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Edited Transcript of SSBR3.SA earnings conference call or presentation 21-May-20 3:00pm GMT

Q1 2020 Aliansce Sonae Shopping Centers SA Earnings Call

Sao Paulo May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Aliansce Sonae Shopping Centers SA earnings conference call or presentation Thursday, May 21, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniella de Souza Guanabara Santos

Aliansce Sonae Shopping Centers SA - Chief IR Officer & Member of Executive Board

* Rafael Sales Guimarães

Aliansce Sonae Shopping Centers SA - CEO & Member of Executive Board

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Aliansce Sonae's First Quarter 2020 Earnings Conference Call. Today with us, we have Mr. Rafael Sales, CEO; Mr. Leandro Lopes, COO; Mr. Carlos Correa, CFO; and Mrs. Daniella Guanabara, Strategy and IR Officer.

We would like to inform you that event is being recorded. (Operator Instructions)

There will be a replay facility for this call for 1 week. We have simultaneous webcast that may be accessed through Aliansce Sonae's IR website at ir.alianscesonae.com.br.

Today slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. We would like to inform that questions can only be asked by telephone. So if you are connected through the webcast, you should e-mail your questions directly to the IR team at ri@alianscesonae.com.br.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of the company's management and on 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 in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Rafael Sales, who will start the presentation. Mr. Rafael, you may begin the conference.

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA - CEO & Member of Executive Board [2]

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Good morning, everyone. I would like to thank you all for your interest in Aliansce Sonae. I'll start today, we're on Slide 3. Obviously, it's important to comment and highlight at this point about how the company is going through this challenge in the face of the pandemic and the consequent closure of our malls. This is a dramatic human and economic crisis and the Brazilian economy has never faced something like this before. None of us had experience to deal with such crisis like that nature.

At the beginning of February, the company was already organizing a working group to take preventive actions regarding the coronavirus, even before the first case was confirmed in Brazil. Right after, we created a Crisis Committee to manage this situation. And since then, we have gone through several phases. First phase was to try to preserve the health of our employees and our visitors while the malls were still open. We promoted a strong awareness campaign in all of our malls, even before state or municipal governments took an initiative. Soon after, governments determined the interruption of nonessential economic activities in the considering shopping centers at (inaudible), and we kept opened only (inaudible) markets, health care providers and drug stores. All other operations were closed, and we had to implement a closure protocol that has never been used before. We closed 39 malls in 4 days, which was a great effort from all of our team. We implemented closing protocols and right after started to pursue operational when (inaudible) cost reductions. Then we started to address the topics regarding our commercial relationship with the tenants which will later be discussed in this presentation.

While, in this tough environment, we also started working, as you can see on Slide 4, on the expenses reductions initiatives in which we called a first phase of our contingency plan. And basically we adopted the home offers on large-scale. This experience has been very positive as the video conference tools and the data access tools are working very well, proven to be very efficient. And we believe this is a trend that is here to stay and will help to reduce travel costs in general and maybe even other costs as well. We also could -- a big part of our employees on vacation to reduce vacation time in the future. With the worsening of the health crisis in the country and the extension of the temporary closure of our shopping centers, we are implementing the second phase of this contingency plan, which includes the (inaudible) level of some work contracts and the reduction of working hours and wages.

For a period of 60 days in the beginning that can be postponed according to the labor law that was recently approved in Brazil.

We adopted a temporary reduction in working hours of 25% and the reduction in wages for all employees. And this reduction will be from 10% to 40% depending on the salary range. The smaller the range, the smaller reduction; the smaller the salary, the smaller the reduction. The measure adopted so far, the measures adopted so far, added to the seasonality nature of the quarter should generate a strong reduction in SG&A for the second quarter. We expect SG&A to be 20% to [23%] below what we saw in the first quarter. Going forward, with the temporary closure of our centers, here on Slide 5, we took measures to support our tenants, reducing the needs for working capital and bringing some, [we believe], to their cash flow. Regarding tenants, the company granted a 50% discount in March and 100% discount in April. The balance of the 50% due in March will be charted in 6 installments starting in October 2020, for in line stores, and will be charged in the end of this May -- this month, May, for anchor stores. Regarding [common area] costs, the company granted a 20% reduction on April collection and a 50% reduction on May's collection. For the coming months, we expect to redesign centered by suppliers' contracts, reducing even more some costs, making a leaner structure and -- but at the same time, keeping the high quality of our services. Only with the gradual recovery of our operations, we will see these costs coming back. And we -- when we work to have more efficient structure going forward.

