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

Good afternoon, ladies and gentlemen. Welcome to Portobello Group video conference to discuss the results for the fourth quarter of 2024. This video conference is being recorded, and the replay can be accessed on the company's website at ri.portobello.com.br. The presentation is also available for download. [Operator Instructions] The presentation will be held in Portuguese with simultaneous translation into English. Before proceeding, I would like to emphasize that the forward-looking statements are based on the beliefs and assumptions of Portobello Group's management and the current information available to the company. These statements may involve risks and uncertainties since they relate to future events and therefore, depend on circumstances that may or not occur. Investors, analysts and journalists should take into account 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. Here with us, we have Mr. John Suzuki, CEO; and Mrs. Rosangela Sutil, Vice President of Finance and Investor Relations. I would now turn the floor to Mr. John Suzuki, who will begin the presentation. Please, Mr. Suzuki, go ahead.

Good afternoon, everyone. You're all welcome to our presentation of the results for the fourth quarter of '24. We will start with a market contextualization by Rosangela, and then we will approach Portobello's Group operational performance, and then we will talk about the different units who had consistent growth. Immediately after, I will come back to talk a little bit about the strategic projects and our outlook for '25. We will end with a Q&A session. Rosangela, I turn over to you.

Good afternoon, everyone. It is a pleasure to present to you the results for the fourth quarter and closure of 2024 to you. To start, we're going to evaluate the performance of the Brazilian market. According to publications, we had an increase of 0.6% when compared to the fourth quarter of the previous year. In '24, when compared to '23, we had a growth. And we can also see that PBG had a growth above the market as we had throughout '24. The company reached 12.4% of growth when compared to the fourth quarter of '23. And in the accumulated results for the year, we grew 17.6% when compared to '23. This performance with a more challenging market represented a gain in market share for all businesses of the company. In the U.S., this market faced significant challenges. And then in the first quarter of '24, we had results disseminated by TCNA, and we can see an increase of 10% when compared to the same quarter of the previous year and a decrease of 2% in the accumulated results for '24 when compared to '23. The civil construction sector in the United States remains below its historic average, but we can see signs of resumption, especially with the recovery of housing starts in December '24. Despite this adverse scenario, Portobello America had significant growth of 57.2% in the fourth quarter when compared to the fourth quarter of '23. The unit with a national production on tiles in the United States consolidates its presence in this strategic market for Portobello Group. Now moving on to the operational and financial performance. We had an increase of 13.6% in net revenues when compared to the same period of '23, totaling BRL 662 million in the quarter and BRL 2.4 billion in the accrued results for the year with an advance of 9.9% when compared to '23. All of the business units recorded growth in the quarter. Portobello America grew 48.3% in the fourth quarter of '24 and 30.8% in '24. Pointer advanced 29.9% in the fourth quarter of '24 and 28.8% in '24. Portobello Shop, our specialized area, had a growth of 13.8% in the fourth quarter of '24, reaching 8.6% of growth in the year. Portobello, our productive unit with some sales channels such as resales, engineering and export channels, grew 3.8% in the fourth quarter of '24, reaching 4.8% of growth in the year of '24. In terms of geography, the participation of the revenues went up to 22.3% in the accumulated results for the year, reinforcing our strategy to internationalize. In the fourth quarter of '24, the company had operational optimization aiming at the efficiency of our businesses, guaranteeing a more solid base for growth. We had nonrecurring impact on the following areas for the fourth quarter of '24. Gross revenue, BRL 28.2 million, resulting from the inventory adjustment generated by production costs in the ramp-up of the Portobello America unit. Operational expenses with an impact of BRL 16.9 million, resulting especially from more efficiency in the group resulting from layoffs. And then we had a total impact of BRL 45 million. With the optimization, the company remains strong to capture efficiency and guaranteeing its position in the market, advancing with its long-term strategy. Now we have the effects of the optimization. The gross margin had 36.63%. In the year, we reached BRL 894 million and a growth of 45% when compared to '23. The operations in Brazil sustained the consolidated gross margin, reinforcing the resiliency of the business. Pro forma expenses totaled BRL 195 million in '24, totaling 31% of the net revenue. In the consolidated results for the year, we had BRL 700 million left, indicating our continued focus on operational efficiency. The pro forma EBITDA was -- had a margin of 13.1%, a growth of 26.2% when compared to the fourth quarter of '23. In the year, the pro forma EBITDA reached BRL 358.6 million and a margin of 14.9%. We closed the fourth quarter with a pro forma net debt impacted by exchange rates of BRL 639 million with continued reduction of the cash conversion cycle via optimization of stocks, negotiations in deadlines generating strengthening of operational liquidity. Also, in terms of our free cash flow, we had an increase of BRL 109.5 million. And this reinforces the operational reinforcement. And the investments totaled BRL 184 million, a decrease when compared to '23. But I would like to remind you that in '22 and '23, the company carried out significant investments according to its strategy to expand with Portobello America, whereas in '24, the priority was only on maintenance investments and technological investments, which are essential for the continuity of our business model. Therefore, we closed '24 with a net debt of approximately BRL 1 billion and a pro forma leverage of 2.8x the net EBITDA, therefore, maintaining our commitment with deleveraging. I now turn over to John, who will talk about our strategic projects.

