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 Third 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 iralianscesonae.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 would like to inform you that questions can only be asked by telephone. So if you are connected through the webcast, you should e-mail all your questions directly to the IR team at ir@alianscesonae.com.br (sic) [ 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 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 Mr. Rafael Sales, who will start the presentation. Mr. Rafael, you may begin the conference.

Good morning, everyone. I would like to thank you all for your interest in Aliansce Sonae results. Starting our presentation. First, I'd like to highlight the strong resumption of operations throughout the third quarter, which confirms the excellent work our team did during the crisis. I would especially like to thank our operations teams and malls teams that were great warriors in the defense of our company and our tenants, partners during this crisis. This quarter, we were open, on average, 70% of the regular prepandemic operating hours. And now we are already working over 80% of hours comparing to previously to the pandemic. We can see that month after month, sales in our malls have shown consistent recovery in the quarter. Total sales have reached nearly 70% of the third quarter '19 level. In September and October, this comparison has already reached 80% and almost 90%, respectively. Just pointing out October, we had a 12% drop in sales, which was a much better number than we first expected, but especially because October '19 was a very tough comp. We had a 12% growth in October '19, the same figure, but different numbers, of course, creating a very big comparison standard for the review. But nevertheless, it was -- so I believe it was a good number. In some of our malls in the North and the Northeast Region, we already saw important growth comparing year-over-year. Those malls were Parque Maceió, Parque Belém, Parangaba and Shopping Manauara. All of them have presented sales growth comparing to '19. As we highlighted at the beginning of the pandemic, our main goal from a commercial standpoint was to reopen the assets with a high occupancy rate, allowing the malls to continue to deliver a unique experience to our consumers. With fewer restrictions over mall activities, we have confirmed our reopen with a higher occupancy rate as we targeted in the beginning. This past quarter, we kept 95% occupancy level. This high occupancy rate reflects the high quality of our portfolio and the importance of our locations for our tenants and to our consumers. The company's revenue was BRL 138 million, a 37% drop. If we use the number of linearization effect, we would have a much better number, but it's not what our -- is not what the management uses for evaluating performance. With the linearization effect, we would have a 25% drop, but what we consider is the net effect of the linearization process here. We have discounts being gradually withdrawn in this quarter according to the opening hours of each segment as well as the operational performance. We understand that considering the positive sales, outlook for the fourth quarter -- we expect an additional drop in discounts in a more regular billing process on our side, leading to better operational results. Meanwhile, revenue is still recovering. We have kept under control our cost and expenses and posted a great reduction of almost 20% in total cash costs and 25% in general expenses. With this, we presented a 49% drop in NOI and a 52% drop in EBITDA, which is a big number, but it's much better than we had in the second quarter, improves the resiliency of our business model and the capacity to quick recover for the moment that we were -- when we were with the shopping and the centers all closed. We have increased our PDA, the provisions for delinquency, which will give us capacity to report results in a clearer way in the future once the operations are totally back to normal. Also important to highlight, of course, is our AFFO that dropped 50%, but it's still much better than last quarter. And we reported -- we are reporting today a BRL 53 million AFFO, which is a much better number than we had last quarter and shows that our recovery in operational figures has a direct effect over our profitability like we -- as we saw during this quarter. I will provide some more details on our operational performance here in the next Slide 3, where I will comment on our leasing activities. So here on Slide 3, we can see the company's occupancy rate. The third quarter, as I mentioned, it was a 95% figure. That is a reduction of only 40 bps compared to the second quarter and a small impact of less than 1% versus the first quarter of this year when we had just a small effect of the pandemic over the operations. This indicator continues to confirm our expectations then reflects our efforts and our commercial team capacity during the crisis. Another positive highlight is the number of contracts signed in the quarter, 108 contracts during the last 3 months. September already had a volume close to the prepandemic monthly average of contracts signed, indicating a growing demand for areas in our malls and reinforcing the quality of our assets, which remain attractive and even during such difficult times. It's important to highlight that in October, we are also seeing strong demand and contract being signed in a higher rate than we saw last month, so increasing the potential of new leases and also giving a better occupancy perspective. Given that we had a low vacancy during the period, the strategy was good on keeping the tenants. The new contracts that we are signing today have a positive leasing spread of around 3% in the positive side, which was also unexpected during the beginning of the crisis, but shows the consequence of the good performance that we had during these months. On the sales front, on Slide 4, we have already discussed the sales, but we can better observe the correlation here between opening hours and pace of sales recovery. We expect the malls located in São Paulo will reach better results in the fourth quarter, reflecting the lower operational restriction since October. We have already seen better sales in these malls during the last month, and we can see that the malls in the North and Rio and in the Northeast are performing better because they have more flexibility in the operating hours. And that's what we expect from São Paulo, and we hope we're going to see a much better fourth quarter based on that trend so far. Also, it's important to mention that we are not seeing an increase in casualties from the COVID in the cities where we are operating for longer hours. The second wave, the so-called second wave in Brazil has been very less impactful in casualties. We don't know exactly the reason, but probably because of the weather in Brazil. Today, we are currently getting to the summer time here, compared to the Northern Hemisphere, which is going to the winter time. So probably, that's one of the reasons of that effect. And that's why -- and also why performance in the malls are not being affected by that. And also, the health figures also are not being affected by that. On the digital front, on Slide 6, I would like to update you about our digital strategy and bring some news on that front as well. To reinforce our digital and omnichannel team, we brought a new director to lead the department. We are in a very important milestone to boost the tenants' integration to the company's digital platform, a very successful initiative that we took over in the past 4 months. By the end of September, more than 4,000 tenants were connected to our platforms, representing more than 80% of the potential base. This engagement brings a very positive perspective, that's why we are investing stronger in this front and creating this department in the company. This year, we have 2 very important launches scheduled yet. We have the shopping digital of Parque D. Pedro and Shopping da Bahia to be launched before Christmas. And we expect a high tenant engagement as a result of this successful agnostic strategy to integrate them into our own online platforms and into the most important mall segment marketplace simultaneously. Helping them to be updated and integrating their inventories with those players and helping them to have better sales coming from our centers, preserving the commercial strength that our centers have in their regions, where they normally are the leaders in each of their markets. Since 2018 -- it's an additional point here on the digital front. Most of Aliansce's shopping mall websites already ran through a structure called PWA, which replaces an app, but has the whole functions of an app. We thought it a necessity to keep that updated or to download them in the devices of the clients. In other words, it's not necessary to keep the specific app for each mall, but you can simply browse it in the web and connect it in the browser -- in the website of the mall, and it will appear and operate like app. And it gives us a much better capacity to increase accuracy, launch new products and new features and be more agile and effective in reaching our consumer on the web. As you know, the mall, the shopping centers, plays an essential role in the omnichannel retail strategy. This trend has been reinforced a lot here in Brazil by the last -- the companies that are performing better, the retail companies that are performing better comparing to their peers when they integrate the solution omni and -- in an omnichannel way, integrating online and off-line sales in a more efficient way. The trend that we also see in other markets is being replicated here in Brazil, and we are part of this solution. Continuing to innovate, there is another solution that we launched to reduce friction between the online and off-line solution that is to make available for our clients to collect in hubs that will be convenience hubs that we call PEG. PEG is the Aliansce Sonae brand developed by our digital and omnichannel team together with our development department to implement facilities in the shopping malls' parking lots and central areas, intending to make easier for the customer to access and organize the several modes of delivering and pickup that could be carried out in all different sales channels, both online and off-line, providing a better experience and less-friction experience for the consumer. That is our end goal. I will turn the floor to Danny to speak a little bit more on the financial results. I'd like to thank you very much, and I'll be here to discuss during the question and answers. Thank you.

