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Edited Transcript of IGTA3.SA earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q2 2019 Iguatemi Empresa de Shopping Centers SA Earnings Call

Sao Paulo Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Iguatemi Empresa de Shopping Centers SA earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Jereissati

Iguatemi Empresa de Shopping Centers S.A. - CEO, New Business Officer, Member of the Board of Executive Officers & Director

* Cristina Anne Betts

Iguatemi Empresa de Shopping Centers S.A. - CFO, IR Director & Member of Board of Executive Officers

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Conference Call Participants

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* Luis Guilherme Braga Stacchini

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for waiting. Welcome to Iguatemi Empresa de Shopping Centers Second Quarter 2019 Results Conference Call. With us here today, we have Mr. Carlo Jereissati, CEO; and Ms. Cristina Betts, CFO and Investor Relations Officer.

We would like to inform you that this event is being recorded. (Operator Instructions) The event is also being broadcast live via webcast and may be accessed through Iguatemi's Investor Relations website at www.iguatemi.com.br/ir, where the slide presentation is also available for download. Participants may view these slides in any order they wish.

Before proceeding, let me mention that forward-looking statements are based upon the beliefs and assumptions of Iguatemi's management and all information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Iguatemi and could cause these results to differ materially from those expressed in such forward-looking statements.

We will now give the floor to Mr. Carlos Jereissati, who will begin today's presentation. Please, Mr. Carlos, proceed.

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Carlos Jereissati, Iguatemi Empresa de Shopping Centers S.A. - CEO, New Business Officer, Member of the Board of Executive Officers & Director [2]

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Good morning, everyone. First of all, I'd like to thank you once again for participating -- participate in our conference call. It's always a pleasure to have you with us and today as we will present the results of the second quarter of 2019.

Before I wanted to highlight, I just wanted to tell a few words about the context. So we really believe not only from the perspective of our company but from the market as a whole that we are facing a scenario of shy economic recovery by constant negative revisions of our GDP in Brazil. We are really foreseeing a better economy in the near future.

This quarter, we've been impacted also by the weak comparison base. Remember last year, we have a lot of the various strikes that really harmed this quarter.

So we delivered solid numbers, and we're sure that once again, we will meet the guidance for the year, which is very relevant for us. We've been doing that for the last few years. Our discipline also in focusing on -- highlights quality assets, what we're calling the A, B markets, income classes of Brazil, has allowed us to attract new retailers, and we use a tenant mix for our malls, a strategy that has led us to further improvement of productivity per square foot occupied in all of our company's assets. This is why we say that we achieved a good result in the period, especially with the increased sales in our portfolio. Our numbers reflect our dedication to filing vacant areas with qualified brands. That is our continuous goal.

We have noticed a great interest from retailers, not only inside Brazil but also from abroad. And we were even being more proactive in switching to better operations, having the short-term and negative impact on occupation rates that we will talk a little bit in the future. But of course, we -- this quarter it was also kind of like an inclusion of the new offer that we opened, the I Fashion Outlet in Santa Catarina in this index.

Prior to this, the reduction of -- in discounts granted to tenants, although gradually made. In addition to the inflation of the period, and the maturity -- the maturation of the new operation was important to boost the rental rates growth in the second quarter. This is something that we have been talking in the last few quarters and it's happening once again.

Still talking about changes. We continue to focus our efforts on assets that have more potential, more adequate growth profile to our business and the current strategy. Therefore, we announced last week that we sold Iguatemi Caxias do Sul and we will highlight a little bit more further down in the presentation about the sale.

Finally, it's a great enthusiasm that we recall that the launch of Iguatemi 365. We've been very enthusiastic about this combination of bricks and mortar or physical world that we've developed for many years and entering this digital economy with the launch of the 365, which is our -- it is our marketplace, which is scheduled for being launched on the end of the third quarter, taking advantage of such important days of the retail in Brazil like Children's Day, Black Friday and Christmas. We have already started testing the platform with more than 500 people that are testing the platform for a few months. And there are -- also the -- we're bringing a very strong and constantly integrating the process with retailers are in the advanced stage. We believe we've got to maintain future resilience with the reports and quality portfolio in a solid balance sheet which continues to follow the economic movements. We are confident that a lot of the good things are coming to our economy that will help us to continue to grow and invest and strategically motivated, and to provide a complete and differentiated consumer experience on a daily basis to our consumers, which is something we've been very willing to do for many, many years and it continues to do that.