Thank you very much, Rosangela. As Rosangela mentioned, in '24, we grew in all business segments, which was above the market, both in Brazil and the United States. The year was challenging, but with a lot of resilience, capacity to adapt and focus on our priorities, we were able to have a good performance and advance with our strategy. And now talking about the operations in the United States, which is one of our strategic pillars, which had important advancements in '24. The unit is getting close to the main assumptions, including costs. At the end of the year, we reached the breakeven EBITDA. Our net revenue in dollar had a growth of 57% when compared with the same period last year with 35% from the distribution channel. Production of 3 million square meters in '24, reaching 85% of the utilized capacity, I'm sorry, with quality. We had 8 launches produced at the PBA factory and 4 launches from the new special pieces line. And now talking a little bit about our outlook for '25, we have some main challenges. In Portobello America, the main challenge is no longer the stabilization of the plant and its sales, especially with improvements of mix and channel products gaining market share in the U.S. market. It will be a year where we expect to collect some results. Portobello Shop will continue expanding through company-owned store and franchises with the maturation of the B2B channel to strengthen growth. We still have potential to grow, be it with a diversification of channels and products or because of the efficiency leveraged by digital improvements. We also take into account the recent successes we've had in the Portobello unit, which started '25 with strong challenges and the impact by the January rains in the state of Santa Catarina will continue growing in different channels. We will move on with internationalization, increasing our market share. This unit has demonstrated good resiliency and capacity to adapt despite having faced the most challenging scenario. And here, we also have positive expectations regarding launches. And in Pointer, we are consolidating a very important strategy shift with the competitiveness of the unit. We will have strong sales volumes, greater penetration through the dry route. Rosangela, can I talk a little bit more about prospectives from a financial point of view? Well, from the economic financial point of view, our expectation is to continue delivering the business strategy, capturing growth in the investments that have already been made, acting with discipline and productiveness, reducing costs, aiming at improving our operational results and cash generation. The investments have adequate levels to maintain quality, delivering products, innovations and technological updates. Regarding leverage, we continue committed with the re-profiling of our debt. We will focus especially on cash generation, leveraged by operational productivity, running capital efficiency and making maintenance investments only. Thank you very much.

[Operator Instructions] The first question is from Daniel Chaves.

What is the reason for the decrease in the American market?

Well, I understand that the question refers to the market and investments in ceramic in the United States. In the case of ceramic in the United States, we have the effect that we see not only in the U.S., but here in Brazil and in other parts of the world with increased interest rates, which result from inflationary pressure. The U.S. market is really feeling this. The real estate market depends on funding. And also, their real estate leasing with a very long terms and also the interest rate curve has increased, which makes some pressure for the construction of new homes. This is the main effect we felt. We've seen this in all different channels going all the way to the distributors. Also, in the release of results of some important players, we can see the same effect. And so this results from interest rates.

I would like to add by talking a little bit about the structure of the U.S. market, which includes 30% of local production, 70% by imports. And many of these oscillations in the last few quarters, we haven't really seen it like that. But these market oscillations are more due to imported products than to the local production. And right now and also because of the change in government in the United States, we see a scenario of strengthening of local manufacturers. For those who, like us, import products, the fact that we are manufacturing in the U.S. places us at an advantageous position with a more positive perspective for the United States despite the scenario demonstrated by all of the indicators.

The next question is also from Daniel Chaves, GT Investments.

