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

Good afternoon, ladies and gentlemen, and welcome to Portobello Group's video conference to discuss the results for the second quarter 2026. This video conference is being recorded, and the replay will be available on the company's Investor Relations ri.portobello.com.br. The presentation will also be available for download. [Operator Instructions] Before we proceed, I would like to remind you that forward-looking statements are based on the beliefs and assumptions of Portobello Group management and the information currently 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 may not occur. Investors, analysts and journalists should bear in mind that factors related to the macroeconomic environment, the industry and other factors may cause actual results to differ materially from those expressed in the forward-looking statements. Joining us for the presentation of the results is Mr. Ronei Gomes, Vice President of Finance and Investor Relations. I would now like to turn the floor over to Mr. Ronei Gomes who will begin the presentation. Mr. Gomes, you may proceed.

Good afternoon to all of you. Welcome to the earnings call for the Portobello Group. Let's begin the presentation speaking about the outlook and some figures. We will begin with the foreign view. We have prepared this slide to prepare for you the market. We have separated the wet process and exports, you will see that there has been quite a bit of pressure this quarter. There has been a drop in the wet process, and this refers to the competitive price war and due to the unused capacity. We're working at 71% of utilization capacity. Now the market had a drop of 3.1%. Our performance had a somewhat larger drop because we were leading a decision, a strategic decision to qualify our mix. So we had a drop that was somewhat larger. And we offset this in our revenue with a very good performance in exports. We are working this quarter with a capacity of 91%, and we're still working with volumes that are higher than that of the market. So this is a portrait of the Brazilian market that shows you the -- what is happening now. What you'll see in this slide, you see construction material. In the last slide, you were looking at coverings. Now this is a market still operating much below that of other sectors, drugstores and supermarkets. There are no great variations between one quarter and the other. And the portrait therefore, is not very different from what we see in terms of coverings and volume compared to the American market, which is our second largest market. The market, once again, is still under pressure. The one in Brazil is moving sideways. We have had drops. And in the United States, the drop is somewhat higher. You'll see a drop of approximately 12% here, and this also refers to the change after the tariffs that were implemented in the American market. To the right, you can see there has been a market drop and the trend is that imports will continue to [ drop ] and the local producers are continuing to sell. 90% of the volume produced in the U.S.A. is for the American market, only 10% comp to Brazil. It came through Mexico this year. Now this change ends up being a competitive edge for Portobello and this is what has been happening. The share is 33%, and Portobello America locally is capturing some opportunities, while the market had a drop of 12%, Portobello America grew their volume by 1.7%. So our thesis is that United States is doing very well as we have a broad portfolio, and they produce 90% of what we sell. So this is a bit of an outlook in the foreign markets. Let's recap what is happening in our domestic market. It's important to mention that we did change our strategy continues to be a growth in the integrated retail and own network of Portobello and growth, of course, in the international market. We're working on both fronts. Now these 2 strategic pillars remain unaltered. And as of last month, what we did was to slightly adjust our priorities to improve operations, not only in Brazil, but also in the United States and to deal with a structural issue, which is our capital structure. So these are the 2 priorities that will continue on. I will share with you the results of the second quarter with our outlook, of course. As part of that context, the operational improvement refers to a change in our value generation model, we had high volumes recently, but we lost a bit of margin and EBITDA margin. Now this, of course, refers to what is happening in the market. Our growth internationally so that we could have a better revenue improvement gross margin and, of course, also improve our EBITDA and control our expenses and working capital. Now these are the changes that we have observed while we were addressing our capital structure. Now regarding the outlook for the second quarter, the sector is stable when we look at total values, but there was a drop -- we're speaking about stable revenue. We had a good growth in the second quarter vis-a-vis the first quarter, approximately 10% and revenue remained quite stable with the mix from the international revenue, the exports and of course, the domestic market, allied to a drop in volume. As a counterpart, our gross margin was above 37%. We were able to advance even further than that, 5 points vis-a-vis the first quarter, and this is due to our decision of improving product mix, controlling expenses and, of course, leading in terms of prices. In expenses, to avoid the inflationary impact was of approximately 7%. This is what we see in the second quarter. Expenses started walking sideways and we had BRL 10 million of savings in expenses in the second quarter. Now economically, therefore, we're highly aligned with what we wanted, and this was part of our outlook. In terms of working capital, this was quite stable. It grew because