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

Good Morning, ladies and gentleman. At this time we would like to welcome everyone to Aliansce Sonae's Third Quarter 2021 Earnings Conference Call. Today with us, we have Mr. Rafael Sales, CEO; Mr. Leandro Lopes, COO; Mr. Jose Tomas, CFO and Chief Integration officer; and Mrs. Daniella Guanabara, Strategy and IR Officer. We would like to inform you that this event is being recorded. [Operator Instructions] We have simultaneous webcasts that maybe accessed through Aliansce Sonae's IR website, at ir.allianscesonae.com.br. The slide presentation maybe downloaded from this website. We would like to inform that questions can only be asked by telephone. So if you are connected through the webcast, you should email 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 for the company management and on information currently available to the company. They will [indiscernible] uncertainties and receptions 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. I'd like to thank you all for your interest in Aliansce Sonae's results. [indiscernible] this third quarter of '21, we found very much more positive outlook for the retail sector in Brazil and especially for our malls. With the vaccination progress, our malls returned to their regular opening hours, and the flow of visitors has been gradually returning to the normalized level. Over the past 18 months, we made efforts on several fronts, such as our Leasing department, which ensured our high and healthy occupancy rate, currently. In addition, we focus on our retail phygital initiative, in order to serve and delight our customers through whichever channel it's convenient for them. With these initiatives, we posted important results in this past quarter. We reduced discounts, leading to rent revenues already in the same level of 2019, which is much -- which happened much further than we first thought, when we had our malls closed in the second quarter of this year. Our company's diverse geographic footprint also helped in our sales recovery. Overall, in the company, we've reached 98% of total sales, compared to '19. However, once again, the highlight of our portfolio was our malls located in the northern region, surpassing sales of '19, about -- in more than 15%. As for the malls in Sao Paulo, which were previously lagging in the other regions, now sales are quickly recovering to the average since the lifting of restrictions of functioning and in time of [indiscernible]. Another important point, we've managed to keep discipline in controlling operating costs, with a reduction of almost 8% year-to-year versus '19. All that happened, despite the strong inflationary pressure that we saw in this last 18 months period. Operating costs were impacted by common-area charge, especially for rebated stores, during this quarter. This effect is a temporary impact due to the grace period granted to new tenants. Moreover, our total costs were also benefited by a significant reduction in provisions, which dropped 27%, compared to the last quarter of the year. This is due, especially, to a considerably lower net delinquency that this month -- this quarter was only 1%. As a result, the NOI for the quarter was BRL 183 million, and our EBITDA was BRL 155 million. All -- both of them very close to the number that we presented in '19. Another positive highlight is our operating cash flow, which has already reached BRL 357 million this year. Only in the third quarter, we generated BRL 165 million in -- an amount even higher than the reported EBITDA of the company. Thus, we ended the quarter with a cash position, already back, to the BRL 1.3 billion level and with a very low leverage of just 1.4x net debt EBITDA. Remembering that the EBITDA of this year was affected by the month that we were closed. So next year, leverage ratio should be even lower, considering the current balance sheet. In Slide 4, I would like to comment a little bit further in the equivalency rate and the leasing activity. This -- I already mentioned that we have 96% occupancy today. This occupancy is higher than the average of our industry, when we compare with the competitors in the regions that we are -- we see that our strategy was very successful to support retailers, support tenants and to keep our consumers close to us for the digital connections that we have and also due to our malls' strength, in our destinations being the main destinations of each region, where we are. It's also interesting to highlight that this occupancy level is already similar to the fourth quarter of '20, which was the strongest quarter of the year, when all the malls were already open. So I think, it's a very good start for this fourth quarter, which is the most important of the year. The [ Leasing ] department also remains reaching very interesting results in the -- in signing new contracts. We have signed 125 contracts this quarter, which will highlight to the segment -- to a few segments, especially