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Edited Transcript of SON.EP earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Sonae SGPS SA Earnings Call

Maia Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonae SGPS SA earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* João Pedro Magalhaes Da Silva Torres Dolores

Sonae, SGPS, S.A. - CFO & Director

* Luís Mota Duarte

Sonae Sierra, S.G.P.S., S.A. - CFO & Executive Director

* Paulo Simões

Sonae, SGPS, S.A. - CFO of Worten

* Rui Manuel Teixeira Soares de Almeida

Sonae, SGPS, S.A. - Director

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Conference Call Participants

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* António Seladas

A|S Independent Research - Analyst

* Artur Amaro

Caixa - Banco de Investimento, SA, Research Division - Analyst

* João Filipe Pinto

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal

* José Manuel Rito

Banco Português de Investimento, S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to Sonae's First 9 Months 2019 Results Conference Call. (Operator Instructions)

I will now hand the conference over to Mr. João Dolores. Please go ahead, sir.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [2]

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Hello. Good afternoon, everyone. And welcome, and thank you for attending Sonae's Results Conference Call for the third quarter of 2019. Together with me today, I have the CFOs of our businesses: Rui

Almeida, from Sonae MC; Paulo Simões from Worten; Miguel Moreira from Sonae Fashion; Luís Mota

Duarte from Sonae Sierra; and also our Investor Relations team.

I will start by giving you the performance highlights for each individual business, and then I will cover Sonae's consolidated figures for the quarter before opening up for Q&A.

Starting with Sonae MC. Sonae MC maintained very positive performance with strong top line growth, which equates to market share gains once again and sustained its level of profitability. In the quarter, turnover grew 9% year-on-year, with a like-for-like of 2.4% despite the food deflation in Q3. In year-to-date terms, growth stood at 9.5% year-on-year, reaching EUR 3.4 billion, with a like-for-like of 3.4%. So strong growth levels once again on the back of a clear value proposition, which is increasingly valued by our customers.

And the company continued its expansion path and opened 58 new company-operated stores since the beginning of the year, including 9 stores of our proximity format, Continente Bom Dia, and also 3 Arenal stores, thus expanding our Health & Wellness network in Spain.

In terms of profitability, Sonae MC's underlying EBITDA margins remained stable and reached EUR 340 million in the first 9 months of the year. I would also like to highlight Sonae MC's working capital management and cash flow generation, which was the main driver behind Sonae's net debt evolution. Sonae MC generated an additional EUR 196 million in cash flow in the first 9 months of the year when compared to 2018.

Moving on to Worten. Worten reached EUR 744 million of turnover in the first 9 months of the year, with retail sales in Portugal and the Canary Islands with positive performances despite the negative evolution of seasonal categories in August, mostly due to the unusual low temperatures in Iberia. In Spain Mainland, as already stated last quarter, we have taken the decision to adjust our operation and, as planned, 9 loss-making stores were closed in Q3 and 2 additional ones already in November. We expect an improvement in performance in this geography in the coming quarters.

Already in Q4, it's worthwhile mentioning that Worten reached an agreement to acquire 100% of the share capital of iServices, a leading smartphone repair company operating in Portugal through a network of 15 stores. This transaction, which is still subject to antitrust approval, will reinforce Worten's capabilities in its services offering and contribute to strengthen its customer experience and omnichannel value proposition.

Sonae Fashion continues to show positive operational performance. Turnover increased 4.2% in Q3 and 3.8% in the first 9 months of the year. This was supported by a strong omnichannel like-for-like growth, 8% in total in the first 9 months, which means that the business achieved an increase in market share in Iberia for the fifth consecutive quarter.

I would like to mention the strong growth rates that all our fashion banners have been achieving in the e-commerce front, namely MO and Zippy, which have registered 45% and 62% rate of growth, respectively recently. Concerning underlying EBITDA, Sonae Fashion increased its level of EBITDA by EUR 1.1 million in the quarter and EUR 3.4 million up to September, reaching a margin of 7.9% versus 7% in the first 9 months of last year.

Moving on to ISRG. We continue to be quite pleased with the performance of this joint venture in sports retail. Total sales of ISRG maintained a double-digit growth rate in the quarter. And this was achieved despite the ongoing refurbishment of Sport Zone stores. In the first 9 months of the year, turnover increased by 15.5% year-on-year, surpassing EUR 500 million in total turnover. EBITDA also improved significantly with the margin doubling versus last year from 4.6% to 9.2% this year with positive evolutions from all brands. All in all, equity method results included in Sonae’s accounts in the first 9 months of the year stood EUR 10 million above last year at EUR 7 million, and our outlook for this business continues to be quite positive for the next few quarters.

