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

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Aliansce Sonae's Second 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 this 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. The 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 [email protected]. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of the company's management and the 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.

Good morning, everyone. First, I'd like to thank you all for your interest in Aliansce Sonae's results. Starting our presentation, I'd like to highlight the great challenge we faced during the last quarter. For the first time, because of the pandemic, we had to deal with the temporary closure of all of our malls. And it was for a long -- for a very extensive period of time, much longer than we first thought and that was first projected by the authorities. But thankfully now, we are in a much better stance. As the local authorities observed improvement in local health care conditions, as of May, we start seeing some relaxing in social distancing measures and a gradual recover of shopping centers activities in several regions of Brazil. The reopening process is a highly complex one. It remains a huge effort, not only from our own team, but also from our tenants and their employees. The city in Brazil has determined its specific operating roles, including restriction opening days, hours, food court activities and so on. Aliansce Sonae operations teams, which manage 39 assets all over the country, achieved a remarkable job restarting our activities. Following the rules imposed by each of the different cities we operate and a strict protocol developed in partnership with the referral hospital Sírio Libanês in São Paulo. We have also tested all of our employees in our centers and our offices and using a protocol to observe a significant reduction in the number of cases among our team members. Even after the reopening of our portfolio, there was an important drop in the total cases among our team members. Currently, 26 out of 27 of our owned malls are open, which corresponds to 98% of our NOI and our GLA. Total sales posted a reduction last quarter of 84.8%, a very strong negative number, of course, impacted by the closure of the portfolio during most of the quarter. On average, we had only 11% of hours opened in this last quarter. And we saw sales reaching 15% of what was seen last year in the same period. As more assets were allowed to reopen during June, it was possible to observe a sales recover pattern in our portfolio. Among the highlights in June, we have the shopping mall in the Northern Region and of the state of Rio de Janeiro, which posted daily average sales nearing of 65% of the levels of June last year. These assets are now more recently are operating 12 hours per day, from 10 a.m. to 10:00 p.m., and sales are still improving. The correlation between hours open and sales is very strong. In July, total sales already reached 51% of the level posted in the same month in 2019, operating with 50% of opening hours. On Slide 4, you can see some images of how our malls are behaving and are following the reopening protocols. Those are just some examples of how carefully we are taking care of our visitors, tenants and employees. On Slide 5 and 6, you can see that, as we mentioned in the first quarter, we had already announced a series of measures aiming to reduce costs during the time of restricted operations. Now our offices are gradually returning to activity with alternating teams, home office for those who are part of the considerable risk group and all the required care for everyone to preserve the health and wellbeing of our team members and our visitors. And it's important to highlight that we didn't promote important layoffs in the company. We focused in reducing costs and expenses, but keeping up our execution capacity, both in the commercial side, the development side and especially in the digital initiatives that we have implemented in our omnichannel strategies. In the cost front, we were able to reduce it in 52% our cash costs compared with last -- the same quarter of last year. This important reduction was compensated by an increase in provisioning levels once we took measures to cover a possible worsening in the collection of rents and common-area charge. Regarding expenses, because of more flexible labor law in Brazil, we had an important reduction of 39% comparing to the first quarter of this year. Considering that, we didn't take any radical measures. Our team has been preserved and it's prepared to resume their activities, including commercial and install initiatives. On Slide 6, in June, we continued to support our tenants with reduced common-area charge and discounts on minimum rent, which were granted in a case-by-case basis. Moving to Slide 7. Here, we demonstrate our omnichannel initiatives. We already have nearly 3,500 stores connected to our platforms, representing 7 -- 67% of our tenant base. This will allow us to have a much stronger engagement once we launch the marketplace for each of our malls during the next months. We have seen a consistent growth in the numbers of unique visitors through the digital sales channels of our tenants, throughout our web apps and our social networks of our malls. The platform direct-to-consumer to several types of sales, depending on the availability of the tenant, such as the e-commerce, WhatsApp sales, drive-thru and others. At the end of July, we reached a total of 770,000 unique visitors to the platform, which represents a growth of 3 -- more than 3x compared to the end of May. Our partnership with iFood also continues in a very good path with all of our portfolio malls connected to the platform. We already have 4 iFood hubs, which are structured that organizes the food delivery operations in each mall. And we are also rolling out 2 -- 4 more iFood hubs in our mall during this year. In the iFood hubs, we saw GMV of 6x bigger than what we were seeing at the beginning of the year. In my general comments on the overall performance of the company, I'd like to highlight that considering that we did not expect to have great results for this quarter, our goal was to focus on keeping a high occupancy rate for the portfolio and a strong commercial TV for the resumption of our operations. We believe that we have been very successful at this task. In addition, higher provisions provides us a comfort to conduct the company's commercial strategies throughout the year. Occupancy remains good at over 95%, and commercial activity remains strong with 27 contracts signed in the second quarter and 57 deals under analysis to be signed during -- under analysis in July that we expect to be signed this month in August. Daniella will go into further details about the company performance later on this presentation. I also would like to bring some color in our potential construction capacity in our malls, in our -- in the land bank near or connected to our centers. So in Slide 9, we have a brief overview of our potential that today reach 4.4 million square meters in the expansion of the mixed-use, but the majority of that is mixed-use projects. Today, we are working on 18 projects in 7 of our old malls. Regarding these projects, we have already signed 6 of them and the others are under negotiation. Total usable area reached almost 321,000 square meters with a land area of nearly 145,000 square meters. The estimated PSV for the signed projects is BRL 500 million. It's important to highlight that our assumption is to have the mall as the main asset in the mixed-use area, and everything is started and designed to add value to the center. Our goal is to also diversify our base of clients and increase this in the primary area of the mall, at the same time, contributing to help improve the quality of life in that region. Here on Slide 10, you can see that we have projects for the development of several kinds of real estates, such as residential corporate towers, hotels, hospitals and others. On Slide 11, we highlight the main projects that we have today that is in the Parque Dom Pedro Shopping center. This project is already approved for 420,000 square meters of construction potential. And this approved area has a total sales potential of BRL 2.1 billion, and half of that is a part of our -- the stake of our company. The project involves very diverse class -- most diverse class of real estate projects, such as flats, corporate towers, acquisition centers and clinical and medical clinics. We have also projects in others -- in several other malls. But we here are highlighting, on Slide 12 and 13, some other that are already advancing. Today, in Maceió, we have 2 residential projects being developed with MRV, one of the largest Brazilian developers, for a total of 544 apartments in -- with a PSV of BRL 125 million. In Franca, we signed already 2 projects: one is residential, while the other is a mixed-use of commercial corporate offices and hotel. The contracts were signed with a local developer, and it presents a PSV of BRL 207 million. In Passeio das Águas located in Goiânia, we have a very interesting project in partnership between EBM and Cyrela for the construction of 6 residential towers. We have an estimated PSV of BRL 167 million. In Uberlândia, we already also signed a hotel project with 220 rooms. And in each of those areas that we mentioned, those malls, we have much more construction potential that will be launched once we have partners to develop the projects together with us and the demand on the regions. Today, in Brazil, we have a strong demand for housing. And these kind of projects near centers -- near shopping centers and also near mixed-use projects, we believe this will be an important strategy of the company going forward to accelerate those 4.4 million potential construction area. Thank you so much. I will pass now to Daniella that -- who will give you more color in the results, and I will be available for answering your questions later on. Thank you.

