. We believe it's an ideal condition between commercial banks and development banks. It's a good balance. Now this is our first initiative. We are going to obtain more funding from them. Well, BNDES has a very good potential. We have worked with some loan lines with them for significant amounts. And throughout the coming months and the coming year, we're going to continue to capture these loans, better balancing our debt profile between commercial banks and development banks.

Our next question comes from [ Mr. Lorenzo ].

Congratulations for your excellent results. Could you speak about the capacity of your plant in Portobello America?

In the third quarter, we operated at 85% capacity. And I'll make the most of your question to remark that it was a very positive quarter from the industrial viewpoint. We have reached stability, a concern in this project, a significant stability of the plant, be it from the viewpoint of quality of production or from the viewpoint of labor turnover, which was one of the challenges of this project. I think we have been able to turn the page when it comes to the plant. Now our concerns now refer to demand and inventories, but these concerns are no longer connected to challenges we faced in the plant ramp-up.

[Operator Instructions] Our next question comes from [ Mr. Thiago. ]

With the maintenance of PBA, can you capture a dollar at lower interest rates? Now regarding your production costs, the purchase of gas in the free market, does this already allow you to have savings, which is the magnitude of the savings?