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

Good afternoon, ladies and gentlemen. Welcome to Portobello Group media conference on its earnings results for the second quarter of the year 2024. This media conference is being recorded. The file can be accessed through the company's website, ri.portobello.com.br. The presentation is also available for download. [Operator Instructions] And before proceeding, let me reinforce that the forward-looking statements are based on the beliefs and assumptions of Portobello Group's management and current information available to the company. The statements may involve risks and uncertainties since they relate to future events and, therefore, they depend on circumstances that may or may not occur. Investors, analysts, and journalists should take into account that events that are related to the macroeconomic environment segment and other factors could cause those results to be substantially different from the ones expressed in the forward-looking statements. This video conference, we would like to welcome Mr. John Suzuki, Chief Executive Officer; and Ms. Rosangela Sutil, who is the Vice President of Finance and Investor Relations. Let me now give the floor to Mr. John Suzuki who will begin with the presentation. Mr. Suzuki, proceed.

Good afternoon, and welcome again to our second quarter of 2024 earnings results presentation. As usual, we'll start with our contextualization that Rosangela shared with us. Right after this, we hope to go through the financial and operating performance of Portobello Group, contemplating our business units and then discuss talk more about the strategic projects and outlook for the second half of the year, and we'll then end with a question-and-answer session. Rosangela, please proceed.

Good afternoon. It's a pleasure to share the results of another quarter. In the second quarter of 2024, we saw a recovery in the sales volumes [indiscernible] showing a growth of 7.2% compared to the second quarter of 2023, and consolidating 5.6% of simulated growth in the first half of 2024 compared to the first half of '23 to emphasize data. The Portobello Group is currently outperforming the market as a result [indiscernible]. In the second quarter of 2024, operations also grew by 20.4% compared to the second quarter of 2023. And in the end of the first half of 2024, the group consolidated a total of 18.8% growth in sales volume. In the United States, the ceramic tile market is still facing challenges. And data from the first quarter of the year that was recently released by TC&E showed that the consumption fell by 10.7% compared to the same period in 2023. And this consumption dynamics has a greater impact on imported goods, maintaining good stability for local manufacturers as seen historically in the [indiscernible] Data from past charts, which reflects the dynamics of the civil construction market in the U.S. still shows a lower volume of launches than historically. However, with a slightly more positive outlook until the end of the year, although it still depends on political and economic developments that should influence this market initiative. Now moving on to the Portobello Group operations and financial performance, let's take a closer look at the progress made in the second quarter. The group's consolidated net revenue had good progress with a growth rate of 7.3% in the second quarter, amounting to BRL 589 million of revenue for the period. In terms of business units, we saw growth in all our branches, particularly Pointer, which grew by 32.6% compared to the second quarter of 2024. Portobello América, which grew 27.9% in the second quarter. In the breakdown by geographical area, the U.S. operations grew more than 27.9%. With that, the share of international markets now represents 22.6% of the Portobello Group's total revenues. Moving on to the gross profit and gross margin. In consolidated terms, we ended the quarter with a gross profit of BRL 215 million or 36.5% of the U.S. market margin. Compared to the second quarter of 2023, we could see a reduction that was mainly impacted by the ramp-up, reduction of the Portobello América plant. Partially offsetting this, we could see the positive margins of the Brazilian operations with a focus on the [indiscernible] Portobello unit and the recovery cost competitive Pointer. We could see that the production operated at full capacity, [indiscernible] of costs despite the market, was still operating at a certain price. Operating expenses, the percentage in relation to net revenue 33.8% in the second quarter of '23 to 28.4% in the second quarter of 2024. This result basically reflects the company's disciplined management of expenses with a better dilution of these fixed expenses as well. The EBITDA, we reported a growth that was close to 44% in the second quarter of 2024 compared to the second quarter of 2023, reaching BRL 11.2 million in EBITDA and an EBITDA margin at 15.5%. The net result, we reported a loss of BRL 11.5 million in the second quarter of 2024 compared to BRL 38 million in the second quarter of 2023. This evolution is a result of the evolution of the strategic operations together with management actions [indiscernible]. Working capital, with the high emphasis [indiscernible] structuring actions aimed at improving this indicator with lower cash expenses. The investments made in the second quarter are in line with the planning for 2024 showed a significant reduction of 67.4% in the company's financial paybacks as compared to the same period in 2023. We maintained only what was already programmed and what was essential to [indiscernible]. Our net debt for the quarter totaled BRL 11.2 million in all specific fixed production and the company's average level, reaching 3x the net debt EBITDA. We ended the quarter with a 1.6 percentage points reduction in the average cost and a 1.4% improvement in the average debt maturity [indiscernible] compared to last year. Moving on to the qualitative developments in our business. During the second quarter, we finished the structuring of our first [indiscernible] which was published [indiscernible] will enable us to significantly improve the company's financial management process [indiscernible] Another [indiscernible] was the approval of the company's foreign share buyback fund, with the acquisition of approximately 1.2 million shares to be carried out within 18 months, and the total plan representing 0.8% of the company's total shares with 2.2% of outstanding shares. And the main part of this [indiscernible] is basically to hedge a long-term incentive plan for the company's executives. Now let me give the floor back to John so that he can talk to us about the strategic projects.

