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 First Quarter 2021 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 [email protected] (sic) [ [email protected] ]. 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 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 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 would like to thank you all for your interest in Aliansce Sonae results. We have now concluded the first quarter of this year. And once again, we faced the consequences of the COVID-19 pandemic in Brazil. Especially in March, we had to close most of our malls following the restrictions imposed by governors and mayors in almost all major cities in Brazil. We have already brought to the authorities' attention that shopping malls are controlled in safe environments in which protocols are strictly followed. In the months that the malls were opened before, we did not see an increase in the number of cases or fatalities due to the pandemic. But the number of cases started to grow in January. It was possible to easily correlate the increase in infections with a more relaxed behavior in recreational activities or family events. There is no correlation between the increase in cases and shopping mall operations for our experience so far. Despite our difficulties, our shopping malls proved to be once again very valuable destinations to our consumers, both in person and online. Apparently, we will have all of our malls open again. I believe that with the advance of the vaccination campaign, the worst is already behind us. From now on, we expect a closer to normal resumption of activities. We also expect sales and demand for services in our malls to begin a strong recovery, as we have seen in the fourth quarter of last year. This quarter, our sales -- our leasing department had a very strong performance, leading to a high occupancy rate of over 95%, allowing us to keep offering very good experiences to our consumers once the malls are reopened. In addition, despite difficulties that our tenants are facing, we continue to generate reasonable operational cash flow, which reached BRL 110 million, enough to cover all financial obligations and investments in the period. We ended the quarter with a cash balance of BRL 1.4 billion and still low level leverage of 1.2 net debt/EBITDA. It's also worth noting that we were open on average for 74 hours of regular time. In total, sales reached about 70% of the first quarter of last year. Considering this scenario, the decline in revenue ended up being relatively small, given the additional discount to support our tenants during the COVID period. We have been affected by operational restrictions, EBITDA and FFO reached BRL 82 million and BRL 41 million in the first quarter, respectively. Here, I'd like to highlight the great effort from our team to control costs and expenses with our focus on the 20% drop in general and administrative expenses. It's already a consequence of the integration synergies after the merger that created our company. Our result was also highly impacted by provisions to cover the delinquency risk that the crisis may still bring. In addition to the regular provisioning defined by the company's policy, we booked an additional BRL 6 million provision related to future receivables from tenants that were granted discounts scouts. One of the factors that certainly contributed to our excellent occupancy level was our physical to digital convergence strategy, strengthening our cognition initiatives. Today, we already have 4,900 retailers offering products in our online platforms. Another interesting initiative that we bring today is the opening of our first PEG hub at Parque D. Pedro. It's a very important logistics solution that will further strengthen the leading position of the mall refinance market and will improve consumer experience as an overall solution, and we will give you some details ahead. This quarter, we are also bringing a case study of another very strong mall in our portfolio, the Manauara Shopping. The mall is located in a city that was strongly affected by the pandemic in the beginning of the year. But then with the vaccination, the market there was reopened earlier. And now we can see the operational metrics are already above last year and even higher than in 2019. Daniella will present a more complete study ahead. Moving now to Slide 3. Here, I want to mention the strong, very strong and very healthy occupancy rate that we are still -- we remain above 95% this quarter. This rate is very high, as I mentioned, compared to the industry average, especially considering that we were just ending the worst seasonal period of the year that is the first quarter for occupancy. This is a very important achievement and confirm the strength and resilience of our portfolio. Another very interesting fact is the number of new contracts signed by our leasing department. Despite all difficulties, our team managed to sign 79 contracts this quarter and even greater volume than the same period of last year. On sales on Slide 4. Complementing what I previously mentioned, we can see that operations were impacted at the most in March. But when you observe the northern region, you can follow a much more positive track, showing improvements in the last month of the quarter, chiefly driven by the sharp sales recovery in Manauara, as I mentioned. On the digital front, on Slide 6, in the first quarter, we have been talking about the logistics solutions that we were implementing. And today, we already have the first PEG complete and full operating since April in Parque D. Pedro. This innovative project connects certain platforms and products delivery, integrating the fiscal and digital environment of both the mall and tenants. In this ecosystem, the consumer has an exclusive area to withdraw their -- through drive-thru or lockers the products that they purchased online. The PEG hub also addressed one of the main challenges of digital retail, the reverse logistics. We are feeding rooms to try our own products acquired online, enabling the exchange or return in the same space reducing friction and cost -- and operation costs for the tenants. In addition to the PEG hub, our malls, we also have convenience points for the customer inside the mall to collect and exchange products purchased online as well. We remain focused on developing solutions that increasingly improve the customer experience and our tenants' profitability. I will now turn to Danni. Thank you very much. And later, I will return to the question-and-answer section. Thank you.