So when I -- about the highlights of the quarters we have on Page 3, the total sales reaching BRL 3.5 billion in the second quarter, a 7.9% growth compared to last year, accumulating BRL 6.6 billion in sales in this first semester. Same-area sales grew 7.2%; and same-store sales, 6.9%. We had same-area rent increasing 7.4% and same-store rent, the highest in the month with increasing 10.0% in the quarter -- 10% in the quarter.

Net revenues reached BRL 187 million, up 7.2%. We had EBITDA reaching BRL 137 million, also an increase of 3.9%. EBITDA margins, with a margin in the period of 73.4%. Net income came in to BRL 60 million, a little bit below or almost even to the last quarter. FFO was BRL 91.6 million, 4.3% above last year's quarter. Leverage ending in 0.06 below first quarter '19 at 2.55x and net debt over EBITDA, which is something that we've been talking about in the last few quarters, that we're reducing our leverage. And it was an important decrease compared to last year's quarter.

And as a subsequent event, we had the sales of the stake in Iguatemi Caxias. And as I mentioned, we're going to describe a little bit more in detail further down the presentation.

On Page 5, a little bit of the teaser of what is our app that we have for the premium e-commerce that we launched in Iguatemi 365. 365, as I mentioned, we have already 80 brands signed, which are very important. A lot of exclusive brands, not only national but international brands. It will be a relevant effort to bring novelty to our -- to this project. And I think that would -- that is in a very nice connection to our customers, and they will like to be able to reach the best fashion brands, not only in Brazil, but some of them that are not present in Brazil that will come to the 365 in the near future. So I think it will be a very nice addition to our portfolio, having the opportunity to serve our customers through the Iguatemi 365 in the near future.

In Page 6, we have this project as I mentioned, one of the strategies of Iguatemi is to transform its properties in mixed use projects. We've been doing that for a long time. We've been very successful with the last tower that we launched at Iguatemi Porto Alegre. It's 100% occupied, very quickly. So we are doing that now in Campinas, which is the second largest city in Brazil. We are doing a tower with 14,500 square meters of GLA in addition to the mall of Galleria. Significantly, we're going to have an expansion to that mall. We have CapEx of BRL 125 million, and we're going to own 55% of that tower.

Now we go to the results, and I give the word to Cristina. Thank you.

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Cristina Anne Betts, Iguatemi Empresa de Shopping Centers S.A. - CFO, IR Director & Member of Board of Executive Officers [3]

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Good morning, everybody, and thank you for being on our call. So on Page 8, we have the main performance indicators. So similar to last quarter, we have the addition of 1 extra mall, which is our I Fashion Outlet in Santa Catarina, the growth from '17 to '18, which has affected then all our GLA numbers as per the top part of the chart.

Carlos, already mentioned in terms of sales, we reached BRL 3.5 billion, which is almost an 8% growth in the quarter and BRL 6.6 billion in terms of sales, which is 6.7% growth for the semester.

Again, as a reminder, the second quarter of '18 was a very difficult quarter, very challenging with different events happening. So we had a very -- weaker numbers. And therefore, we have a very strong second quarter comparatively, and the numbers as Carlos said, same-store sales growing at 6.9% and same-area sales at 7.2%. And we have same-store rentals at 10% and same-area rentals at 7.4%.

When we look at occupancy cost, basically stable at 11.7%. A little decline in the occupancy rate, given that we are being a little bit more proactive in terms of shifting the mix of our malls since we see some positive economic scenario going forward. And it makes sense for us to be a little bit more energetic, I guess, about changing the mix of the malls.

Also the result of a long-time work here in terms of this retenanting and changing the mix and so on, we have a really low net delinquency rate for this quarter, which is at 0.6%. And also for the semester when you look at it as a whole, 1.8%, which is very, very low given the scenario and also the period of the year.

We look at Page 9, we see our P&L. So we closed gross revenues of BRL 214 million, which is a growth of 6.4%. And after our tax and discounts, which is fairly stable, we closed net revenues at BRL 187 million, which is a growth of 7.2%.

Cost and expenses we'll be detailing a little bit ahead, so -- but basically, altogether at BRL 55 million, which is a growth of 12.4%. And we have other operational revenues, net operational revenues at BRL 4 million for the quarter. But if you look at the semester at BRL 9 million, which is a growth of 8% almost.