Thank you, Rafael. Good morning, everyone. In Slide 8, the net delinquency of the third quarter was 11.6%. This quarter, we have observed greater impact as a consequence of a still gradual sales recovery and the difficulty some retail segments presented during the reopening. As assets' operations returned to a more typical scenario, we have been observing a more substantial drop in delinquency and the recovery of overdue payments. The PDA in the quarter was in line with the second quarter and higher when compared to the previous quarters, reinforcing the provisioning to face the risk of future delinquency on rent and common area charges, following best accounting processes. Moving now to Slide 9. Regarding the company's cash flow, we had an increase in the cash position of BRL 104 million in the year, reinforcing our consistency in managing resources during the crisis. In the first 9 months, operating cash generation was up BRL 158 million, which is more than enough to cover interest and financing amortization, although it's still affected by adverse conditions due to the COVID-19 pandemic. And in the third quarter of '20, operational cash flow was also enough to cover debt amortization and interest payments. The company's leverage remained at a low level of 1.3x net debt to EBITDA, confirming that Aliansce Sonae's balance sheet remains the strongest in the Brazilian shopping industry. On Slide 11, we will briefly speak about one of Aliansce's official pillars, sustainability and the company practices that already reflects this value. One of the company's highlights, the high percentage of gender equality in leadership positions, 43% female and 57% male. These figures are well above the retail average of 24% female and 76% male as per a study done by the consulting company, Korn Ferry. Disclosing some of the 2019 Sustainability Report results, we focus on solid waste management. We record a recycling rate of 31% in 2019 and have several permanent campaigns in our shopping centers to evaluate the efficient use of natural resources, such as energy, water and gas, using alternative sources as well as recycling and reusing. In the social aspect, we direct our investments to culture and sports, education and environment with entrepreneurship as a transversal theme and with the objective of transforming the reality of the communities where we operate. We carry out several donation campaigns all over Brazil, supporting several social projects. And we also act as sponsors, such as Instituto Reação. Strengthening the company's new pillar on corporate governance practices, Aliansce Sonae's Ethics and Governance Committee has been renamed to Ethics and ESG Committee. Moving on to Slide 13. In the second quarter of 2020, we presented the construction potential of 4.4 million square meters for Aliansce Sonae. In this third quarter, we bring more details on this figure. Currently, from these 4.4 million, 2.2 million are destined to mixed use, 1.6 million to future potential with masterplans still in development and about 550,000 square meter to asset expansions. Total potential presents balanced geographic distribution: 25% to the state of São Paulo, 19% to the state of Rio de Janeiro, 17% to the North and Northeast Regions, and 39% to other regions in which the company has assets. Moving now to Slide 15. Let's talk about the partnership we recently announced with the Captalys credit platform. With this partnership, we are enabling exclusive credit to Aliansce Sonae's tenants, and our goal is to help small and medium tenants to have access to cheaper credit and through a simple and digital process. These credits will have a maturity date of up to 24 months, and the collateral will be a percentage of future sales. This will bring flexibility to the tenants as they don't have to pay a fixed monthly installment. Also, the interest rate will start from 1.5% per month, which is below the rates currently practiced in the market. Another differential is the hiring process, which is entirely through digital means from the proposal to the signature, including the submission of all documentation and analysis. Tenants will also be able to follow the performance of their credit through the platform. And in this process, there is no need for payments on a specific date since the resources are retained directly from the card machine. The platform is providing up to BRL 100 million in credit concessions and will be available now in November. Moving now to Slide 17, we provide more color about the current buyback program. By the end of the third quarter, we had already repurchased 1.3 million shares of Aliansce Sonae, nearly 0.5% of the company's total capital. The current program allow us to repurchase up to 5.3 million shares, which corresponds to 2% of the capital. And the expiration date is June 24, 2021. We continue to evaluate the opportunities for repurchasing shares. Thank you very much. Let's now open for questions and answers.