Regarding financial services. It remains a growing business, both in operational and financial terms. Turnover increased 18% year-on-year to EUR 27 million, and underlying EBITDA was up by EUR 2.4 million, which corresponds to a margin of 24%.

The Universo Credit Card has already surpassed 820,000 users with a reinforced market share of total credit card production of 12.6% at the end of September.

Regarding Sonae Investment Management. During the first 9 months of the year, the company has invested in 6 new ventures, 3 of which are seed stage, and also this year in alignment with its active portfolio management strategy, Sonae IM sold 100% of Saphety's shares to members of its management team. And also in Q3, it sold 100% of Wedo shares to Mobileum, Inc. Both transactions generated important capital gains for Sonae. And at the end of September, Sonae IM had EUR 119 million of cash invested in respective portfolio, which is now composed of 30 companies and the participation in 3 investment funds. It has a track record of 4 exits that has resulted in a total of EUR 140 million in terms of cash inflow and quite attractive returns on investment.

Looking at Sonae Sierra now. Sierra continues to register a solid operational performance, both in terms of tenant sales and also in terms of rent and also a good performance of its services division. Direct results in the 9 months was stable versus last year despite the sales of assets, which occurred in the last 12 months. Indirect results in Q3 amounted to a negative EUR 10 million, and this was mainly a reflection of secondary asset revaluations and also accounting impacts from the merger in Brazil with Aliansce. I would say that this is a conservative approach to the valuation of our assets, and we see a valuation upside in both our core assets and also in Brazil.

Regarding Brazil, I would like to highlight the very positive reaction of capital markets for the merger. The market cap of the combined entity has more than doubled since the announcement of the merger. And the first signs of the integration process give us even more confidence that the value-creation potential that was identified will be materialized in the coming months.

Looking at capital recycling. Sierra has concluded in Q3 the sales of its stakes in 3 assets, AlgarveShopping, Albufeira Retail Park and Alexa, generating total proceeds of EUR 45 million in the quarter.

Regarding NOS. As you know, NOS has already published its Q3 results with operating revenues increasing by 2.1% year-on-year to EUR 403 million driven by a solid telco performance and also by a strong growth in audiovisuals and cinema. EBITDA increased by 3.4% above the pace of revenue growth, totaling EUR 173 million and leading to a market -- margin increase to 43%.

Net income increased 5.7% year-on-year in the quarter and 10.4% in year-to-date terms, therefore, showing an increasing contribution to Sonae's results.

Finally, looking at our consolidated figures. Sonae maintained overall a solid performance in the third quarter, underpinned by positive contributions from practically all the businesses in the portfolio. Consolidated turnover increased by 9% year-on-year in Q3 to EUR 1.7 billion and EBITDA increased 41% to EUR 206 million, driven by the positive contributions of fully consolidated businesses, with underlying EBITDA increasing 21% year-on-year in Q3, but also by the higher contributions of equity method consolidating businesses, namely ISRG and NOS and also by capital gains on asset sales, in particular, Wedo's disposal by Sonae Investment Management. All in all, net income group share more than doubled in Q3 to EUR 50 million, and RoIC stood at 9.8%, very close to our long-term target of 10%.

Our capital structure remained solid, with net debt decreasing EUR 20 million year-on-year and EUR 113 million on a comparable basis to EUR 1.5 billion at the end of Q3. Cost of debt and maturity profiles also remain at a very comfortable level. And all the companies in the portfolio maintained conservative balance sheets. Sonae MC posted 1.9x financial net debt to underlying EBITDA level, NOS registered a financial net debt to EBITDA also of 1.9x. Sonae Sierra's LTV decreased to 28% and the holding LTV stood at 14%. So I think this evolution demonstrates the group's cash flow generation ability once again despite the strong level of investments that we continue to deploy to constantly improve our value propositions and the experience of our customers.

So overall, we remain confident in the ability of our businesses to continue to outperform their respective markets, and we expect to reach the end of the year with at least the same level of performance within the first 9 months.

I will now end this brief overview of our Q3 results and invite you to ask questions. You can please open the session for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [2]

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João Pinto from JB Capital Markets. The first one on food retail. Could you tell us what was the basket inflation in the quarter? Also on food retail, your like-for-like was higher versus your main competitor and your top line growth has been higher than the increase of food and beverage retail sales in Portugal. Based on your estimates, can you confirm that you have accelerated market share gains this quarter versus the previous quarter?

