Allos S.A. (ALOS3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Aliansce Sonae's conference call. Today with us, we have Mr. Rafael Guimarães, CEO; Mr. Carlos Correa, CFO; and Ms. Daniella Guanabara, Strategy and IR Officer. We'd like to inform you that this event is being recorded. [Operator Instructions] There will be a replay facility for this call for 1 week. We have a simultaneous webcast that may be accessed through Aliansce Sonae's IR website at ir.alianscesonae.com.br (sic) [ ri.alianscesonae.com.br ]. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. We'd 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 [email protected]. 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'll turn the conference over to Ms. Daniella Guanabara, who will start the presentation.

Thank you. Good afternoon, everyone. Thank you for your interest in Aliansce Sonae. The idea of this webcast is to provide an overview of the measures and initiatives that we've been facing -- in face of the impact caused by the COVID-19 pandemic. After the presentation, we will open the floor for questions and answers. Just as an update, we will publish the first quarter of 2020 results on May 20, after the trading session. Starting on Slide 3. We will focus on the initiatives regarding the operation of our centers. Here, we can see the main actions we have taken since the confirmation of the first COVID-19 case in Brazil. At the beginning of March, we created a crisis committee, which analyzes and coordinates the implementation of new protocols and procedures. Following the recommendations set by municipal and state health authority, by March 22, all malls were temporarily closed while keeping essential operations open, such as pharmacies, supermarkets and medical clinics. Food delivery services are still running. We expect a partial reopening of our portfolio during May, but these reopening plans will be coordinated along with local authorities and ABRASCE and may be revised at any time. Moving now to Slide 4. We show our current expectation for the reopening schedule of our assets. We expect that part of our portfolio will begin to operate again during the first half of May. In the second half of the month, we expect to reopen our centers in the states of São Paulo, Minas Gerais, Bahia, Goiás, Espirito Santo and last, in Distrito Federal, starting this process from the countryside. The restart of operations in the states of Rio de Janeiro, Amazonas, Pará and Sierra is still to be defined. The reopening plans will be coordinated along with local authorities. On Slide 5, we provide details on the development of the reopening protocol for our centers. We are structuring the return of operations as reduced hours and tenants may choose whether to operate or not during the first week of reopening. In addition, we are training our on-site teams, reinforcing training procedures, providing hand sanitizers, establishing the mandatory use of surgical masks and temperature measurement for all employees and tenants. And we are also suggesting the use of surgical masks for our clients. The development of our opening protocol counted on the support of a renowned Brazilian infectious disease specialist. We would like to transmit a real sense of security for our customers, tenants, and employees, seeking a new normal for operations as time goes back. Moving now to Slide 6. On April 18, our management -- managed mall in Santa Maria was reopened. In this specific case, the opening hours were declined between 11:00 a.m. and 7:00 p.m. from Monday to Saturday. The center is restricting the numbers of visitors, increasing the space between the tables of the food court and keeping movie theaters and playgrounds closed. And to stores like Renner, Riachuelo and Smart Fit are already reopened, and the level of tenant sales so far is nearly 40% over the same period of last year. This was a successful reopening for the [ homepage ], which we are using as a basis for the next operations to be restarted. Moving on to Slide 8. We will show the measures related to rent and common area charges. For the month of March, we granted a 50% discount on rent. The collection will be made in fixed installments starting in October 2020 for in-line stores and in May for anchor stores. For the month of April, the company granted 100% discount on rent. In addition, we will not charge transfer fees for franchisees until February 2021. Regarding common area charges for all our tenants, we granted a 20% discount for April and a 50% discount for May. This reduction in common area charges is a result of the effort the company has put together along with its suppliers to reduce operating costs during the shutdown period. At the same time, we are working in the maintenance of our centers so that when we reopen the centers, we will present the same level of excellence our clients are used to. Moving now to Slide 10, we will talk about other important measures and initiatives that the company adopted in face of the COVID-19 impact. In our People & Performance department, we have developed a short-term contingency plan. We have adopted home office on a large scale. This experience has been quite positive as the video conference tool has proven to be very efficient. We believe this is a trend that is here to stay and will