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

Good afternoon, ladies and gentlemen. Welcome to Portobello Group's video conference to discuss the results for the first quarter of 2025. This video conference is being recorded, and the replay can be accessed on the company's website, 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, we 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 as they relate to future events and therefore, depend on circumstances that may or not occur. Investors, analysts and journalists must understand that events related to the macroeconomic environment, industry and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this conference are: Mr. John Suzuki, CEO; and Mr. Gladimir Brzezinski, Interim Executive Vice President of Finance and Investor Relations. I would now like to turn the call over to Mr. John Suzuki, who will start the presentation. You may proceed, sir.

Good afternoon, everyone. It's a pleasure to be here with you once again. Welcome, everyone. We are now going to discuss the results of the first quarter of 2025. We'll talk about the market, our operating results and financial results as well with a highlight on the growth that we had, in a very broad sense in all our business units. We are also going to make comments on an event, which was very important for our first quarter, which was the heavy rains in Santa Catarina in January. And finally, we are also going to cover the financial aspects, especially our cash, cash generation and so on and so forth. But before getting into the agenda, I would like to make some comments on the decision that was made yesterday at the Board meeting. We had the election of the Statutory Board. We had some changes, important changes in the Group. I remain as the Chief Executive Officer of the Group. And here with me, I have Gladimir Brzezinski, as I have already introduced, he is the Interim Executive Vice President of Finance and Investor Relations. He has been with the Group for more than 40 years, a long history working with us with international experience, and also working in the financial dimension abroad. He was also part of the controlling and also in the internal audit. So in short, long and beautiful trajectory with us and now providing support to us as CFO. And the new Statutory Board has Romael Soso as a member. He joined the group in 2021. And since then, he's been the CEO of our business unit of Portobello Shop. So you know the story of Portobello Shop, especially during the period when he was here, where he promoted a very major transformation in our business model in the retail dimension, reporting strong growth. And he maintains his position as CEO of Portobello Shop, but he's also with us with our corporate team as an Executive Vice President of Retail and Innovation. So let me delve into the market overview. The Brazilian market of ceramic ended the first quarter of 2025 with modest growth of 0.4% year-over-year, as you can see in the graph. Since the pre-pandemic period, we see the seasonal effects on the graph, but our sector still performed lower than what we had before the pandemic in 2019. We are experiencing a low growth in our sector. But when we move on to the next slide, we can see that Portobello and considering the operations in Brazil stands out in the sense. When we compare our performance in terms of volume per day of our sales and the operations in Brazil grew 6.5% in volume when compared to the 0.4% reported by the market. But it has been operating at full capacity in all our units in Brazil, Portobello, Pointer. So we are operating at full capacity when the sector is operating at 67% as capacity utilization. In addition to our own production, we also have production made in outsourced units. In practice, that means that we have been selling above our capacity of production. On the right, you can see the history for purposes of comparison. We always compare with the period before the pandemic. We see that the market is at 85% of what was reported in the pre-pandemic period. And we are gaining market share in comparison to the market, as we can see here. In the United States, which is a market which also depending on the metrics, we have been observing a negative number or a low growth level. Consumption is still at the level of 5.9%. These are the data of the fourth quarter of last year. We still do not have data about the first quarter of 2025, but this is what we posted. In terms of local production, we had a drop of 2.4%. When we compare with our performance in the United States, we see that our performance posted a growth of 53.2%. As I said, of last quarter, we look at the income, we saw that we grew in 44% in U.S. dollars and 66.8% in BRL. On the right, we see a little bit more about the perspectives of the market. We can see that this is important to understand the dynamics of our sector. It's still moving sideways. Just regarding the seasonal effects, we are at the same level when we compare with the same period of the previous year. And down below to the right, we see the consumption of what was happened in the United States, and we see imports and domestic production. Local production accounts for 29%. We have a typical dynamic today in terms of imports and exports as a result of this movement of tariffs that we have been seeing in the United States. So -- but even so when we compare the fourth quarter and the same quarter of the previous year, we can see that there was growth. We can move on now. And now talking about our performance. We ended this quarter, this first quarter of 2025, reporting a growth of 12.6%, considering the context that we have just described, both