the business grew 10% in the second quarter. So we maintain our cash conversion cycle stable. In terms of our capital structure, we have made strides this quarter. We have just concluded the sale of Pointer, which is something we had announced in July, and we have now come to the conclusion of the operation. I will explain to you the transition of Pointer further ahead. Here, we'll speak in detail of the revenues in the second quarter compared to the first quarter compared, 10% compared to last year, basically stable. We did very well with the exports of Portobello, a strong growth in these 2 segments. And this will give you a bit of color in terms of our strategy. In the domestic market, we observe a drop, I will explain to you what happened. But now our priority, our margins for the sectors in Brazil. Now to break this down Portobello Ceramic with growth -- strong growth, once again strong in terms of exports and some sales in our channels, Portobello Shop, a very similar dynamic to Portobello Ceramics coverings especially because the Portobello Shop was the leader in terms of price increases and a change in mix. Now very similar to what happened in the first quarter here, we have a drop due to the market demand. And I think what is important in this quarter is that we did very well. And and Portobello America with a growth of 8% vis-a-vis the previous quarter and the second quarter in 2025. So the variation here is not constant, but there, of course, it would be in dollars. And it shows you the recovery of Portobello America in terms of their invoicing. Well, margins, almost 5 points vis-a-vis the first quarter. So we made strides in price and mix and Portobello America, Portobello Shop were leading this process as we will see in the following slides with coverings, Portobello advancing from 39% to 41%. That's what we had imagined. Portobello Shop reaching 46.1%. We were expecting 45% pointing -- Pointer -- excuse me, maintaining 9% and Portobello America that 16% seems to be on the path to get to 20%. We have already had 18%. And with this figure, we are back to a breakeven position. I spoke about that U-curve, and that refers to our change in the portfolio of producing more. 60% of the volume produce there, 40% imported from Brazil after the tariffs we made an adjustment in the portfolio and, of course, altered prices. Presently, we have 90% of local production, but with a competitive edge vis-a-vis the rest of the sector. So in Portobello America, we have had an economic boom, one of the great achievements that we wanted, and this is what happened in the second quarter. Let's go on to the expenses you will see the strong work of our units and operations. We were able to avoid 7% of our revenues, approximately BRL 54 million. We were able to have a savings of BRL 10 million for the first half of the year. We carried out some investments in the commercial area. And these are increasing as a percentage of our revenue. But in absolute terms, it shows you that we were able to avoid the inflationary pressure, thanks to the initiatives we put in place, especially in the second quarter. Now having said that, when we look at the evolution of gross margin and expenses, here, you see the evolution of our EBITDA quite significant compared to the first quarter. It almost grew twofold. We are at BRL 97 million, a growth of 15%. Now we have amortization, depreciations and others, but this is a figure for our quarter compared to the first quarter and you can see the EBITDA for the last 3 months and last 12 months. All of this works very well on the operation part. But we do have a problem in terms of our capital structure, our debt and the service of the debt and everything related to capital structure still continue to cause high pressure. And this is what we're addressing with our partners at banks. We're working to reprofile the debt. Now any operational improvement doesn't necessarily translate into profit. Some of them have an impact on our performance economically and financially as well. And while we do not resolve that part of our losses will impact the company. Working capital, we had an improvement regarding our historical data. We have a growth in absolute figures; it refers to that 10% growth of our business. And we have [ 590 days ], and this operating capital does not include financial instruments. So we're up to BRL 600 million in terms of inventory, and we would like to reduce our inventory as it's a way of releasing working capital and cash for the company. But that quarter as one of our priorities, we were still not able to reduce the part of inventories. We will do this further in the third and fourth quarter. And our cash conversion cycle was quite stable vis-a-vis the first quarter, a significant advance in cash flow. We have a stride in the operational part. We had a part of sale and leaseback for the Pointer unit, we had BRL 60 million in the first quarter. We have another BRL 40 million coming in, in the second quarter, reaching BRL 102 million of lease back. We have also restricted our CapEx somewhat. So operationally and in the cost of investments, we had an improvement of BRL 7 million and 9.7% in terms of investment flow. Of course, this is not sufficient, we did not carry out any fundraising. We focused on debt amortization, and our cash balance dropped from BRL 150 million to BRL 135 million. Now all of this combined with our financial operations, and our debt operations of 15% of our loans have collaterals, so the cash standing at BRL 134 million, but we have BRL 68 million in linked operations. Our gross debt is BRL 1.3 billion, BRL 1.4 billion, which means a net debt of BRL 1.2 billion and our leverage is 1.37. So as I mentioned, capital structure is one of our priorities. One of the initiatives this quarter, and we're working strongly in the financial arena to have