In addition, we are also working along with some financial institutions to try to streamline the process of credit concessions for small and midsized tenants, especially mom-and-pop stores.

Regarding our reopening protocol, on Slide 6, we provide some detail here on the reopening studies that we did to prepare our centers. We are structuring the return of operations at reduced hours. From noon to 8 p.m. or from 11:00 a.m. to 7 p.m., tenants will choose whether to operate or not during the first week of restarting. In addition, we are training our on-site teams, reinforcing cleaning and protection procedures such as the access control, temperature measurement, mandatory use of masks for all employees and tenants. And also, we are suggesting that our clients also use masks. We are working together with the city hall in each cities that we have operations to issue orders that all visitors must use masks while they are entering the center. So that will help us to limit the visit of people without masks.

The protocol was inspired in the best experiences we saw in Asia and in Germany. And we hired the specialists and doctors to help us implementing -- developing and implementing the protocol together with our team. Currently, there are more than 5,000 malls opened around the world. So far, we have not seen cases of increased contamination after these openings. In addition, in Brazil, we have already 88 malls operating, and we also have not seen an increasing contamination on those areas. We understanding that each region in Brazil face a different reality, and we expect the reopening process to start with cities that present lower occupancy rate of hospital beds and to gradually continue towards larger and dense citers. For (inaudible) size cities or smaller capitals, we believe there is a good chance for the reopening to begin later this month or early next month. We are, in fact, transmitting a real sense of security to our customers, tenants and employees. This now normality, what we call this low-touch economy normality, should last for some time. And we believe that later on, we will be able to increase operating hours and maybe start relaxing some procedures.

In the meantime, we should continue to take this strong disciplined additional precautions controlling the flow of people and cars to enter in our malls.

On Slide 7, I'd like to show you some information regarding the centers that we have already reopened, Santa Maria and in Londrina. These were 2 successful experiences, which followed our reopening protocol, and we will then use those experiences as examples for the next operations to be reopened.

On April 18, our managed mall in Santa Maria was restarted. And in this specific case, the opening hours were defined between 11 a.m. and 7:00 p.m. 92% of tenants are currently operating. The mall is restricting the number of visitors, increasing the space between tables in the food court and keeping movie theaters and playgrounds closed for a while. Anchor saw its reopening in second week of operations.

On May 8, our first owned mall was opened Boulevard Londrina. It started with 93% of tenants operating. Anchors were also opening as we returned to operations. And the mall is -- operates today from 11 a.m. to 7 p.m. There are some operations that are not opened yet like the movie theaters as well.

An another front that I'd like to expose to you and give you some updates, there are our initiatives regarding innovation and our omni-channel solutions to provide services to our customers and to our tenants, while the shopping are still closed. Some initiatives were already underway. And some so we were only evaluating, but we were able to implement some very interesting new tools recently. The idea is basically providing these solutions to our customers, make it easier and enhancing the sales experience and the shopping experience for the customers, increasing sales while the shoppings are closed to our tenants.

At the end of April, we launched special pages in our website and in our apps of our malls to promote different sales channels of our tenants, offering several delivery options that include the home delivery, drive-in, drive-thru pick up, lockers and express delivery like Ifood and Loggi. [With] implementation of these 2, we had 232,000 unique visitors access being, 116,000 to e-commerce; 70,000 to websapp; 43,000 to drive-thru; and 3,500 to express delivery channel. The drive-thru experience has already been implemented in 36 of our 39 malls.

We are also providing delivery options through lockers at Shopping Parque D. Pedro, Shopping da Bahia and Plaza Sul. In addition, the marketplace of Parque D. Pedro has boosted our -- the base of tenant -- the base of the tenants that are connecting to our platform. We are also developing partnerships with companies that can accelerate this kind of omni-channel solution for other malls, while we don't have the definitive solution implemented as we did in Parque D. Pedro. At this front, I believe there will come very good results after the crisis has ended, and we will be able to keep profiting from this omni-channel initiatives going forward.