fashion, fast food, restaurants and wellness. Now, I would like to comment on sales on Slide 5, please. As I pointed out earlier, you can see that our sales are already at the same levels of '19. And I would like to draw your attention to the fact that when physical stores were closed, the only alternative for consumers was to buy online on the e-commerce. So e-commerce grew in Brazil as never before, as it happened all over the world. During the last few years, we always question the potential impact of e-commerce to the health and sustainability of our business, in the long term. And with the current level of sales and activity in our malls, we could see that the malls in Brazil have a totally differentiated competitive advantage. And we found that the growth of the online e-commerce, which we believe and forecast to be brutally affect our malls, didn't end up materializing, which is clearly, very different from what happened in other parts of the world, but it's due to differentiated mix and service that we provide in our centers. The challenge nowadays, relies on the combination of the physical and digital. Our proposition on our phygital strategy is to offer a superb experience in both worlds. The largest -- those large marketplaces platform, obviously, will grow, especially in more standardized products and segments. It's inevitable and will continue to happen. However, we are strong in segments such as experiences, brands and services, which the consumers want to better understand the progress and demands curation, and we are very good in this [indiscernible]. We have a spectacular mix in our physical stores, and we will be growing our capabilities in the phygital, in order to provide this fantastic experience, also in the phygital world. We are very confident that our strategies are being well perceived by consumers and by our tenants. We have been seeing a great alignment of interest among our main tenants, and we will be following this strategy for the next years. It's doing -- and it's been very interesting for us to see how this develops, going further. Also, I'd like to comment on Slide 7. If you look at this one, please. I think it's worth noting that our strong balance sheet allow us to continue pursuing our long-term strategy. We were not stopped by the pandemic, in the contrary. For example, also tax investment in 2 startups, Box Delivery and Hubsell. For those of you, who are not yet familiar with Alsotech, it is our retail transformational arm, which we launched in August this year, officially. Box Delivery is the first start-up that I mentioned, is a logtech focused on the development of last-mile delivery technologies from our hubs -- from our shopping centers. It's already operating in our marketplaces and our digital platforms at two of our main centers. Box is already present in more than 200 cities and make 700,000 deliveries per month. And we have an operational partnership with Box to implement our PEG, that is our delivery hubs, in all of our company's malls. We should end this year with 15 PEGs in operation, together with Box services. Meanwhile, Hubsell integrates retail with online sales platform, including our own marketplaces. We have the opportunity to leverage the experience of retailers in our malls, in addition to building other solutions with the e-commerce vertical that they already are operating very successfully. All in all, both start-ups are fully in line with our consumer-centric approach, the continuous innovation and our goal of serving and delighting our customers every day. In addition to this physical -- phygital investments, this quarter, we are also bringing more color on companies in our company's development potential. In the last quarter, we commented in the Moody [ U.S. ] project. And now today, Danny will present a little bit more in our expansion and renovation projects. Out of this, today, we have 8 malls, under development of new expansions. And out of these, 4 are already under construction. We are very optimistic on the sale -- on the leasing activity of these expansions because we're seeing strong demand for them. So we will see more details, further today. Before handing the floor to Daniella, I'd like to reinforce some points with you as well, especially on the investment side. Those important investments that we did in phygital initiatives and our -- and the renovation and expansion of our physical equipment, is supported also by acquisitions, when they present important opportunities and relevant opportunities, will be essential for us to continue growing and serving our customers in the coming years. And we're even more enthusiast now, after we surpassed the largest crisis in the retail industry in Brazil ever faced in the economy of our country. So we are very optimistic today, and we are very excited for seeing the results in this next quarter and next year. Thank you very much. I will be back in the question and answer -- the Q&A section. Thank you. Bye-bye.