We closed the quarter with an EBITDA of BRL 137.6 million, which is a growth of 3.9%. And depreciation, a little bit above what was last year, given that we have an extra mall. So this is where we should be stabilizing more or less our depreciation. And then below the EBIT line, we have net financial expenses, a little bit lower than the second quarter of 2018 at BRL 29 million. This decrease is basically just the decrease of the indebtedness of the company, since I think the major differences in the interest rates have -- are behind us now. And we have a fairly stable scenario of low interest rates going forward as well.

Income tax and social contribution, a little bit higher, which means that we closed net profit about BRL 60 million, which was slightly below which is stable from second quarter '18. And an FFO, we put back in depreciation now at BRL 91 million, a 4.3% growth.

On Page 10, we see the breakdown of the revenues. So looking at gross revenues already on the top right hand corner, we see the quarter. And so rent revenues coming in at 6.5% growth and management fee coming in at 17% growth; parking, a healthy 5.9%; and others, this is -- the reduction in other is due to the amortization of the key money received for the last greenfield that we built, which is finally being amortized. And so in comparison, we have this decrease in terms of other revenue.

When we look at the breakdown of the rent revenues for the quarter, a very healthy increase in the minimum rent of 3.8%. The big impact, which comes from overage, clearly because as we said before, a really important movement in terms of sales. We think this is the result of these years of the change in the mix and the retenanting have -- are paying off in the overage number. And also temporary rents, which for several quarters already have been posting double-digit growth numbers.

We're not going to break down the costs and expenses. Already looking again on the top right-hand corner, we see costs growing at 13% and expenses growing at 11%, whereas in the previous semester, we see costs growing at the same 13% and expenses a little bit lower, sort of averaging out for the semester of 2.5%.

When we look at what happened in the quarter for expenses on the bottom half of the chart, we see that admin expenses grew 6.6%. And basically, the biggest difference is not on the stock options, we don't have a stock options program anymore. We have a stock grant program. And we changed the program if you will remember last year. So now instead of having a stock option program that runs every 5 years with a grant every 5 years and amortizing -- investing 20% every year. We have a yearly program of a stock grant program, and we have the grants happening every year and divesting in 3-year periods. Which means that this year, we have last year's second tranche plus the first tranche of the second program of this 2019 program. This will probably stabilize when we get to the third year, and then we'll have the third piece of the first program, second piece of second program and the first piece of the third program. And then from then on, the variation will be basically due to what stock is granted or not.

In the admin expenses, I think it's important to highlight that it's basically due to the variable portion of admin expenses. This is basically due to the variable compensation program. So in addition to the long-term incentive program where there's a stock, we have a yearly bonus number. And this is the number which has made the admin expenses basically go up. Everything that's fixed actually has been decreased. In terms of payroll, and the fixed payroll and other expenses have come down.

Looking on Page 12. We see the debt profile a little bit more in detail. We closed the semester at BRL 1.4 billion in terms of debt, net debt. So basically, a reduction of 1.4%. And that takes our net debt over EBITDA number to 2.55x, super healthy number. Cost of debt about 108% of CDI, which the current interest rate is a very low nominal rate for Brazil and a very healthy average debt term in at 4.6. And the debt amortization schedule, very, very easy on us for the next 2 years as we had already the mix change program, you'll remember last year. So we pushed out all the debt amortizations out to 2014 (sic) [2024]. We pushed forward the last debentures and giving us a breathing space for the next 2 years.

If we look at the debt profile, 86% of the debt is linked to the CDI. So again, on the outlook that we will continue to have low interest scenarios for the next quarter, I think we will benefit from the low interest rates going forward.

Taking a closer look at the sale of Iguatemi Caxias on Page 15. So as Carlos mentioned, we had an 8.4% stake in Caxisa as we were original stakeholders in the mall and its construction, and we've held it for decades. We sold it, we concluded the sale last week for BRL 28 million, which is at 2018 NOI, a multiple of 12.6x. Okay, so very healthy multiple as well. It's important to note that it does carry our brand name, Iguatemi. And it's part of our agreement that the current owners will have up to 18 months to rebrand the mall and there's a phaseout program for that to happen.

Okay. I think also it's important to highlight, as Carlos said, that this process of looking at assets where we buy or sell, always thinking about what is the company's ongoing strategy and whether each one of the assets contributes or not to the strategy. And I think Caxias have been a minority stake. This is the only asset that we didn't manage in our portfolio. And again, in a smaller city, it didn't really make sense for us to hold any longer.

And finally, on Page 17, we have our guidance. At the moment, we have a 5% net revenue growth, which is already within our band of 5% to 10%; EBITDA margin at 74%, and we are just below the band of the guidance. And knowing that second semester is a stronger semester, I think we are confident that we'll be within the band of the guidance. And CapEx of BRL 57 million, the guidance goes from 150 to 200. And here, we will probably be hitting the lower end of the guidance, if not a little bit, even below the bottom end of the guidance.