in the Brazilian market and in the American market. I'm going to focus a little bit more later on, on the Portobello America, and I will discuss the operation of Pointer, who has reported important evolution since last year. And here, we can show this is a very important indicator that reflects our evolution of our internationalization project. Our revenue coming from abroad through Portobello America or through our exports from Brazilian units account for 27% of our revenue. When we compare with the same quarter of last year, we had 7.2 percentage points of growth year-on-year. So we can see that we are making headway with our strategy to internationalize, headed by our operations of Portobello America. And we can see that we grew in all our businesses. We saw that I mentioned Portobello America growing more than 40% in dollars. Pointer growing more than 21%, 21.8%. We have been making some comments about this progress in previous calls. We did a very important work to reposition the brand, the portfolio of Pointer. And this was driven by a lot of competitiveness that we had at the plant. And this is helping us to gain this -- gains in scale at Pointer. Shop that has a history of showing the highest resilience considering those market moments. And once again, it posted a growth of 2 digits. It grew more than 10% in the first quarter. And finally, Portobello, our B2B business, multichannel that sees in a very broad way all the impact on the market. It grew 2.9%, therefore, above the level of the market, showing resilience. And our focus is Exports and Engineering, which were the 2 channels that had the best performance this quarter. And we can see that those segments are likely to continue growing along the year of 2025. We also expanded our gross margin. This is a very important balance to take into consideration since the market is weakened. And even so we grew in revenue, in volume and expanding margins. Highlighted is Portobello America that grew its margin. Next slide, I will discuss more about it. And Pointer also grew in revenue volume and margin. And the internationalization by efficiency. A part is -- internationalization part our launches, all related to our commercial strategy. And part of it is explained by our operational efficiency. I can show a bit better each of our business. We come from a quarter which was very fragile, so as to say. Last year, we were in an initial phase of our ramp-up of our plant in the United States; and therefore, with a margin much lower. And we grew. We reached 16.4%, okay? And highlight should be given to Portobello America because with this gross margin with which we are operating, we already exceeded the breakeven of the operation. More specifically, we have been reaching and exceeding the breakeven since December last year and with consistency in all the months until the end of the first quarter of 2025. This is a very important topic, considering that it was an operation considering the level of maturity of our operation in the United States, it's an operation that used to consume our EBITDA along 2024 and in 2025 will contribute to our results in terms of EBITDA. Pointer also expanded its margin from 8.2% to 12.2% in 2025. Again, it's a result of our strategy adopted to reposition and gain scale. We saw back in 2023, some moments where we had some stoppages of our kilns, and that would affect the profitability of our businesses. And now we can see that the business is not only maintaining those kilns working at full capacity, but even selling volume higher than what we produced at the plant. Portobello also had a very good performance. The business is much more mature with more robust margins from a margin of 38% last year, we reached 40% this quarter as a result of the performance of the launches, not only of this year, but also considering those of last year. Portobello Shop is in a segment. And I would like to make this comment because we -- the segment, the retail segment is the one that has been impacted by the market moment, Portobello Pointer, which are omnichannel businesses. But directly Portobello that operates in the retail market. And -- this had an impact on the margin, 46% last year, and we ended at 44.6% in the first quarter of 2025, and we have been working hard to recover this level. So we will discuss more about it when I talk about the prospects. In terms of expenses, it was also very important for us to build the result. We can see that in the first quarter of last year, we had what -- we measure expenses over net revenue. We had an expense of 30% and when excluded the effect of the rains is when we -- this is when we see the effect of the rains because the losses that was caused by the rains, which was losses related to the inventory levels, they were included in expenses. But when we exclude this effect, we can see that the expenses reached 29%, 28.9% to be exact of our net revenue with the effect that reached BRL 20 million, our expenses go to 33.3%. So we can see that this topic of going after operational efficiency is something which is very present at the company for the moment, even from the point of view of costs or expenses. And with this, we reached a margin EBITDA of -- again, excluding the rain effect, we reached an EBITDA margin of 17%, right, the largest margin considering this history period. And when we exclude the effect of the rains, it was the highest absolute EBITDA. EBITDA would have been BRL 104 million if we exclude the effects of the rains. And with the effect of the rains, we reached BRL 75 million. So we can see the effect being BRL 28.9 million because the effects were not only related to expenses