help reducing travel costs in general. We also put on vacation a good part of the employees of our centers as well as our commercial, and [ more initiatives ], which was a less costly alternative while preserving our execution capacity by the time of the reopening. Using the measures announced by the government regarding labor law, we managed to present some short-term savings with the component of labor charge in both our holding company and shopping centers. This measure helped to reinforce the cash position, especially of our centers during the closing period. Taking from the efficient measures we have taken will only start impacting results from April onwards. Going now to Slide 11. With the temporary closure of our centers, the company advanced in some innovation initiatives that were already underway or being evaluated. The idea is to provide the solution for our customers, making it easier and enhancing sales of our tenants, even while the centers are closed. Regarding food delivery, the iFood operation from the Parque Dom Pedro, Leblon and Via Parque already performed quite well in March, multiplying sales by 4 to 5 fold. We have then extended our partnership with iFood, accelerating the integration of our tenants from other malls to the platform. We have also set up a partnership with Loggi, a relevant express delivery company in Brazil, to enable our tenants to deliver goods, not just food, through online and WhatsApp sales. We are also providing a drive-thru and pick-up option, in which tenants can deliver their sales for other channels to pick-up points to the parking lots of our centers. 36 of our 39 malls will have this solution. We will display on our shopping centers web ads, an exclusive page to promote our tenants' online sales. This initiative, which is also being advertised on social media, will be available from April 30 for all our own malls and for most of our third-party managed malls. Lastly, we are boosting the marketplace of Parque Dom Pedro based on the increasing demand from retailers should be connected. We are also developing partnerships with other white label companies to accelerate the entry of other centers into the digital market. Moving now to Slide 12. Aliansce Sonae is committed to supporting the community through a series of initiatives. We donated 35,000 gift baskets of food supplies to vulnerable communities, 75,000 surgical masks to the health units in locations where we operate. We contributed to activate 60 ICU beds, and it's in a hospital in Rio. We promoted flu vaccination campaigns in drive-thru format in the parking lots of several of our centers. And we helped to set up a quick test center of COVID-19 in partnership with Instituto D'Or in the parking lot of Via Parque Shopping. Going now to Slide 14. In addition to all the initiatives adopted by the company, we would like to highlight some aspects of our portfolio and financial statements that we believe will bring strength to our company, which should be ready to perform well once the economy starts to normalize. Starting on Slide 14, we can see that we have a solid cash position and low leverage, which led us well prepared to face the crisis. We will end the first quarter of 2020 with a robust cash position, considering that the first 2 months of the year showed strong figures. Our CapEx will be considerably reduced with the postponement of the expansion plan, and we are comfortable with meeting our debt amortization schedule. Even in a more severe operating performance scenario, we should end the year with a solid liquidity position. Our balance sheet is recognized by Fitch Ratings as the strongest in the industry in Brazil, according to a published report. The debt negotiation foundations in progress during the first 4 months of the year were maintained, helping us to further reduce our company's financial costs. Lastly, we are pleased to announce that even during this crisis scenario, we managed to conclude some divestment deals. We sold our entire stake in Shopping Santa Úrsula and reduced our stake in Boulevard Shopping Vila Velha, which are 2 Tier 3 assets. We have also reduced our stake in Boulevard Shopping Campos and Parque Shopping Belém. The total value of this deal was BRL 170 million, with a cap rate of 6.5%. Going now to Slide 15. Regarding our portfolio, we observed the dominance of our largest malls in terms of sales per square meters. This metric reinforced our competitive positioning and reiterated the strength of our assets compared to peers in their respective markets. In the next few slides, we explore a little more about the 2 largest centers in terms of NOI, Parque Dom Pedro and Shopping da Bahia. Parque Dom Pedro, which is extremely dominant in the city of Campinas and its surrounding, has a qualified income in its catchment area of more than BRL 4 billion. The asset posted an NOI of almost BRL 170 million in 2019, with 89% of the mall's consumption coming from income classes A and B. Shopping da Bahia, our second largest mall, has a dominant presence in the city of Salvador, with qualified demand of BRL 10 billion within its catchment area. The asset presented NOI of BRL 119 million in 2019, and 75% of the mall's consumption comes from income classes A and B. Thank you. We will now open the floor for questions and answers.