And my third question on this news today in the Portuguese press saying that Sonae's analyzing the new REITs regime in Portugal. Could you please give us some color about the interest that you're seeing for commercial real estate in Portugal? I mean do you feel that there is interest for your assets at your NAV levels?

And finally, if you could give us some details on Worten's acquisition, such as the economics of the business -- of the new business and the amount of the transaction would be great.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [3]

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Hello. Sorry. Apologies for this technical glitch. I hope you all can hear us now. And we had a couple of questions from João Pinto from JB Capital Markets. A couple on food retail, then one on the REIT regime and then another one on the acquisition made by Worten in the last few days -- or agreed by Worten in the last few days. So I will ask Rui, Luis and Paulo to cover the 3 blocks of questions again.

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Rui Manuel Teixeira Soares de Almeida, Sonae, SGPS, S.A. - Director [4]

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Okay. João, going back to -- well, I will try to summarize the questions regarding the inflation rate in our baskets here in Sonae MC in the first quarter was slightly negative by minus 10 basis points in our -- in the third quarter in our basket.

Regarding the growth in terms of market shares, according also to the information we got from the Portuguese National Institute of Statistics, the information we got from the -- from them, we increased our market share from -- about 40 basis points from the information we got and the information we got from ourselves and the discussion we got from their side. We increased our market share. So now I will pass the speaker to Mota Duarte.

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Luís Mota Duarte, Sonae Sierra, S.G.P.S., S.A. - CFO & Executive Director [5]

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I'm Luís Mota Duarte from Sonae Sierra. Taking your question on the current REIT regime and on the valuation of our assets. So in terms of the actual REIT regime in Portugal, we welcome the introduction of it. We see the strong support of the Portuguese real estate markets, which will drive further visibility and liquidity which is a positive for all investors and players in the sector. From Sierra point of view, we are actively assessing this opportunity, as we believe that we are uniquely positioned to create vehicles which combine high cash-yielding assets with a strong track record, but we also believe that our domestic and international track records puts us in a position where we can combine international investors and Portuguese investors in Portuguese-listed vehicle.

The answer to your question around whether we think we can place the asset at the yields at which we're currently valuing them? The answer is, of course. I mean that's our role to value the assets at their market value. So that's why it should reflect that.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [6]

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Paul?

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Paulo Simões, Sonae, SGPS, S.A. - CFO of Worten [7]

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Okay. João, thank you for your question. Regarding iServices. iServices is a small company that is very good at repairing mobile phones, that's its main business. And that acquisition is very important for Worten because it will allow us to accelerate the execution of our strategy to expand our services areas and improve customer experience related to these services in Worten. The company has 11 stores -- sorry, 15 stores in Portugal, 11 in Porto and Lisbon metropolitan areas. And then the investments was really immaterial when compared to Worten's size. So it's a small company.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [8]

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Just a follow-up on the market share. Rui, this 40 basis points was during the third quarter? And can you tell me how much was year-to-date?

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Rui Manuel Teixeira Soares de Almeida, Sonae, SGPS, S.A. - Director [9]

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40 -- 30 basis points. On a year-to-date basis, 30 basis points.

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Operator [10]

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We will now take our next question.

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Artur Amaro, Caixa - Banco de Investimento, SA, Research Division - Analyst [11]

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I have 3 questions, if I may. One of them is related with the average basket size of Sonae MC, if possible, to know, to have an idea. The other one is related with Arenal. If I'm correct, I heard that you opened 3 stores during the quarter or was it on the 9 months? And just to have an idea, what can we expect for the coming years in terms of stores expansion regarding Arenal? And finally, I heard the CFO commenting on the press that the minimum wage increase could have a significant impact. The question is, what was the assumption that you were working for next year? Or is this figure above what you expected for the coming year? And that's it.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [12]

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Thank you, Artur. So I will take the last question and then I will hand it over to Rui to take the questions on MC. Just a quick -- a slight correction. I didn't say that it would have a significant impact. I said that it was a significant increase in the minimum wage, which is slightly different. In terms of the impact on our top base, it will have a slight impact, which we expect to be able to fully accommodate with productivity and efficiency gains. So at the end of the day, we do not expect a material impact of this measure in our overall profitability levels. Rui?