and because this also would include the costs. Talking about our net income now in the first quarter, excluding the effect of the flood, we would have reached a little loss of BRL 3.8 million. Below, we can see the information about the rainfall effect. So we have been working very hard in this first quarter on the cash flow. And part of it came from the work that was done in working capital. We can see that our cash conversion cycle dropped from 52 to 1 day in the quarter. So a great part of it comes from an intense work related to negotiations of terms with our suppliers. We managed to expand with those partnerships that we established 40 days as an additional term, and we use our FIDC. This was a very important way to structure our first quarter with the FIDC, our supplier reaches BRL 106 million. We built a very important instrument to allow those negotiations with our suppliers. But we also worked on the inventory levels and also with the clients to reduce this conversion cycle. So these were initiatives that were very important for our cash flow for this quarter. Okay, we can move on. And we managed our investments very cautiously. When we look at the deleveraging actions, we only maintain the essential investments for our operation or those which were already being made along the time. And in the quarter, we invested 18. (sic) [ BRL 18.8 million ] So that was the lowest value in this historical period that we are showing you. And with this, considering all the work that we did and having the operational results and working capital and CapEx, we managed to reach a cash flow of BRL 136 million when we compare to the same quarter of last year when the cash flow was negative -- so we had about BRL 200 million additional cash generated in this period. With this cash flow, we were able to maintain our commitments of deleverage at a gradual pace. When we look at the dotted line, orange, which is the pro forma leverage, excluding the extraordinary effect, we were at 3x EBITDA last year, and we are closing at 2.85x this quarter. And we would have closed at 2.7x EBITDA if it were not the effect of the rainfalls and the restructures that we did in the fourth quarter of 2024. And with those effects, our level is slightly above 3x. It's important to remember that we even had a communication to the market, and we had a very important capture of $54 million. And that amount was very important to maintain the liquidity of the company, but especially to improve the debt profile of our company. We can see the amortization schedule and with this new mission, we managed to expand the elongation of our debt for 2.12 years. So we are evolving. So this is still the challenge that we have. We still have a volume of amortization of BRL 361 million still this year and BRL 370 million for next year. And a large part of this amount is being worked on. And briefly, we are going to announce some new updates about this as well. And closing with the operation, we closed with a cash and equivalents of nearly BRL 500 million. And part of it are the quotes, subordinated quotes that we have in the FIDC. If it weren't for those, we would have a cash of BRL 412 million. And even so, it's still a very robust cash considering we are -- for the end of the quarter. So this was the information I would like to share about the first quarter of 2025, talking about the prospects for the rest of the year. So I'll start with Portobello America because not only was it important to have this first quarter, we generated positive results at Portobello America. We expanded gross margin, and we posted positive EBITDA results, but we see the evolution of all those operations along 2025. We are likely to continue this ramp-up related to sales or our plant, which is already very mature. It's already very competitive at the industrial level. But we are going to continue watching the business to evolve, especially the effect results because part of what we see in industrial ramp-up is still in the inventory level. And we do not immediately see this reflected in the results. And also growth in terms of volume, and this growth in the sales volume is likely to provide a gradual reduction of the inventory levels, either through the sales mix, which is an initiative that we are likely to complete along the year. In terms of Portobello Shop, the margin is an important topic. We lost margin in the first quarter. We are working to recover those margins and different commercial strategies are going to be adopted related to portfolio launches or work with our network, which is likely to ensure a recovery of our margins. And at Portobello, our omnichannel business, we are going to watch a year with growth coming from especially the segment of Exports, Engineering segment. As to Retail, we see that we have to face tough moments. So another important point is the great competitiveness we have in terms of cost. We have just closed a contract to migrate to the gas captive market to the free market of gas. gaining competitiveness that is likely to incorporate it. By the way, it's already being incorporated in our cost matrix at Portobello unit. And finally, at Pointer, we are going to continue seeing the capture of gains as a result of the repositioning that we made at Pointer. From the industrial viewpoint, we continue making headway gaining competitiveness in costs. And this is what is allowing us to make this repositioning of our portfolio. And with this, we are likely to continue watching the strong growth of Pointer and with profitability. This is what we would like to share with you in relation to the first quarter. And now I'm going to open the Q&A session.