[Operator Instructions] Our first question comes from Nicole Inui, Bank of America.

I think everybody is right now focusing on the opening of the malls and what we can expect afterwards. So you touched a little bit on your -- about it on your presentation. But I thought it was interesting that with the openings, so the tenants can choose whether they want to open the stores or not. And I'm just wondering, in your conversation with the tenants and in the experience with some of your shopping malls already reopening, I imagine most of the tenants want to reopen. I think the question is, can they reopen? So knowing that probably the flow of consumer is going to be lower, the desire to spend is going to be lower for the consumers. Are you hearing just from some tenants that they're going to delay opening? And if so, what type of tenants, if you look at anchor satellites in terms of types of -- food court or restaurants? And also have any talked about permanent closures, given the crisis?

Nicole, this is Rafael. I will answer this question regarding commercial relationship for our tenants. So far, the main demand from tenants is to understand from the local authorities and government and state government how the process to reopen will take place. And we have -- we are working together hand-to-hand with those authorities to allow us to have a good planning. So the places where we are planning to open, mentioned [like the short ones] and will happen in the next 2 weeks that were mentioned in the first part of the slide that Daniella showed. Those we have already approved with the city hall and with the health authorities our protocols. The reopening protocols that we developed are inspired on the protocol that we used in Asia and also in Germany to open the centers while the retail was reopening together with shopping center for services and restaurants. So we took the same kind of cautious preparing this protocol. And the consequence is that we are feeling a good feedback from the tenants about reopening. The example of Santa Maria is interesting because the anchors were not ready to open the first week, but all of them opened in the beginning of the second week. So it was a good test of how the protocol would work. Now more -- we have 75% of the centers -- of the stores opened in Santa Maria. All the anchors are opened. And those are anchors that are in many of our centers. So it's a good sign that makers will not take that much time to open. And in fact, for those next ones that we have already presented, we have already aligned well the anchors to open together at the center, and some stores will grab the great period of 1 week for them to structure themselves to open. There is no pressure about not opening. There is a pressure, of course, about reducing the time of opening to have more control of costs. Since for the reasons you mentioned, we don't expect sales to be that strong as they were before in the beginning of the process of reopening. So that's why we are opening from 11:00 a.m. to 7 p.m. and/or from 12:00 p.m. to 8 p.m. -- 12:00 p.m., 3 p.m. to allow the gradual reopening process and allow the tenants to have lower cost during the beginning of the reopening schedule. And we expect to have it for maybe a month, but it will depend a lot on each mall performance according to sales and traffic. In Santa Maria, for example, sales are already at 40% of what it used to be. So a reduction of 50% in time -- opening time is reasonable. And we are not seeing that pressure for our closures. Regarding those discussions going on with tenants that maybe are in financial struggle and will be difficult for them to open again with us, we have so far, we see less than 1% of our [totaling mix] less effect, close to 0.6% of our [ total AOE ] that are considering not reopening, and we are still negotiating conditions with them -- for the ones that we believe are good for the centers and that have capacity to keep operating. So we don't expect vacancy to be much worse. And, in fact, since we ended the year, we have a very high occupancy rate. We don't expect to have some big vacancy during the next 2 months. And the last one, of course, we have an extra publications cost and problems coming -- arising from the pandemic and that are most foreseeable now. But the states that have been with these most difficult scenarios to deal with the pandemic are agreeing with the protocols, and we have discussed with the state governors and our protocol seems to be okay. So we expect this reopening will be lower in a gradual way and, well, lower traffic will be enough for the process of keeping the malls open. Okay.

The next question comes from Victor Tapia, Bradesco.