Thank you, Rafael, and good morning, everyone. Moving now to Slide 15, we present the highlights of the company's results. And here, we can see the impact of having all our malls closed for most of the quarter. The company's net revenue reduced to BRL 162 million, partially offset by the straight-line rent adjustment. The company reported positive NOI of BRL 4.8 million, already excluding the straight-line rent adjustment and the increasing provision for doubtful accounts in the quarter. We have already considered the possibility of covering common-area charge delinquency, so it does not affect the coming quarter results. The contingency plan we mentioned earlier also contributed to mitigate the impact on adjusted EBITDA, which was negative by BRL 10.7 million, already excluding the straight-line rent adjustments net of taxes. The successful liability management process, in addition to a reduction in the base interest rate of the economy, contributed to a significant drop of BRL 37 million in financial expenses. AFFO, which already disregards nonrecurring and noncash items, was another indicator impacted by the lower operating figures, but partially offset by the financial results. On Slide 16, we can see that the company's occupancy rate in the second quarter was 95.2%, a reduction of 0.5 percentage point compared to the first quarter of 2020, which confirms our expectations that we would have an impact on vacancy below 1 percentage point between the 2 quarters. Another highlight that even with the malls temporarily closed, our commercial team signed 27 new contracts in the second quarter. And in July, another 57 contracts were under negotiation. The figures show an increased recovery in our commercial activity. Moving on to Slide 17, we show the sales performance study we conducted. With the reopening of a relevant part of our portfolio between the end of May and June, we selected several assets that remained open for at least 15 days and didn't close again. This enabled us to perform a more consistent and normalized analysis of the sales performance of these centers. As a result, we observed that the malls with the highest flow of visitors located in more densely populated regions, which remain with longer opening hours than others in the portfolio, had the best performance. We highlight the assets in the Northern Region, in the state of Rio de Janeiro, which reached average daily sales in June of 2020 of nearly 65% of June 2019. Individually, Parque Shopping Belém, Bangu, Manauara and Caxias outperformed the portfolio. All of them were allowed to operate up to 8 hours per day and are assets that received a high flow of visitors. In July 2020, operating hours in the Northern Region and Rio de Janeiro were extended to up to 12 hours a day, which contributed to sales in that month reaching 91% and 67% of sales in July 2019, respectively. Going now to Slide 18, the net delinquency observed in the second quarter of '20 was up 8.7%, impacted by the effects of the mall closing. The PDA was higher than previous quarters, reinforcing provisioning with an increase in credit risk, mainly on the collection of common-area charges and following the best accounting practices. Moving on to Slide 19, we can see that we have solid liquidity and low leverage, which leave us well prepared to continue facing this year's challenges. In the second quarter of 2020, despite efficiency gains compared to the same quarter of 2019 and to the first quarter of 2020, with a significant reduction in costs and G&A, the operating cash flow was impacted by the temporary closure of the mall for most of the period. In addition, considering the amortization and interest payments in the amount of BRL 23 million, the shares repurchase of BRL 8.4 million following the program announced in June; the repurchase of BRL 47 million in debentures issued by the company, which reduced our debt level; and a CapEx of BRL 8.4 million in the quarter, we ended June with a cash balance of BRL 1.3 billion. Combined with the reduction in the base interest rate, even during this period of economic crisis, we concluded the renegotiation of debt in the amount of BRL 77 million in the second quarter. Therefore, the average cost of the company's debt was reduced to 4.6%. The company's leverage remains at a low level of 1.1x net debt/EBITDA, confirming that Aliansce Sonae's balance sheet is the strongest in the shopping mall industry in Brazil. Thank you all. Let's now open the floor for questions and answers.

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

Thank you all for your attention. We appreciate your relationship with Aliansce Sonae. Our IR team is available for answering any other doubts that you may have. I hope to see you next quarter. Thank you, guys. Bye-bye.

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