[Operator Instructions] Our first question comes from Daniel Chaves with GTI. And this is his question. If you could provide more color on the new debt issue of $54 million term and equivalent rate?

We issued those bonds at the end of March, at the end of the quarter, as we mentioned, $54 million. The term is 5 years, 2 as grace period -- 2 years of grace period. With the support of our collateral and exports, it's in dollar. The interest will only be paid according to the CDI. I'm going to confirm some information with the team. If I say anything wrong, they're going to correct me. So it was CDI plus 2.7. Yes.

[Operator Instructions] Our next question comes from [ Alexandre Gavakadchi ]. When the management expects the company to have positive net income?

We have our policy not to provide any guidance. So I cannot answer in a direct way the question that you asked. Obviously, the management is working hard so that we can start generating net income in the short term. This is our purpose, our target. And most of what we have been discussing related to the focus on cash flow, reduction of expenses and also working hard on the working capital. The purpose is really to go back to have profitability, reduce our leverage ratio, reduce our indebtedness level, reducing financial expenses, which have been an important factor in our income statement and go back to being profitable. I would like to reinforce the information we have already provided. We have the rainfall effects in the first quarter. So this affected our income statement. If it were not for the BRL 28 million effect, we would have get close -- very close to a positive income -- net income.

Our next question comes from [ Leonardo Perefissa. ] Could you talk about the potential savings generated with the new gas contract?

That's a very good question, Leonardo. We are not very happy with the migration to the free market of gas. It's a very important share of our cost matrix. And we estimate that in relation to the gas cost that we have today, we are likely to see a reduction of 8%.

[Operator Instructions] Our next question comes from [ Julio Cesar, KVKNG ] Congratulations on the results. I would like to know, when we are going to see the resumption of payment of dividends.

Julio, thank you for your question. Julio, our dividend policy -- as you know, we are always after the 50% of distributable net income. Along the lines of the previous question, in terms of income generation, we are working hard to generate net income in the short term, and we would be very close if it weren't for the rains. If we have net income, we are going to follow our dividend distribution policy.

[Operator Instructions] Our next question comes from [ Jose Netto. ] The financial expenses grew in a horizontal analysis in relation to the first quarter of last year, about 21%. The depreciation and amortization grew about 15% in relation to the first quarter of 2024. CapEx had a reduction of about 18%. In addition to the nonrecurring effects of the rains, is there anything else that you would like to mention about those effects?

Let me answer your question by parts. First, talking about financial expenses. Financial expenses have the effect of the level of our debt naturally. So there is a growth of the debt. There is a natural growth in the interest rate. I'm talking about the basic interest rate level and it has been growing and has a direct effect on our financial expenses. But there are instruments that we are bringing into the company. As I said, we have the FIDC that has its financial cost and the financial cost of the FIDC is included in financial expenses directly. These are the main effects of financial expenses that we have, right? In terms of depreciation and amortization, we have some increases of amortization, depreciation in Portobello America also related to the expansion of our own stores that also have the depreciation and amortization aspects. Let me check with the team if there are other effects. But basically, these are the effects on the depreciation and amortization. I think Gladimir reminded me of Portobello America. Maybe we could provide more details because Portobello America had one of the lines -- on is, I suppose, is special pieces, and we started to -- start recognizing the depreciation of those lines quite recently at the end of last year to be exact. I'm not sure if I answered all the questions. I think so.

Our next question comes from [ Luis Bajose. ] When you talk about net revenue of Portobello Shop, you also talked about the own stores. When we talk about our own stores is the addition of Portobello to the own stores and to the sales of the final client. And the other one is related to the franchisees.

Before answering your question, let me make a correction related to the question of $54 million, the previous question. The cost was not -- yes, it was not -- it was CDI plus 2.2. So we -- I'm correcting the previous information. And in relation to the net revenue, how it's formed of Portobello Shop. In fact, we have revenue coming from our own stores and also revenues coming from the network of franchise companies. For our own stores, we recognize what we call -- refer to a sellout, which is the sales to the consumer; and therefore, the full price, so as to say. And for the franchised stores, we recognize the sell-in, which is the sales to our franchisee units, franchised units, not to the consumers, okay?

