(MENAFN- The Rio Times) Three Brazilian companies reported third-quarter earnings this week that reveal starkly different fortunes in Latin America's largest economy.

Smart Fit, the region's dominant fitness chain, continues its aggressive expansion despite warning signs in key markets. Dexco, a building materials giant owning iconic brands like Deca bathroom fixtures, stumbled into losses as construction demand weakened and debt costs spiraled.

Meanwhile, Armac, a heavy equipment rental company, made a calculated bet on regional consolidation just as Brazil's infrastructure boom shows signs of cooling.
Smart Fit: Rapid Growth Masks Emerging Cracks
Smart Fit reported net profit of R$177 million ($33 million) in the third quarter, up 43 percent from last year, while revenue climbed 28 percent to R$1.8 billion ($333 million).

The company now operates 1,867 gyms across sixteen Latin American countries and recently entered Morocco, serving 5.2 million members. During the quarter alone, it opened 49 new locations.

But the growth story conceals mounting pressure. Smart Fit 's EBITDA margin improved only modestly to 32.1 percent despite massive scale advantages, suggesting that expansion costs and competitive dynamics are eating into profitability gains.



More concerning, the company's Mexico operations-its second-largest market after Brazil-experienced a 7 percent decline in per-gym revenue even as management pushed through 13 percent membership price increases.

This suggests either weakening demand or intensifying competition in a critical growth market. Smart Fit plans to open 340 to 360 new gyms this year, maintaining its bet that Latin America's growing middle class will sustain membership growth of 19 percent annually.

However, this strategy requires near-perfect execution: any slowdown in new sign-ups or acceleration in membership cancellations would quickly erode the company's premium stock valuation of nineteen times forward earnings.

The company operates with net debt at 1.0 times EBITDA, providing financial flexibility, but its expansion targets commit substantial capital to new locations that must deliver immediate returns.
Dexco: When Leverage Meets Demand Destruction
Dexco swung to a loss of R$43 million ($8 million) in the third quarter, compared to a profit of R$184 million ($34 million) in the same period last year. Revenue fell 5 percent to R$2.1 billion ($389 million), while EBITDA dropped 16 percent to R$567 million ($105 million).

The company's problems run deeper than cyclical weakness. Dexco operates in Brazil's building materials sector through brands including Deca sanitaryware, Duratex wood panels, and ceramic tile makers Ceusa and Portinari.

It also owns 49 percent of LD Celulose, a joint venture producing dissolving pulp for textile applications. This diversification was supposed to provide stability, but instead multiple businesses weakened simultaneously as Brazil's construction activity slowed.

The killer blow comes from Dexco's balance sheet. Financial expenses are projected to reach R$820 million to R$850 million ($152 million to $157 million) throughout 2025 and 2026-consuming roughly half of the company's operating cash flow.

With Brazilian interest rates persistently above 10 percent, servicing debt has become nearly as expensive as running the underlying businesses.

Goldman Sachs recently downgraded the stock to neutral, noting it has underperformed Brazil's benchmark index by 56 percentage points since 2021. The company's shares have fallen 36 percent over the past year.
Armac: Consolidation Play at a Crossroads
Armac purchased a 60 percent stake in Engelog Fornecedora for R$15 million ($3 million) in equity, assuming an additional R$79 million ($15 million) in debt.

Engelog operates 390 heavy machines across Brazil's Northeast region, generating approximately R$120 million ($22 million) in annual revenue and R$47 million ($9 million) in EBITDA.

The acquisition makes strategic sense on paper. Armac paid just 3.3 times EBITDA for the business, well below its own valuation multiple of 4.3 times.

Engelog strengthens Armac's position in the Northeast, where infrastructure spending has accelerated, and brings specialized maintenance expertise that could reduce operating costs across the combined fleet.

Yet timing raises questions. Armac is simultaneously restructuring its core rental operations to improve equipment utilization rates, which reached 46 percent EBITDA margin in the second quarter.

Adding a sizable acquisition during internal transformation multiplies execution risk. If Brazil's infrastructure spending slows-a real possibility given fiscal pressures-Armac will carry Engelog's debt while managing operational integration.

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