Could you talk a little bit more about the adjustments of the fourth quarter and detail a little bit more of the lines which had an impact? Also, could you talk about other quarters, which did not have adjustments since the rampage of the plant in the United States -- or the ramp-up of the plant in the United States has been taking place since '23?

Well, we had stock and inventory adjustments throughout '24. And we've been talking about this from the very beginning of the year because of the ramp-up of the plant in the United States. In the beginning, they went through a phase with higher production costs because of the reasons we described in the past and that are related to the fact that we reached the desired quality level. And so throughout the year, we carried these results until we reached the expected costs. And then in the end of '24, we had a stock with higher [ main ] cost. And at the end of the year, we made the decision to provision for these results to guarantee that throughout '25, we will capture more consistent results, which are clean and take into account the current production process, which is more mature in terms of qualification and quantification. This is one of the effects. Another effect in the expense line, especially expenses with personnel, this is related to layoffs. We reevaluated our team, aiming at productivity and efficiency, and decided to have a onetime so that we could start the year with a more efficient OpEx so that we could have cash generation throughout '25. There was a second question. Could you repeat it, please?

Daniel asked to comment why there was no adjustment in the other quarters since the ramp-up has been taking place since '23.

Well, I think I somehow already addressed this question. I will reinforce: Throughout the year and in the other quarters, we were trying to reach this quality level, leading to more adequate costs and also with an update of our stocks. That's why at the end of the year, we understood that it was the best moment to make this adjustment so that we could start the year with a more robust gross margin generation for Portobello America.

The next question is from [ Thiago Nascimento ] .

I would like to know what EBITDA margin you expect for PBA and Pointer.

[ Thiago ], we only open our results to the level of gross margin. What happens is that below the gross margin, some expenses are direct and others are distributed and therefore, we prefer not to open it.

Well, I would like to complement it here. We avoid giving this kind of guidance. This is part of our policy. But I would like to reinforce an important aspect that we commented during the presentation when we talked about the breakeven. This is something very important in our project. When we talk about breakeven, we are talking about EBITDA, even though we do not disseminate the results. And so we are already operating with a positive EBITDA in Portobello America, and we're talking here about a plant which has been running for 1.5 years, greenfield, so it's only natural. We have this impact by the plant. It's a little bit slower than we would like it to be. But of course, this is not the same level that we were expecting from the project. And we've only surpassed this breakeven aspect. Now we expect to reach even better results. I can also comment that structurally speaking, the U.S. market operates with superior margins, be it gross margin or EBITDA margin when we compare to Brazil. And therefore, the expectation is very positive in this regard.

[Operator Instructions] The next question is from [indiscernible], [indiscernible] Itau Assets.

I'd like to know how much investment the company expects to make this year and in '26, and how much of this CapEx would be for maintenance.

Once again, I have no comment about this. We do not have any guidance data, but we can qualify it a little bit. So [ Thais ], thank you very much for your question. I would like to mention that leveraging is very important to us. This is a very important guide, and we commented about this in the perspectives of our commitment to deleverage the company moving to a healthier level. But even so, this is a very important aspect for us throughout this year. So this means that we will be more careful with our investments. We refrained from investing last year. When compared to previous year, this is only natural because we were making investments. We will probably not have a very different CapEx than what we had last year. And '26 will result from this moment when we are deleveraging. Our strategy is still aimed at growth, especially in the United States, but also here in Brazil because of our businesses, our stores, and digital investments. Our priority right now is to deleverage the company. And so in '26, I can tell you that we will not have huge opportunities for investment, but the level will be a function of the deleveraging.

Well, I'd like to add something here about CapEx, reminding you that the CapEx is financial and to cash disbursement. The reported CapEx and what we expect to have for this year and for next year, a large part of it is about 20%, which is aimed at the production of Portobello America investments. And the other difference is related to the evolution of the required maintenance.

The next question is from Andrea [indiscernible].

When John spoke about the challenges for '25, can we expect any changes in the gross margin?

Well, this is what we are aiming at. There is one effect that we've already seen in our operations, and I commented about them. We will turn the page of the plan to stabilization with a -- we are aiming at lower costs and costs that are close to what we had in our business plan, and we are reaching now. This alone will give us a better gross margins. My other comment was that we have another challenge, which is a new page and improvement of the mix. We have a long way to go in terms of the mix, be it in the futile, looking for products with better finishing, better design, but also we still have another very important part of the special business line, which has less production, but high added value. We're talking about products which will have average costs that are 2 or threefold higher. And that has a direct impact on the gross margin. And throughout '25, we will see an expansion of the gross margin and consequently in the EBITDA.