Okay. So with that, I think we conclude our second quarter presentation, and we are available for any questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Luis Stacchini from Crédit Suisse, would you like to make a question?

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Luis Guilherme Braga Stacchini, Crédit Suisse AG, Research Division - Research Analyst [2]

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I have got 2 questions, actually. First one on vacancy. What I wanted to know is as far as your visibility goals, whether you foresee any further increases in vacancy as we still have some of these struggling retail chains finalizing their downsizing process? Or whether you already see, maybe Iguatemi at a turning point in this regard? And maybe if you could also provide us a little bit more color on the potential revenue gains that the company might enjoy as these empty spaces are pretty much filled with new tenants and you'll most likely undergo some sort of satellization process that you guys intend to make. So that could maybe provide a little bit on the potential of revenue gains that you guys see as vacancy stabilizers. And my second question would be on capital deployment going forward. What I wanted to know is what is the company's current appetite to announce -- especially on multiuse projects, I understand that you guys are waiting for a better timing to announce growth on the mall side in order to reap better rents and higher returns. But we're already kind of witnessing a more heated residential and better profits for office rents in São Paulo. So what I wanted to know is whether we should expect further growth announcements and new project announcements? Or in the absence of those, whether you guys would maybe consider improving payouts as a means to improve capital structure?

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Cristina Anne Betts, Iguatemi Empresa de Shopping Centers S.A. - CFO, IR Director & Member of Board of Executive Officers [3]

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Luis. So on the vacancy, I think we have a lot of things contracted to come in, in the second half of the year, okay? So already -- and part of the vacancy that you seen was already part of this change in mix. Obviously, we've had some surprises among -- well, not really a surprise, but some conclusions of some processes that we were sort of accompanying over the period -- of these periods of these last few years, like the bookstores and several others. But also, it's an opportunity for us, right? I mean as Carlos mentioned in the beginning, I think we have a lot of demand from new kinds of stores, even international brands who are again demonstrating interest and coming back with growth or new stores. And so I think the solution is when you take out the store, regardless of whether it's a satellite store or a megastore or even an anchor store which is underperforming, and you put in somebody with a lot more potential. You see results like we see in JK and like we see in Praia de Belas and several other malls that we've already done a lot of retenanting. And we still haven't finished, okay? So I think in terms of filling out the vacancy, the answer is yes, I think we are -- yes, there was a downturn on our vacancy, but we should be going back to some kind of growth towards the end of the year because these are -- big spots are being taken in several of our different malls. And then in terms of results, what these new tenants bring is, they bring a renewed kind of interest and traffic to the mall where everybody benefits. Not only just that one location, which is important because typically, you take out an underperformer to put in somebody stronger. But also everybody else feels the impact. That's how we have in terms of our rent, for example, same-store rents, higher than same-area rents at this moment. Because we have a lot of new tenants coming in who are still under the grace period. But you see that the tenants who were there before, making a lot better numbers, okay, where they have overage and so on. That's why the overage number increases so much. So I think we are very -- we have a very positive outlook on the increase of our occupancy rate and the kind of results that they can bring, not only to those spaces, but everybody else around them.

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Carlos Jereissati, Iguatemi Empresa de Shopping Centers S.A. - CEO, New Business Officer, Member of the Board of Executive Officers & Director [4]

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And in terms of capital deployment, I think we are always analyzing opportunities. And I think that -- and also the contrast. So for the moment, where we see that, we have to be doing things with the right timing. So as I mentioned earlier, we are looking into expansions, acquisitions in our portfolio, things that will make more sense right now, waiting for a better moment to really do something else in order to get the better rent, key money. So I think that it's too early to say that we will be looking to other things rather than the 2 things that I mentioned.

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Operator [5]

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(Operator Instructions) Ladies and gentlemen, there are no further questions at this time. Mr. Carlos Jereissati, you please proceed with your closing remarks.

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Carlos Jereissati, Iguatemi Empresa de Shopping Centers S.A. - CEO, New Business Officer, Member of the Board of Executive Officers & Director [6]

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I'll just say, thank you for participating in the conference. So if you have any further questions, please feel free to contact our people, our team and the IR team. They will be more gladly to help you with any further questions. Thank you very much.

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Operator [7]

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This concludes Iguatemi's conference call. You may disconnect your lines at this time.