Regarding the results, here on the [left side], I'd like to share with you some comments on the actual results of the first quarter. The operational figures were very strong. We could see that sales have been growing strong -- well at the beginning of the year comparing to what we saw until March 15. Sales grew 9% organically. In January and February, the figure was even stronger, with growth above 10%. And regarding the financial results, I'd like to highlight the expressive reduction in the cash cost in shopping malls operations, which was down 12%, of course, this is one of our main synergy lines, which were already showing some results in the beginning of this year. And of course, the weaker revenues that we're going to have this second quarter, we're going to have -- we won't have this effect of scale gains that we saw combined with the cost reduction that impacted the first quarter results. But it's going to be back in once we reopen the centers in the future, and it will be good contribution to our margins.

Importantly, the synergy curve will also be postponed regarding the top line commercial synergies, and we expect this to reflect the results in the coming year and in the next. Consequently, our EBITDA was still quite positive, growing 3.6% despite the effect of the reduction on sales on revenues in March. AFFO was flat, which I think is very positive because here, we are already -- disregarding the straight-line rent adjustment from the discounts in March, as well, we're discounted here the nonrecurring cash gains we have with sales of assets that we sold price for higher price than they were in our books. And also the earn outs of pesos sales that we did before. So the AFFO, as you can see on the presentation and in the earnings release, grew much higher than 3%. And like EBITDA, it was a big growth of more than 20%. But adjusted for those, new recurring numbers, it's flat, which is already very good considering March close.

In addition, I think it's also important to highlight our cash -- our strong cash flow. Generation this last quarter was of BRL 150 million, all in operations, in addition to the gains of the sale of assets that I mentioned. With that, we ended the quarter with a balance of BRL 1.5 billion in cash, leaving us in a very strong cash position. We have already built some stress test scenarios. And in case the models remain close for another month or even 2, we will not have any issues regarding that covenant, which is a very important thing in that kind of moment. Company will not be restricted by covenants.

With this good level of leverage and the well-structured balance sheet, I am comfortable to say that we are currently the strongest balance sheet in the industry. And I will give -- Daniella, of course, will give more details on the company's financial structure, but I think the point -- the thing to point out here is that even with a significant drop in EBITDA this year, we would still have a strong balance sheet with capacity to keep investing. If we give the number of our EBITDA of last year, we would have BRL 1.8 billion in capital allocation capacity. And we also consider the drop that we expect for this year, we still would have BRL 1.1 billion in capital to be allocated in investments. So once the market normalized and stabilized, we are quite sure that we could come back to pursue the growth opportunities that we were pursuing. However, now, our focus is the timing in the operational sites, keeping our malls well occupied and preserving our customer experience as good as possible.

This crisis won't stand in our way on the longer term. We will keep delivering the results, that we are postponing now, in the future, I'm confident about it.

Now I'll turn to Daniella to give you more details on the quarter, and I'll be available for question and answers after that. Thank you.

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Daniella de Souza Guanabara Santos, Aliansce Sonae Shopping Centers SA - Chief IR Officer & Member of Executive Board [3]

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Thank you, Rafael. Moving on to Slide 11. The occupancy rates remain in line with the one posted on the first quarter of '19 and reached 95.7%. So far, we didn't have many tenants asking to resign their contracts. Therefore, we expect a lower than 1% impact on our occupancy rate after the reopening. Another positive highlight is that even with the malls temporarily closed, our commercial team signed 15 new contracts throughout April, in addition to 71 contracts signed during the first quarter, being 18 in the second half of March.

On Slide 12, the net delinquency in the first quarter was up 5.5%, which already reflects the economic impacts from the COVID-19 pandemic. [Via] has also been affected by the distress scenario. The discount granted for rent is conditioned to the payment of other obligations, such as common-area charge. And so far, we had a positive result in collections over this past month.

Moving now to Slide 13. Aliansce Sonae's total CapEx in the first quarter was up BRL 15 million, out of which BRL 5 million is related to maintenance. Preserve cash in face of the impact from the COVID-19 pandemic, the company decided to postpone all non-essential investments planned for 2020 and, therefore, the expansions in Shopping Taboão, Caxias, Franca and Campo Limpo are postponed until better market conditions. In addition to all initiatives adopted by Aliansce Sonae, we would like to highlight some aspects of our portfolio and financial statements that we believe will bring resilience to our company which remains prepared to resume the growth rate of its activities once the economy stabilizes.