Thank you very much, Rosangela. Let me start by talking about the internationalization project, which is mainly materialized by Portobello América, where we continue to make important progress. So with regards to the sales, despite the still adverse scenario in the local market Rosangela presented earlier, we showed a strong growth of more than 40% compared to the second quarter of 2023. The volume of sales exceeded the production by more than 2x in that period. And in April 2024, we started our [indiscernible] small format production line. And this is a line of special parts that are [indiscernible] highly demanded and which is very characteristic of the American market, which represents another very important step in the positioning of our brand. For the production line, the final line specifically continued to make progress in the process of maturing and stabilizing the process that we talked about a lot in the first quarter. And we made progress in productivity and the quality so reducing the costs. Margins, however, still reflect the [indiscernible] and this is due to the natural process [indiscernible] And at the same time, ramping up the [indiscernible] we have successfully adjusted the unit's expense level, which you see. We have reduced the expenses over revenue by 21 percentage points compared to the second quarter of last year. And this level still fails to reflect the ideal level so obviously, we still have a way to go in terms of revenue growth. But you see, the growth [indiscernible] Course of this year reinforced the confidence that we all have in this project, and it gives us an important perspective for the next quarter, especially [indiscernible] contribution results perspective. We had already mentioned this last quarter, but it's worth reinforcing our participation in this year's conference which took place in November. Portobello América was once again [indiscernible] highlights of the year, and this time, with all the launches of the collection based on the product, produced at the Tennessee factory in the 4 launches of the new small format line. And it is worth noting that this is the largest ceramic tile trade fair in the United States, and this is a very important moment to strengthen the robustness of our position in that market, with the aim of being recognized as a brand of design innovation and a product made in the U.S. So Portobello Shopping, our business unit that leads the integrated retails, also remains very good results. End of the second half of the year, we had 156 shops, of which 127 were franchised, 29 own shops with the conversion of 2 franchises into own shops. And this year, one of the main focuses has been the qualification for our shop network, whether through sales performance or improved productivity, with an emphasis on the locations with high growth potential and underperforming operations. Our own shops already account for 47% of the unit's revenue, which show double-digit growth, reaching 10% despite the fact that this was still a quarter of low sales at 1.7%. We continue to have a high NPS, 86%, which demonstrates good execution of our strategy of valuing our customers' shopping experience. An important highlight that we bring for this quarter is the B2B expansion. We can say that the main objective of this general [indiscernible] aims at strengthening this presence in specific segments. [indiscernible] a customized base, which is ultimately provided by our Portobello Shop Network. And this new channel, which complements others that we have in the group is designed to maximize the results of the corporate sales, with sales teams dedicated to serving franchised networks and commercial units. And the results of this channel saw significant growth with revenue increasing by 47.2% in the second quarter of 2024 compared to the same period of last year, representing more than 7% of the total revenue. And another very important pillar, which is part of the Portobello Group's strategy is the [indiscernible]. We meet [indiscernible] and that is basically aimed at highlighting our vision for the future and the evolution of our commitments towards sustainability. Our 40th anniversary marks this special innovation and pioneering experience, and it reinforces our role as protagonists in the evolution of sustainability in our society. Let's now take a look at the outlook for the second half of the year at Portobello. And as I have already mentioned, more details we expect progress in the process of ramping up our operations [indiscernible] have a very important impact on our results. Portobello Shop has proved to be the group's most resilient unit over the last few years, and that is still part of one of our greatest integrated retail. We are focused on resuming our growth levels. And we've already had higher growth levels than the ones at the moment. Whether through growth in the sales segment or the maturation of the chain's growth, or even through the pricing strategy. As for the Portobello unit, we must continue to grow in all channels. And we seek to evolve with our product mix through launches within our innovation cycle as well as making progress on new strategic pillars, [indiscernible] internationalization. And the export of the Portobello unit is also part of our internationalization strategy. Pointer must continue to make progress on our strategy of strengthening and training small and medium-sized sellers, as well as [indiscernible]. The resumption of industrial competitiveness should be an important [indiscernible] continue to generate good results going forward, either from the [indiscernible] For example, let's talk a little bit more about the economic and financial [indiscernible] As a result of that, investments for the economy are at a level which [indiscernible] On the leverage side, [indiscernible] implementation of financial solutions for companies and infrastructure, [indiscernible] mainly with the good lending and monetization schedule and reducing the effective costs of these debts. Thank you.

[Operator Instructions] Our first question comes from Mr. Gabriel Duarte. What is the forecast for the start of the third furnace?

Gabriel, thank you for the question. Well, you are right. We aim at opening this second tile furnace. And we started the special pieces operation last April, and we plan to commission the third furnace. And the third furnace should start its operations in the beginning of 2026. So 2025 is definitely a year for us to implement this line so that we can start with the operations effectively in the beginning of 2026.