[Operator Instructions] Our first question comes from Tito Labarta from Goldman Sachs.

Just a couple of questions. I guess one in terms of the occupancy rates. How do you think that, that can evolve from here going forward? Do you think it's sort of bottomed and begins to improve from here? Or could there be some more risk of more vacancy? . And along those lines, also like on the delinquency, do you think that's also peaked? Just to get a sense of how you see that evolving and what should we kind of expect for the rest of the year and into next year.

Tito, thank you for your questions. Thank you for your attention again to our call. Well, on the occupancy side, it's very important to highlight that and I'm glad that you asked. The trend has been very positive as the third quarter was, but October was also very good. We already leased -- in October, we signed the same amount of contracts we were signing last year, which is good for many reasons. First, because we don't want to sign too many contracts and also don't want to sign too short of contracts, right? And we want to be in a good rate. That is the rate of normal revision of the mix, and that's why I think it was a good strategy to keep occupancy high and now being able to switch or turn some tenants case by case. This is leading to interesting process. We expect to end the year in a figure close to what we have today in terms of occupancy because we still have some stores to open and some stores to close. But there is not too many things to be done in November and -- in December, of course, because of Black Friday, that this year, by the way, will be Black Week in our case, and Christmas, right? Basically, we will have -- since we got to the fourth quarter with a very high occupancy and big engagement, we expect this performance to allow us to have a combination of better revenues already in the fourth quarter that will lead certainly to more margins. However, we cannot be sure that delinquency will go down in that scenario. Because as we start to charge more, it's natural that we have some difficulties for specific tenants that have faced some difficulties during the last months, and they are still don't have that much liquidity to pay for their total lease obligations. However, it's also important to highlight that, together with delinquency, we have a big improvement in provisions because we take a conservative approach on that front, considering what we saw in the previous crisis. But usually, when we have such good occupancy, we also are able to recover a part of the provision. And it's already happening in October, but we are not totally, completely sure that delinquency will not keep up the pace. We are happy to see that the conversion of revenue into cash is being -- going to an also normalized way -- level. And cash generation this quarter was very good comparing to what we saw during the worst period of crisis. And this fourth quarter usually is also -- is the best quarter in terms of cash generation, so the company should end the year with even more cash probably than we had in the beginning of the year, allowing us to keep the strategy of growth looking forward. So we do not see high occupancy -- higher occupancy -- vacancy coming further. We expect natural first quarter variation on the seasonality. That is also usual on the occupancy side because we have this good demand for new areas. Just to give you some figures, on the last quarter contract, the 108 contracts that we signed, 90 contracts were with in-line stores and 18 contracts with anchor stores, so a very good balance among bigger operations and smaller operations. And we had demand that was up, especially last month with the contracts that we are signing now. We have a big demand from -- in every segment on the retail, which is a good sign for the first 5 -- the last 3 quarters. We're seeing good demand, for example, in women apparel in in-line stores, which is a trend inversion that we -- what we are seeing before. And combined with also the recovery of demand for food and beverage operations, that also is something a little bit surprising for the positive side. And on the negative side, I think the average performance of services, especially education and courses, general courses, fitness centers, they are suffering more. Of course, movie theaters are also. But the general retail, it's performing better. And the services, like clinics and other services, that were allowed to function in a normalized way, are already performing very well with very small drop in sales revenues in the last month. So we see that the gradual flexibilization on the functioning of the services operations is leading to a good performance overall in the centers. So that's basically what we are seeing to date. And I'm glad to ask if you have any other question -- I'm glad to answer if you have any other questions.