Thank you, Rafael. Good morning, everyone. On Slide 8, we present the company's cash flow, highlighting the operational cash generation of BRL 110 million, which was enough to cover all funds allocations throughout the period, even considering this most stressed scenario. The company's leverage remains at a low level of 1.2x net debt/EBITDA, confirming the strength of our balance sheet, allowing us to take advantage of investment opportunities such as the acquisition of an additional 21% stake in Shopping Leblon, which was concluded in April. On Slide 9, net delinquency reported in the first quarter was 13.6%, mainly reflecting the drop in sales, which impacted the payment capacity of some tenants. It is worth mentioning that the first quarter has historically presented a seasonal sales deceleration following Christmas. The PDA was also chiefly impacted by the effects of the second wave of COVID-19, which turned into a set back to the recovery path observed in the last 2 quarters of 2020. On Slide 11, we will talk about our commitment to sustainability, bringing some recent outstanding campaigns. We created at Caxias Shopping an exclusive space named Echo House to increase visibility and boost the collection of recycling material. At the beginning of the school year, our malls mobilized to collect the school supplies and financial contributions to provide Internet connection for public school students. We also held collection point for pet bottle caps, which are donated to partnership institution and reverted to the purchase of wheelchairs and pet food for abandoned animals. We reaffirm our commitment to encourage culture by sponsoring the MAM Rio 3D project, which is the Modern Art Museum of Rio de Janeiro. At Aliansce Sonae, we believe in the transformation of power of art and in the use of technology to democratize access to culture. During the first quarter of 2021, road renovations were completed in the surroundings of Shopping Grande Rio. We invested BRL 1.7 million in construction and donated 330,000 seedlings of native plant species, in line with the best sustainability practices and lifestyle, aiming at the local population's well-being and quality of life. For Women's Day, we hosted a live streaming with a special guest, the ambassador of our campaign EmpoderaEla, Jaqueline Goes, PhD. Jaqueline is the Brazilian biomedical and researcher who led the team that sequenced the Coronavirus genome in Brazil in 48 hours. The campaign promoted the role of women in health and science in recognition of their relevance in combating the pandemic. You can access the content of this conversation through the QR code available in our earnings release and results presentation. Moving now to Slide 13. We present updates on our mixed-use projects at Parque Shopping Maceió and Uberlândia Shopping. In Maceió, we signed in 2021, 2 additional short-term projects. In February, we signed a purchase and sale agreement with Construtora R. Pontes, which specializes in high-end assets to develop residential building. In April, we sold a land plot to FII Hospital Unimed Maceió to build a highly complex hospital with 140 beds and with future expansion potential. With this project signed, 2 land plots are still available for sale in Maceió, and we still have additional potential at the malls' own structure. In April 2021, we signed a purchase and sale agreement for another short-term project at Uberlândia Shopping. The buyer is Perplan, a high-profile reference construction company headquartered in Ribeirão Preto. And the project consisted of 2 residential towers. Additionally, the hotel that was announced in the second quarter of '20 earnings release is under construction, and the mall has yet another land plot under negotiation. Moving now on to Slide 15. I will detail the case study of Manauara Shopping, which Rafael mentioned at the beginning of the call. Manauara is one of the strongest malls in Aliansce Sonae's portfolio. Since the first reopening in June 2020, the mall, which is a leader within its catchment area, has been recording outstanding performance, a true resilience example. Located in a city critically affected by the COVID pandemic, the mall posted a sharp recovery after each reopening process with sales growth for consecutive months. The case of Manauara Shopping strengthens the thesis that leading malls in the markets where they operate will recover from the economic effect generated by the COVID pandemic at an accelerated pace, becoming even stronger and more influential as the health crisis mitigates by mass vaccination. Thank you all. Let's now open for questions and answers.