Our next question also comes from Mr. Duarte. Do you have any updates with regards to the anti-dumping policy?

It's a bit more specific about this because we have many anti-dumping policies around the world so I'm not sure whether your question refers to any of those in particular. So maybe we could just wait for you to specify that for us.

And the other question is from Gabriel Duarte. What are the expectations of the company about that?

I believe it's still on anti-dumping.

And finally about the fitting. How will that effectively work? Is this to invest on old receivables or new ones? And how could that help in the net debt?

Gabriel, with regards to the FIDC, I mean, this fund is available for the company to use in upfront cash discounts so the whole turnover of a group of clients can be received directly through this fund. And so this fund definitely aims at managing the receivables management working capital. And if we look at our debt volume, that would represent something like 0.3x net debt EBITDA.

Our next question comes from Mr. [ Eduardo Calero ]. So the results release mentions that the America Portobello plant has reached a quality index of 84%. Could you give us some more color on the quality index? And could you specify what is your aim after the ramp-up process?

Eduardo, thank you for the question. You are right. I mean, we mentioned this and it's a relatively simple concept. And at the end of the line of the production process, we classify the level of quality in 2 parts, premium quality and commercial quality. Commercial grade, which is slightly lower. And the level that we seek to reach is 90% quality. So it is also worth mentioning that our greatest challenge is not quality alone but also productivity, of course. So those are the 2 main variables that we have been keeping an eye on. And as we mentioned in the presentation, this was highly significant in the second quarter and we are still counting. We're still observing some progress throughout the months. And we still couldn't see that translated into the results because obviously, we still have to do the stock rotation process, better productivity, better costs, better quality, lower cost production. So it will take a while until this is produced and translated into better margins.

The next question comes from Leonardo [indiscernible]. Could you please go over the detail of what had an impact on the gross margin of the PBA operations? And what should we expect for the second half of the year?

Leonardo, this is somewhat connected to the previous comment on productivity, quality, and cost. So given the ramp-up process of the plant itself, we were operating with very high costs. So the costs are now getting close to the levels that we definitely need to reach in order to accomplish a good profitability to our process. So this is the main effect of our gross margin. Obviously, there will be effects on the revenue composition, either through the product mix or the analyst mix, but the main effect is going to be on cost. And let me mention something on the top line. Top line, I mean, we've been doing really well. The acceptance of our product, either because of its design, product or portfolio, it has been extremely positive. Our pricing levels can be considered adequate if we consider our objectives, the project objectives. And during the presentation, you probably heard that our sales level has actually overcome twofold the current production. So we have been generating a lot of revenue. So the challenge remains and the bottleneck is at the plant level.

Another question from Gabriel Duarte from [indiscernible] Research. Do you have any updates with regards to the anti-dumping policy? The anti-dumping policy that has been considered by the American government against Indian ceramic products that might end up reducing imports from India to the U.S. What is your -- what are you expecting with regards to that?

Thank you, Gabriel. Now I got your point. Well indeed, this is a work in progress. And we could see this anti-dumping is the Indian product. And we should say that, that has an important representativeness in the American imports. The American market actually imports 70% of its demand, and something like 20% of that comes from India at a very competitive cost, actually. So this anti-dumping process started out at the beginning of the year. It's been accepted and consolidated in the month of May. So that was the first step. And that has gone through a second stage already, which was the analysis of the request so it was already considered valid and validated. And so the next step pertains to effective preliminary and effective actions towards fighting anti-dumping -- Indian anti-dumping strategy. And this is supposed to happen in between September to November. This is our expectation although we still have some level of uncertainty with regards to that. But that's what we aim at. And this is what we expect. So now, I mean, it's just a matter of wait and see how this process is going to develop.

Our next question comes from Mr. Tiago [indiscernible] an investor. How do you plan to restructure the debt since your current cash is still equivalent to the one that is going to be due in 2024? I mean, are there any expectations for new emissions?

Well, aside to the business evolution strategy, we have been saying a lot about Portobello América results evolution. It's been generating very positive figures for the operations and the cash generation. The second half of the year is slightly intense in terms of seasonality. And that usually reinforces the company's cash. Additionally to that, we do have a pipeline of alternative financial operations, and they have different levels of maturity. So at this very point in time, we are not intending to do a follow up.

[Operator Instructions] Well, the question-and-answer session is now closed. I'd like to give the floor to Mr. John Suzuki to make the company's closing remarks.

Well, let me just thank all for your participation. It's a pleasure to share data with you. And let me just reinforce our confidence. It's been a very good second quarter with growth in all the businesses, market share gains in all businesses. And I really hope we managed to convey the consistency of our strategies throughout in all our businesses. Not only we've been growing and recovering profitability but we have been consistently executing the strategies that were defined for each one of those businesses. On our end, we continue extremely confident with our businesses and what is still to come in the future. So thank you very much and see you next quarter. Good afternoon.

Portobello Group's earnings results media conference is now closed. Thank you for your participation, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]