My question is more related to the synergies that -- from the mergers, right? So at the beginning, you guys were expecting, let's say, synergies to reach between BRL 70 million and BRL 80 million to be reached within the next 4 years, something like that. With the current scenario, is there a possibility that you are maybe revealing this story or hope that this year [ that you will be able to reach that figure? ]

Victor, thank you. We reinvested the synergies since we started the process of organizing for reducing the time -- operating time of the centers. And also, we are assessing our commercial planning for the year. Important part of those synergies come from commercial planning, especially the part regarding the occupancy level of some assets, the younger assets, and repositioning of other assets with mix management. Of -- for this part will be with much less efficient to implement this year. So we will not -- we don't expect to have very high synergies coming from the top line side, especially in the occupancy side this year, exactly because of the pandemic and the fact that we won't be able to replace tenants or recruit -- or have better rents with current payments or revising contracts, things like that. On the cost side, we still have good potential this year, and we expect to keep implementing that. Part of it was already implemented, for example, parking and more operating parking model, and this will already affect results this year. The problem is the reduction of costs or expenses this year will be certainly overshadowed by the top line impact of the closure of the centers. So there will be certainly 2 to 3 months where revenues will not be as good as they used to be. So the scale, the gains of scale of the merger will not be perceived on those months, but the reduction in costs as a next step will be implemented. So we expect to be able to give a better view on what are the synergies expected to be implemented this year, maybe in the second half. But we are keeping the same goal of BRL 80 million in 3 years, but with a lower start and more focus on expenses and costs this year, and then a more stronger -- a stronger positioning in the brands for the start of '21 and '22. And also the same thing applies for the expansions that will be postponed for '21 and '22.

The next question comes from Marcelo Motta, JPMorgan.

My question is regarding rentals. Like maybe it's a little bit too early to ask that, but just wondering how the company is thinking about rents for the coming months. I mean just looking at the operations that are already reopened and talking with analysts in China, and even if we look the Santa Maria example from the portfolio that is administrated by the company, it looks like that sales will start to pick up, I mean, later on. Like I mean this asset open 15 days, and you mentioned it, like say around 40% of what they used to be. So I guess, under this scenario, it will be really hard to charge like the whole rent in the beginning. So just wondering if you guys have any conversations with the tenants on how the ramp-up of rents should work after the reopening. And also on that front, I mean, if you could say the number or the percentage of tenants that paid -- that already paid the March rent, right? I mean we are ending April. So just wondering if the level of delinquency is something that is relevant or not?

Marcelo, thank you for the question. Those -- I'll start from the last one. We didn't charge March in the beginning as we announced, we are postponing the payment of March with the 50% discount for in-line stores starting in October. So there is no delinquency here. And we will make -- split this 50% discounted brand with 6 installments starting in October until January -- until March. This is a strategy that, understood, would support the tenant. And at the same time, they give us leverage with them to negotiate the conditions for the reopening and keep them aligned with us for reopening as soon as the malls were allowed to open. So our focus is to keep the good tenants as we did in the last years, to keep a good level of occupancy, allowing tenants to stay longer, even at the lower level of sales. So the good thing is that we have a very low delinquency rate in common area costs, common area charges, that were charged 80% for March and this month of April in -- the next charge, we'll charge 50% because we were able to reduce common area costs strongly in the second month of closure, so in this -- in April. So it was on this side that tenants will be -- will be referred -- will keep the interest in reopening with us since they paid for the common area charges, and this is a very good sign that they will keep their partnership with us, and also the fact that we gave this financial support for them to stay with us. So going to the rent question, it's a difficult question -- difficult to know -- to predict exactly how sales will perform and how traffic will perform. So we expect to have -- to give some special conditions after the reopening. But we don't know yet what level of conditions we're going to have to provide for the tenants, especially because today, we expect to have different kinds of results, performance depending on the location of the assets, regions in Brazil, and if the regions were more affected or less affected by the disease and the coronavirus impact. So the main variables will be applicable. And that's why depending on each location, we will have a different -- probably a different approach. But in this moment where shopping malls and centers were closed, we have a more -- we had a more standardized response for the tenants. But this will be different when we have the assets performing again, opened. I think it's important to point out that this year, we should not expect a big recover. And this recover, if this happens, will be good and very welcoming -- welcomed. But we prepared the company for the worst scenario. So with the cash position that we have, the good occupancy that we have and the great relationship that we have with our tenants -- I think it's important to highlight here, we have only, I think, 20 lawsuits coming from a universe of more than 7,000 tenants. And in some cases, we want in just the right to charge rents, but we didn't charge for April as an example of our partnership with the tenants because we want them to keep the operating -- keep operating our expenses once we open. Of course, we'll be able to separate good tenants from not so good tenants in the future. But that's not the moment. That's the moment to support our universe of stakeholders to keep doing businesses with us. And the balance sheet of our company allows us, as Daniella mentioned, the fact that we have the best balance sheet in the industry and we don't have pressures for short term cash despite that we are not expanding that much cash, will allow us to reopen with a very good level occupancy rate, and that naturally we'll be able to take advantage of situations where we compete with centers that don't have this capacity to support tenants until the reopening of the centers. So the fact that we have this good relationship, that we can offer a national solution for tenants with our presence in all regions in Brazil, and the fact that we're going to have centers perform in different ways in each of those regions, we will be able to give alternatives for tenants that -- especially national chains will be happy to keep [level] and start operating with us, so that -- we are quite confident on that. And when we have received very good feedback from tenants about the way we are behaving with them in these difficult times, nobody is to blame for the closures of the centers and for this economic downturn. But I think the partnership that we are creating with the tenants has been very healthy, and that gives us this confidence that our centers will reopen strong.