more flexibility in cash to address that financial part with a reprofiling with the banks. Our debt is very similar to what we had in the first quarter, and there has been very little change and the debt is still structured with a part in the short term. So our role is not only to work towards a reprofiling, but to reduce the financial part with an extension of the debt. Now what we have just announced today, we are confirming the sale of the Pointer business. This was a strategic priority for an integrated retail and international expansion. And this is where we have the premium products, and we're going to be working through a simplification, working with 3 business units. Financially, we cannot disclose the value of the transaction as we still have a confidentiality agreement with the buyer. This is a closed deal, and we have an NDA, but, in any fashion, the resources that will be coming in will be used in our capital structure, working capital and greater flexibility, all aligned with our financial goal. Now in the month of August, we had the transaction approved by the antitrust agency, CADE, 14th of August. The signature of the contracts in September, a transition of management to the Almeida Group. And in the third quarter, there will be that impact of the deconsolidation of the results in the unit. All of these results will appear in our third quarter results, of course, now what does this mean? This is information from 2005 (sic)[ 2025 ] to show you what we'll have to our portfolio as of the end of the year. This represents 29% of our invoicing, BRL 58 million. It contributed with BRL 5 million in gross profit, all small figures when you think about it. We haven't broken down to see how much Pointer represented in EBITDA. But with Pointer there is a portfolio, 80% focus on the units in Brazil, 42% and 42% and 15% in Portobello America. Now we don't have a statistical effect here. We're working with gross margin of 10%, and we should have an improvement in our gross margin statistically and percentually. So we should have an improvement in our gross margin and improvement in the EBITDA margin. This is what we can expect as of the third quarter. And I think this is very important, more important than the business is what happens in our Brazilian market and in the international market. We will have 72% of our business in Brazil and the rest in the United States, not considering the growth we have had this year, our 30% share internationally. Basically, this is what will happen, a portfolio divided 70% and 30% and an improvement in the portfolio in the midterm. Now with this change, we're focusing on premium things. We have also had a change in our organization, changes in our team to go back to control our challenges to have further synergy, of course, to have everything under a single management. Now we're bringing together our marketing teams. We're focusing on revenues. We're also focusing on distribution, all the part of innovation and product development for retail under [indiscernible], Luciano Alves continues with a focus on exports. Exports that has been our engine for growth, our focus on operational efficiencies, logistics and other areas. So we have an integrated team in the operations part with Luciano Alves and to capture experience and technology Luciano will also be managing this area. So we have reconfigured the teams in Brazil and João continues to work end-to-end with Portobello America. And in Brazil, we're also seeking synergies at corporate level, all the part of human resources, communication in the group and bringing together the legal and financial areas. So the message is we're going to capture the very best from the front area, synergies, but do our homework as well in terms of efficiency, operation and our corporate teams will be working under a leaner, more simplified structure, working more directly on our portfolio with our premium channels, which are, of course, the focus of traction. To speak about outlooks, we have great changes here. We don't expect very much from the market that continues to be very challenging. We should have a loss in the Brazilian market because of the pressure of inventories, companies are working at a lower utilization rates in July and August, we had a certain price normalization, increase in volume. In Brazil, we're going to work with volumes aligned with the market. And our revenue growth will be more focused on the improvement of our portfolio mix and on international growth. In margins, still looking at the former model, we'll still are looking at 37%. And we have that strategy of improving price and mix and, of course, operational efficiency. We're making adjustments in our capacity of approximately 80%, 90%, adjusting for an ever more complicated market, and we hope to continue on our journey and reach that operational efficiency, and we're going to improve the mix of the group as a whole. Expenses we're readjusting everything organizationally. We have had changes in the team. We've put together teams, put together units. We're working more united at corporate level. And this should lead to an improvement in our assets. Now we should see an improvement in the second half of the year. In terms of working capital, we're optimizing inventory levels. The changes already happened in July and August, and this should lead to a gradual reduction and a gradual improvement in our cash conversion. Now all of these will not be sufficient if we don't focus on our capital. If we reprofile our banking debt and, of course, work with a gradual reduction in leverage. With this, I conclude the presentation of our second quarter results, and we will now go on to the question-and-answer session. I will have the participation of João and others in the Q&A session. We will now begin the question-and-answer session for investors and analysts.