The next question is from [ Fabio ] in Portobello America.

We see the production capacity of 85%, and the operation reached a breakeven. When should we see more positive margins only when the next expansion of the plant is concluded?

Well, Fabio, I think that is connected to Andrea's question. We will explore it a little bit more. You mentioned the third line of tiles, which are part of our plan. We don't depend on that to improve our current margin, as I mentioned in the previous question. We still want to try to obtain a little bit more support. When we have a new oven, of course, we will dilute the fixed costs of the plant, and we'll we also have more flexibility in terms of portfolio. We want to improve our mix even further. We would have a potential margin, which is still higher. But in '25, we don't depend on that. The second oven, we've anticipated it for '26. But this is also because of what [ Thais ] mentioned in terms of leverage of the group. And then we have a situation where we will be able to resume our investment.

Next question from [ Thiago Nascimento ].

Do you have an expectation for the outcomes of the antidumping study of Indian ceramic in the United States? Do you have any expectations or conditions to start the third oven in PBA? I would also like to know how you expect to face the amortizations of BRL 400 million in the debt in '25?

[ Thiago ], I will answer the first part, and Rosangela will deal with the second part. I just commented about the oven. We will have an additional oven in '26, probably in the second half of the year. But we are very confident with this deleveraging level. If you analyze our results, you will see that we closed '24 with significant growth in special growth from Portobello America and Pointer, which had significant achievements in '24. And this is also a contribution despite the size of the plant, which is very important, and we will see an evolution of the business and the margin in '25 because of that. And then there was a first question about antidumping. Our association of the sector in the United States is very strong. Our investigation process is ongoing. And it's very difficult to anticipate these results. This was accepted because there are reasons for it. And maybe we will have some influence on the part of the new government with a stronger uncertainties, and we can see this trend. But technically speaking, it's difficult to say. This is very important, of course, for the imports in the United States. It grew a lot in the first quarter. And then we can see a mild decrease in imports, and we will continue observing to see where it will take us. And Rosangela will now complement it.

Well, in terms of the amortization, [ Thiago ], we have well-structured actions and liability management. And in the market, we have some of these actions which address the year '24, but we are also addressing some for '26. And then we have the continuation with operational results, strengthening of our cash generation with our structures, be it with running capital and the need of CapEx investments.

[Operator Instructions] Next question from Daniel Chaves from GTI.

Have all of the adjustments come from PBA?

Daniel, all of the adjustments related to gross revenue, which are stock adjustments, but the part of expenses refers to the whole group in all the different areas.

Next question from [ Renato Cobo ].

The company has market share gains, which is very positive. But in general, the liability assets, isn't it heavy and expensive for the company's assets?

Well, this market share gain has been very important for all of the businesses. The compatibility of our debt has 2 factors. One of them is the moment the company is going through. We couldn't see this scenario, but we've made important investments. We are still not collecting all of the results. And there is some imbalance because of this. But we are at a more critical part when we have concluded all of the investments. And now we are beginning to see the breakeven. These things do not come at the same speed. We didn't expect this level of interest rates. And we have these more expensive accounts, which have had an impact on our results. And yes, we do have a challenge to improve the profile of this debt. This is one of the operations that Rosangela commented about. We want to improve our debt and cost. And this is something ongoing. And it is something that we have to attack.

The Q&A session is now over, and we would like to turn over to Mr. John Suzuki to make the final considerations on behalf of the company.

Well, I'd like to thank you all and make some additional comments. I would like to reinforce the aspect of Portobello America, which is going through a very important moment because when we reach a breakeven, we can see a positive contribution to our results. This is very important in our plants. On one hand, we had negative results and we'll now begin to have more positive contributions, be it for the EBITDA margin and profit. We reinforced this throughout the whole presentation. This capacity to adapt the company to go through these moments where we want to deleverage the company and make all of these captures throughout the year, looking for operational results. Things that we didn't have until then, we will now see this as one of the company's main indicators so that we can really share this message and the priority we give to these topics. We have the integrated market with very important strategies, which have generated value for the company. We've gone through this moment. We have a clear path to follow. I would like to thank you all for your attention.

The conference is now over, and we thank you all for your participation. Have a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]