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

Just a couple of questions. Just first, can you give an update on just how sales and operating hours have been evolving in April and May, just given some of the restrictions we saw in March and April? And then second question, I guess, in terms of your occupancy rate, it's holding up pretty well despite the pandemic. How do you see that evolving from here? Do you think that can increase? Any concerns you have on that? And -- because it sums up pretty well, I just want to get some color on how that can evolve for the rest of the year.

Okay. Tito, first, on the occupancy front, we believe we found the bottom here already. The recovery is clear, and demand is strong amongst other the -- among the other players, and retail partners are growing out a lot. And we are seeing well-capitalized groups with recent IPOs and also some investments from private equity groups. So some opportunities arise against the COVID crisis. And we will -- we are seeing that as a good opportunity to grow. And we are closing good leasing contracts with these new kind of profiles of the groups that are growing in Brazil. On the opening hours, I will pass to Danni, as she has the information there.

I'm sorry. I was talking on mute here, sorry. On April, we had about 60% to 65% of opening hours, which is improving right now. Now we have the whole portfolio opened. We still -- we are still facing some restrictions in São Paulo, especially. So this is the region, which is suffering the most since the reopening this year. But as you could see in the results in the first quarter, both the northern regions and also Rio are picking up pretty well. We have the case of Manauara, which shows the capacity of what a mall can do when opening with the whole 12 regular hours and also with no restrictions regarding capacity either for restaurants or services. So we are confident that we should improve hours and also sales going forward, especially from May on.

Just to complete one point here that I remembered. Last year, there were -- there was a big concern about the effect of the coronavoucher. In fact, the government support in income from families. And the 3 main better performance cities that we have today are Manaus, Belém and Maceió, they are both -- they are 3 -- all those are located in the North and Northern region. And they are pretty much in line with 2019 or a little bit above since they reopened at full. So I think it's a good kind of a proxy that even without the coronavoucher, there is -- the recovery when we have normal hours are more closely -- are more close to normal. But of course, we don't know yet how it's going to perform in the Southeast because São Paulo had much more restrictions than any other place in Brazil. So it's difficult to predict if there will be similar. But at least in those regions, the performance has been quite similar to '19.

That's helpful. Maybe just 1 follow-up on the leasing activity. You mentioned that increased compared to last year. How are the leasing spreads on that? Are you able to increase the spreads?

Yes. We are still leasing positively this spread since last year despite the crisis because we have prepared our planning of new leases. When we accessed that during the pandemic, and since we didn't have that big growth in vacancy, we were able to get a 3% to 4% leasing spread positive, and that's what we saw this last quarter as well.

Our next question comes from Nicole Inui, Bank of America.

Just a follow-up question on the leasing activity. Can you talk a little bit about the type of tenants that are coming in? Is this similar to what we've seen in the past? Are you seeing new types of tenants coming in, talking about in terms of services or other areas? And any change in terms of the contracts in terms of duration, in terms of the inflation indicator that you're using for these new contracts?

Nicole, pretty much the same in terms of terms of the contract. We -- those contracts are commercial contracts, regular ones, mainly base rents with minimum rent and a small overage rent as natural in Brazil. Also, we have -- in terms of the profile of this in segments, since the fourth quarter we had a different trend coming up. There is more fashion, new contract with fashion brands. There was for a while lower -- underperformance in terms of exposure. I think that was because the -- there were so many years where we saw apparel and fashion being affected here -- negatively affected that we don't -- we are not seeing that -- a reduction of that anymore. We are seeing a lot of services still, especially health care treatment and aesthetics treatment, and those are the main performers. Of course, fast food is always one of the main players because there's a lot of change in the food courts, but it's natural. So pretty much a more normal base and just a little bit smaller pace in terms of signing contracts, and we think that was because of the uncertainty about the reopening. And now with the reopened portfolios and all malls getting to -- getting back to normal, we are seeing a normalized way in path of signatures as well.

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

Thank you, everyone, again, for your interest in Aliansce Sonae's results. We will be available to answer further questions during the next months. Hope we get in touch. Bye-bye. Thank you.

Thank you. This concludes Aliansce Sonae's First Quarter 2021 Earnings Conference Call. You may disconnect your lines at this time. Have a nice day.