[Operator Instructions] We'll have Mr. Romael, the Retail Vice President, and Mr. Luciano Alves Abrantes, CEO of the Ceramic Portobello unit; and Mr. João from the coverings Portobello in the U.S.A. Please hold while we poll for questions. Our first question comes from Marcelo Ricardo, investor. He says, regarding the divestiture of Pointer, which is a percentage of those resources that will be geared towards a reduction of net debt, which is the company's estimate of a reduction of net debt through these resources?

Thank you for the question, Marcelo. Well, the strategy, of course, is an improvement of our capital structure. And about the resources from Pointer, there are the resource that will come from the sale of that asset, but also the release of our working capital. Now the value of the transaction once again cannot be disclosed. But in terms of working capital, we can expand how much we need. We have BRL 70 million invested in the account. To answer your question, 100% of the resources coming from Pointer will be invested in an improvement of our capital structure, either to reduce debt or to strengthen our cash. Now either you maintain your cash and strengthen it or you pay off your debt and this is how we will use the amount from this transaction.

The next question comes from Carlos [ Arriaga ] from Insider. In the second quarter of '26, you sold out one of your own stores with BRL 1.7 million. Do you foresee the possibility of a broader movement of capital recycling in stores, the sale of real estate, the conversion of franchises as a tool of deleveraging and to maintain growth through partners.

That's good that you're here with us once again. Carlos. Thank you for your attendance. You're one of the older analysts from our company. Now let me separate here the leverage. The Pointer resources will be focused on the deleveraging of the company and a cash reinforcement. Now that sale that we carried out is immaterial. It was one of the stores of the group, and it was truly a minor thing. Now when we think about assets, all of the assets are up for sale. One of our priorities is to improve the capital structure and to deleverage the company. So we are looking at all of these alternatives, looking at core assets. All of this is on the table as part of our initiatives. I can't speak about our expectation of what will happen. Now the cash generation will continue and because of that, we're analyzing all the operations as a whole.

Now to complement what Ronei has said, Carlos, the strategy of our retail business is anchored on franchises. And I remind you that of the 139 stores in the network, 29 are our own stores, the rest are franchises. That was our expense strategy. Now we do have own stores and the divestment of this own store was simply an operational move. It was far away from a large metropolis center. We can gain scale by having stores closer to us and to have a store that was far away, it didn't make sense. So we believe the franchisee would do a better job, and that is why we sold out that store. Now our strategy continues to be the same as I reiterated a short time ago.

[Operator Instructions] Our next question is from Carlos [ Arriaga ] once again. He says, about Portobello America, we saw that the division delivered a gross margin of 16.4% in the second quarter, but 11.1 [indiscernible] with full use of capacity and a higher average price, can this level of margin be deemed to be representative for a new normal at the plant? Or were there onetime effects or different mix, specific campaigns, effects of inventory absorption that will make it more difficult to sustain that margin in the second half of 2026.