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Rui Manuel Teixeira Soares de Almeida, Sonae, SGPS, S.A. - Director [13]

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Artur, well, regarding the questions you raised, well, it's very difficult to give you a figure because in our portfolio, we have several portfolio of assets from Bagga to Continente stores. And the average size of each asset -- the average size of each basket, it's so different, give you an average basket for the entire portfolio of assets, it's something that doesn't have any meaning of anything. It doesn't have any meaning to give you anything. It doesn't have any meaning. So you need to understand that compared, for instance, proximity stores to one-stop shop stores and to cafeterias and to pharmacies and to everything. It doesn't make much sense to compare anything to give you a figure in terms of basket size -- average basket size. So I would prefer not to give you an average figure from our portfolio of assets, if you don't mind.

In terms of Arenal -- expansion of Arenal. We feel that we will be able to conclude this year with more 3 stores until the end of this year. We are working very hard in 2019 with 3 more stores comparing to the stores that we are having today.

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Operator [14]

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We will now take our next question.

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António Seladas, A|S Independent Research - Analyst [15]

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António Seladas. Just one question related with Sonae Sierra, the performance of Sonae Sierra over the third quarter. So if you can explain more, add more color? And if we would expect more of these in the coming future?

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Luís Mota Duarte, Sonae Sierra, S.G.P.S., S.A. - CFO & Executive Director [16]

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Sure. I mean, it can be a long answer, but basically, in short, operationally, we -- business is performing very well. We've recorded good like-for-like in terms of sales, but also in terms of rent growth as João said. And -- I mean we've seen good dynamics in our portfolio. So we don't expect that to change. I suspect you're also wondering about the indirect result in terms of the asset valuations. In short, the negative EUR 10 million that you're seeing in our proportional indirect results is a reflection of asset revaluations, which I will explain in a second, but also a conservative merger accounting of the Brazilian merger.

I mean if you think about the Brazilian merger, it was completed in August -- in the first week of August. It's a complex merger. We're talking about the largest shopping center operator. We're talking about a business with EUR 2 billion of market cap -- EUR 2 billion. And from an accounting point of view, we account for all of our assets at fair market value. Unfortunately, the combined entity, Aliansce Sonae, does not account at fair market value. And therefore, we have decided to take conservative approach to valuation on -- of the Brazilian side, which, therefore, means that assets, the Brazilian assets in our accounts do not reflect the synergies that we're expecting to achieve, but also do not fully reflect the dynamics that we're currently witnessing in Brazil in terms of yield compression, liquidity significantly rising and overall generally favorable capital markets. Even operationally, the business is doing very well. It announced its results today as well with a very strong performance.

So from a valuations point of view, I think we're overall conservative in Brazil. But given the nature and the stage of the merger, we believe that our approach is a progress and consistent with our practices.

I would just like to point out, as a reference point, that the average share price of Sonae Sierra Brasil in 2018 was around BRL 22, and today Aliansce Sonae is trading at BRL 40, BRL 41.

In terms of the European portfolio, and by way of context, I mean, we are -- and as mentioned before, we are seeing some yield expansions, mainly in the secondary assets and the tertiary assets, particularly in countries like Italy and Spain and as a result of this dynamic, we have worked historically with valued assets on a semiannual basis only. This is the first quarter in which we have valued or introduced the concept of valuing the assets on a quarterly basis.

As this is a gradual process, we did value a large part of our portfolio, but not all of the assets. We have not valued the core assets, which have the most significant gain and which do not see this yield expansion potential that I mentioned before. And therefore, the results are biased towards the negative in terms of valuations. We expect that to be -- to normalize in the next quarter. Having said this, and one important message is that our house view, and it's quite a firm house view is that the yield expansion that we are witnessing right now is purely driven by the Anglo-Saxon sentiments. It's not a reflection of the performance or the long-term outlook of our portfolio. And I can give you 2 reference points to support that. One is that I mentioned, our portfolio operationally is consistently doing well across all the different regions. But also despite this performance, the premium between shopping center yields and the risk-free rate beats any historic levels and the successes by any measure. A long answer for a short, but important question.

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Operator [17]

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(Operator Instructions) We have another question. We will now take that next question.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [18]

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José Rito from Caixabank BPI. I have 2 questions on Sonae MC. So basically, this should be the second year in which the like-for-like is close to 3%. How sustainable do you see this going forward? How do you see this strong performance over the last 2 years? And how sustainable do you expect this to be, let's say, in 2020? I know that you don't provide guidance, but nevertheless, just try to have kind of sensibility of how much recurrent could be this like-for-like evolution.

And then kind of a follow-up question on the minimum wage increase. You mentioned that you don't expect any major impact from this. Could you provide some reference if you need any specific like-for-like in the, let's say, in the food division to absorb this wage increase next year? Or if through the cost measures initiatives that you expect to apply basically with like-for-like of 0, eventually, the margin will still hold? And that will be my 2 questions on Sonae MC.