Starting on Slide 15, as Rafael has already mentioned, we can see that we have solid liquidity and low leverage, which leave us well prepared to face the crisis. In the first quarter of 2020, the company's cash position was of BRL 1.5 billion, representing a growth compared to the fourth quarter of '19, especially based on a strong operational results in the first 2 months of the year, inflow from divestments and earn-out and the successful liability management that we've been conducting.

The company's net debt decreased to BRL 624 million in the quarter, and its leverage dropped 2.9x net debt EBITDA, which confirms that Aliansce Sonae's balance sheet is the strongest among the mall industry in Brazil. The company's ability to face the economic impacts caused by the COVID-19 are also reaffirmed by its investment potential while keeping an adequate level of leverage. Considering the current cash balance and the results accumulated in 2019, the company could increase its investments up to BRL 1.8 billion without exceeding the 3.5x net debt EBITDA. In a more stressed scenario, even with a 30% drop on 2019 results, Aliansce Sonae would still have an investment capacity of BRL 1.1 billion without [experiencing] 3.5x net debt EBITDA. We highlight that we are also comfortable with our debt amortization schedule which [faced] the first quarter, represents BRL 90 million for 2020 and BRL 231 million for 2021.

Moving now to Slide 16. Aliansce Sonae has consolidated its competitive position as the largest mall manager in the country with 1.4 million GLA under management. The company's commercial strength combined with balanced geographical footprint with leading assets within its catchment areas. Dominance is the result of a set of factors that include high geographic density, disposable income and leadership. Our portfolio, 10 largest assets in terms of sales per square meters presents strong operational metrics above the average of their competitors within their catchment areas, which increases their ability to attract tenants and consumers.

The company's asset management strategy is focused on concentrating stakes and dominant assets, which brings the stronger results and greater resilience to the portfolio.

In the next slide, we show in greater details the factors which determine the dominant positioning of the 5 largest company's assets in terms of NOI. Starting with Parque D. Pedro. The asset is dominant not only in Campinas, but also in the nearby cities. The household income in its catchment area is 39% higher than in the Carioca, Campinas, reaching BRL 8,900 per month with a qualified annual demand of BRL 4.3 billion and the concentration of sales in the A and B income classes, the mall is the company's greatest asset in terms of NOI.

Moving now to Shopping da Bahia. The asset is one of the most traditional in Brazil and located in one of the most qualified regions of Salvador. The 1.4 million inhabitant of its catchment area represent average household income of BRL 6,200, which represents a qualified demand of BRL 10 billion, which is mostly captured by the assets, considering its dominance. Sales in Shopping da Bahia are 75% concentrated in income classes A and B.

Moving now to Manauara Shopping. A little over 10 years after the start of its operations, the asset is dominant throughout the city of Manaus, being the main center in the capital of Amazonas. The mall catchment area reached 807,000 people, with an average household income of BRL 6,800. 82% of total consumers come from income classes A and B. And the highlight of the assets is its sale per square meter, which reaches almost BRL 2,900 per month.

Going now to Shopping Leblon. The mall is located within an area of high average household income of almost BRL 47,000, in which AAA consumers assure a qualified annual demand of BRL 3.3 billion and present one of the highest sales per square meter of the industry, reaching almost BRL 3,800 per month.

Going now to Shopping Boulevard Belem. Located in the most qualified and dense region of the city, Boulevard Belem has a strong dominance within its catchment area, being the main asset of the city. The mall concentrates 78% of its sales in income classes A and B, which translates in solid operating figures, such as almost BRL 2,900 per month of sales per square meter. Thank you all. Let's open the floor for the Q&A section.

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Operator [4]

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Excuse me. At this time, I would like to turn the floor over back to Mr. Rafael Sales for closing remarks.

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Rafael Sales Guimarães, Aliansce Sonae Shopping Centers SA - CEO & Member of Executive Board [5]

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Hello, I appreciate your attention to the company and our results. We had a very long conference call in the Portuguese version previously to that meeting. I think there were questions -- interesting questions that were answered in this call, and it will be available and translated in our IR website. So I suggest you to take a look at it.

Also, I hope everyone is healthy and safe during this crisis and we can see each other soon once this crisis is over. Thank you. See you next quarter.

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Operator [6]

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Thank you. This concludes Aliansce Sonae's First Quarter 2020 Earnings Conference Call. You may now disconnect your lines at this time. Have a nice day.