Our next question comes from [ Leonardo Perefissa. ] The working capital dropped to 1 day. It's likely to be leveled and normalized at what level?

Leonardo, that's a very good question. Again, we avoid to provide guidance, as I said before. But our expectation is not to remain at 1 day standard. In this first quarter, we did one task force, and we negotiated with our partners, with our suppliers, but we are not likely to remain at this level. But we are not likely to go back to the previous level of 50-some days. So we are likely to be anywhere in between those numbers. And part of those are -- are you -- or when we use other instruments such as FIDC. And we are likely to negotiate good terms with our suppliers. So we are likely to remain somewhere in between.

Our next question comes from [ Andre Santana. ] What's the effect of the tariff in the United States to Portobello America businesses and operations?

Andre, this is a very complex question because the scenario is not yet very well defined. I may share with you how we see the situation at this moment. When the tariffs -- additional tariffs came into play, at first focused on Canada and Mexico and then being known as [ Tariff FASO ] or a big tariff, we saw a positive effect on our operation, especially when we think about how our client base would respond when we talk about the imports and the local production. So we saw this as something positive. As the American government was retreating or providing a longer term for the accommodation that we are living now and beginning to negotiate with different countries that were being imposed those additional tariffs. We came into -- we started to have -- experience a moment of a lot of uncertainties. We saw the volume of imports increasing in the United States. And from the information that we have, this is something that has already stabilized. In terms of prospects, it seems that this trend is very clear that imports are going to be -- to have tariffs, high tariffs, which is with the purpose of valuing the American industry. And since we have a plant in Tennessee, we are an American business. So the prospect is very positive. And even from the viewpoint of Brazil, when we think about the tariffs being imposed, we saw that Brazil was -- had a tariff imposed at 10%, the lowest considering all the tariffs that were imposed. So it's -- we were being favored in this regard. But again, the developments are still very uncertain. And we see that our operation in the United States will be favored. This is how we see it now.

Our next question comes from [ Luciano Sosa. ] Portobello Shop had a significant growth in the first quarter of 2025. What are the main levers that sustain this performance? And considering the perspectives of stabilizing the margin, what are the actions that have been prioritizing not to compromise the expansion rhythm and profitability?

Let me start answering from the margin. There are important works being done. Part is related to competitiveness and costs and others are in relation to operational efficiency. And some of the activities are not likely to happen in the second quarter. I already mentioned the migration to the free market of gas, and this will benefit the whole Group since Portobello unit is a supplier of Portobello Shop. So we are going to have this higher level of competitiveness along the time. The migration started in the beginning of the month of May. But more than that, we have to consider the commercial strategies in the sense of mix of products, thinking about a more noble mix and also considering the competitiveness of the more affordable mixes. So we have this movement in our portfolio that is including the launches, and this is likely to bring a recovery of our gross margin at Portobello Shop. Portobello Shop has been following this growth pace with some fluctuations, but this is the growth rate of 2 digits for some years. And this is a result of the strategy that we have been implementing, both in relation to the evolution of our processes, looking at our competencies within the business, gaining commercial productivity, but also through the expansion of the network that we have. We have an additional channel at Portobello Shop, which is a B2B channel within the retail dimension, which has the purpose of promoting external sales of tours from small commercial works, construction works -- and we have seen good results from this initiative, and we are likely to continue seeing the good effect along the time.

Our next question comes from [ Alexandre Gavakadchi ]. Are share buybacks still happening?

No, Alexandre. We do not have an open share buyback program active. We have a small buyback program that was approved by the Board that only -- that has the purpose of composing shares in the long-term incentive program for the officers. Low volumes that are going to be made up gradually. But in addition to that, we do not have any active or relevant share buyback program.

The Q&A session has ended. We would like to give the floor to Mr. John Suzuki for his final remarks.

I would like to thank you all for joining in. I would like to reinforce some important message that we conveyed to you during this call. It was a good first quarter of the year. All the businesses grew. The Group gained market share in the markets it operates with a very important advance in the financial viewpoint with a good cash position at the end of the quarter. So we saw that the first quarter made good headway for the company, even in a more fragile market scenario that we are facing at the moment. Thank you very much, and see you next quarter.

Portobello Group video conference is now closed. We would like to thank you all for participating, and have a good day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]