Then regarding Sierra, basically, you mentioned in terms of outlook for yields that we start to see some increases in Italy and Spain. So for 2020, how do we see this evolving for the core market, so for Portugal, Spain, and in Continental Europe? And also, a little bit to understand what you mentioned regarding Brazil. If I understood right, basically, previously, you were using market references for Sonae Sierra Brasil, but that is not the case for the new combined company. Could you confirm this? And if that's the case, basically, you're saying that the synergies expected will not be captured in terms of NAV and -- over the coming quarters, right? So that will be my question.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [19]

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Thank you, José. Let me just take the one on the minimum wage because it affects several of our businesses, it potentially affects several of our businesses. It's still hard to give you an estimate on the exact impact and what would have to be a like-for-like growth to compensate for that because, as you know, we do not pay at minimum wage. So we pay above minimum wage, and so it also depends on how we reflect this increase in minimum wage in our cost base. So it's still early to tell. We're still analyzing the topic, so -- but we do expect that with the productivity gains that we are having and we're implementing, that we will be able to absorb the extra cost that might come with this measure. I will now hand it over to Rui to talk about the like-for-like -- the sustainability of like-for-like going forward and then to Luís to take the Sierra questions.

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Rui Manuel Teixeira Soares de Almeida, Sonae, SGPS, S.A. - Director [20]

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And considering also the answer that you -- José, thank you for your questions. And considering the answer that João gave to you regarding the minimum wage, this is also one of the assets that we will also have to take into consideration to forecast the like-for-like for next year because for sure, that the -- we'll take also into consideration the disposable income that for sure that families will have next year to have it put to -- for consumption next year, to have available for -- to consume or at least to trading up in our stores. And we need to consider that in our forecast. But again, those type of movements that João was considering, we were considering as well. And when we gave the -- our ambitions and our -- the guidelines when we were -- in the 3 or 2 months ago because we were already considering these type of movements forecast for the economy. We -- that's why we were already considering this -- the movement that João was mentioning, the productivity gains and the efficiency initiatives that we were already implementing in our company. But again, the like-for-like that we were gaining in the last years is the result of all the initiatives that we implemented accordingly in the last years that were very well received as João said in the very beginning in the introduction -- he mentioned in the very beginning of this presentation. We were receiving from our customers because they are recognizing very well the value proposition that we are offering them. And this -- the value proposition that is very well perceived -- very well received, very well accepted, and we are collecting the gains from our customers and like-for-likes are growing and the sales are evolving quite well. And the levels of awareness are evolving positively. And I feel that we have some room to continue to evolve in the Portuguese economy. That's why we feel so confident to continue to evolve in Portugal, according to the figures and the ambitions that we provide to -- in the Capital Markets Day.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [21]

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Okay. Just a follow-up on this. So basically, can we conclude that the net promoting score has been increasing for Sonae MC?

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Rui Manuel Teixeira Soares de Almeida, Sonae, SGPS, S.A. - Director [22]

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Well, basically, this is sort of an internal measure, it is not public. That it is for an internal measure that we -- like we -- measure -- that is measured internally. It's not public. It's not fair to give you that measure, but it's evolving, growing positively since the day we started to measure that indicator in 2014, evolving positively.

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Luís Mota Duarte, Sonae Sierra, S.G.P.S., S.A. - CFO & Executive Director [23]

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Okay. From -- your questions around Brazil and around yield. In terms of yields, I mean, the yield expansion pressure we have seen in secondary and tertiary assets, it's in Italy and in Spain mainly, but there is also some pressure in Portugal, but less so. The core assets, we are not seeing any pressure, and definitely no pressure is justified based on the fundamental and strategic performance of those assets. Brazil, and thank you for asking those questions, it's worth clarifying. In Brazil, we are -- we will continue to value the assets at fair market value. We value all our open operating assets at fair market value. What happened is that Sonae Sierra Brasil had 9 assets and Aliansce has 20. So now we have to value a portfolio of 29 assets, of which 20 we are getting closer to and learning better. And until we do that, we have a very conservative approach to those valuations.

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Operator [24]

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There are no further questions. Please continue.

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João Pedro Magalhaes Da Silva Torres Dolores, Sonae, SGPS, S.A. - CFO & Director [25]

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Okay. So if we have no further questions, thank you very much, everyone, and looking forward to speaking with you at our full year results conference call in March. Thanks, everyone. Bye-bye.

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Operator [26]

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That does conclude our conference for today. Thank you for participating. And you may now disconnect. Speakers, please standby.