[Operator Instructions] The next question comes from the webcast, [ Ken Barden ] asked, "What percentage of March and April invoice rents have been received?"

Can you repeat, please? Carlos here.

Of course. What percentage of March and April invoice rents have been received?

Rafael, this is Daniella. I can answer this question. We didn't charge rents for April, and we charged 50% rent on March. We considered 50% discount on March, and we will only collect this rent from October on in fixed installments for the in-line stores. What we charged for April was the common area cost with a 20% discount. And the level of delinquency is between 20% and 30%.

And the delinquency on a common area, we expect to -- with a strong reduction still this month with the reopening of the center because no -- there was very low level of indications of store closures. So for reopening, the tenants will pay the common area charge.

We have a question now from the website as well. [ Marcelo Mechado Trioni ] asked, "With the measures announced by the Mayor of São Paulo, will you keep the reopening schedule for May?"

I will answer that one. This is still a work in process. Marcelo, we have today agreed with the government of São Paulo, the state government, about reopening strategy that will start in -- will be announced on May 8, and we expect to start with the countryside of the state with the reopening. As you know, we have some important assets in the countryside of the state of São Paulo, one of them is our biggest asset. In fact, when we start -- we expect the reopening to start in the countryside and then to come to the metropolitan area of São Paulo. On the city of -- so regarding the metropolitan area of São Paulo, then there will be also some gradual allowance to reopen. And we expect to be opening during May, but not -- but we are not sure about when in May. But we will be prepared to do the reopening as soon as the city hall expects -- will have conditions to be reopen for us. It's important to start reopening when it's safe to reopen. So that's why we are focusing more in the countryside of São Paulo, and some other -- maybe other capital off-state, but in states where contamination is very low and hospital utilization is also low. So the fact that we are spread around the country allow us to have different strategies on each state, and that's what we are doing through. So if the city of São Paulo is not allowed to open in the beginning or in mid-May, but we will be opening other centers in this year in other regions. That's our strategy.

[Operator Instructions] This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Rafael Guimarães for closing remarks.

Thank you all for your interest in Aliansce Sonae. We will be reporting first quarter results soon, and we'll have the opportunity to give you more details on results and impacts on -- of the coronavirus crisis in our business. But as I mentioned, we are strong and confident that we prepare the company for driving after this terrible health and economic crisis that we are leading. And we expect to have better time – better days in the future, especially for the smaller tenants. They are the ones that are concerning us more and the ones that need more support from our company. And I hope all of you keep safe and well and healthy. Thank you.

Thank you. This concludes Aliansce Sonae's conference call. You may disconnect your line. Have a nice day.