Thank you, Rafael. Good morning, everyone. On Slide 9, we present the company's cash flow, highlighting the operating cash flow in the first 9 months of the year, which was BRL 357 million and BRL 165 million in the third quarter. This amount was more than enough to cover expenses with principal amortization and interest payments in the period. The net cash consumption of BRL 69 million is chiefly explained by initiatives in line with Aliansce Sonae's long-term strategic planning such as the acquisition of an additional stake in Shopping Leblon, which is in line with our pillar of increasing stake in bidding malls, investments in technology companies, following our phygital strategy, the purchase of land bank, reinforcing our construction potential, the repurchase of debentures, continuing the liability management process and dividend payments. The company's leverage remains at a low level of 1.4x net debt EBITDA, even after its stake acquisitions and dividend payments, confirming the strength of our balance sheet and our operating cash generation, which allow us to continue taking advantage of investment opportunities. Moving now to Slide 10. The net delinquency, registered in the third quarter, was 1%, a significant drop, compared to the second quarter of '21, indicating that sales resumption has already contributed to the relevant recovery, in overdue receivables, in the third quarter of '21. PDA follows the trend observed in net delinquency and in the third quarter of '21, dropped at 27%, when compared to the second quarter of this year. Moving on to Slide 12. We present here some recent achievements and important campaigns, which are in line with Aliansce Sonae's sustainability pillar. On Boulevard Belo Horizonte, the first physical store of Repassa was launched. Repassa is a sustainable fashion start-up and the biggest online thrift store in Brazil. At the store, customers can collect and deliver clothes, shoes and accessories to be sold. The pieces undergo a selection and catalog process and are offered for sale on the website. Those that are not approved for sale, can be collected again by customers or made available for the donation. In Parque Dom Pedro and Shopping de Bahia, 2 new BeGreen units were inaugurated. This being the first urban farms in Campinas, Sao Paulo and in the Northeast of Brazil. The Parque Dom Pedro shopping unit has the capacity to produce 30,000 organic vegetables per month. It also provides guided tours, a store in an area dedicated to activities and events. The Shopping da Bahia operation is the largest in Latin America, with 2,200 square meters and the capacity to grow 60,000 of pesticide-free fresh vegetables and fruits, directly from the farm to the homes of Salvador's residents. At Boulevard Londrina, we had a beautiful campaign for the Golden September, which stands for the fight against childhood cancer. The mall brought together 19 entities and 1,300 volunteers for social action, with the exhibition of more than 30,000 Tsusrus, which are birds made by the Origami technique. The non-profit organization, Viver, which has been supporting children and teenagers with cancer and their families over the past 20 years, received a donation from Boulevard Londrina to make the Viver Solar project viable. Now, I would like to talk about MOVER. MOVER is a coalition of 46 CEOs from large multinationals of different sectors, committed to promoting racial equity in Brazil. Through a coordinated effort, the initiative aims to impact 3 million people and create 10,000 leadership position for black people. With great satisfaction, we can say that Aliansce Sonae is part of the management committee and is engaged in the movement development. Moving now to Slide 14. Let's talk about our development potential. We have here, a compilation of the company's expansion, renovation and redevelopment projects. Out of the 8 malls, 4 are already under construction, which are Carioca, Shopping da Bahia, Franca and Parque Dom Pedro. On Parque Dom Pedro, when it opened 20 years ago, the mall had a large project with strong colors and graphic teams, which contributed to marking its leadership presence in the Campinas region. Today, we understand that it's time to renew our largest mall. The original team will be maintained, but the renovation projects should bring new lines of contemporary graphics, design and functionality to all environments, enabling a new perspective for corridors, internal spaces and external areas. Natural lighting and greenery must be reinforced, and the food court must become a special attraction, where nature stands out and integrates the entire project, also contemplating a series of Instagramable spaces. Lastly, regarding our mixed-use projects. In October, we signed a built-to-suit leasing agreement with the Decathlon store to occupy about 1/3 of our land bank in Barra de Tijuca, Rio de Janeiro. This operation will be the Decathlon's first flagship in Brazil and because of its proximity to Via Parque Shopping, the project also foresees an interconnection, allowing important synergies between the 2 assets. Thank you all. Let's now open for the Q&A session.

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

Just a couple of questions. Good performance on the rental revenues. The operating hours, as you highlighted, are back to pre-COVID levels. But you mentioned, there's still some capacity constraints. Do you think -- how long, do you think, for those capacity constraints to, sort of, subside? Is it just a matter of vaccinations and maybe you already see capacity back at pre-COVID levels? And what impact, do you think, that could have on rental revenues and some of the revenue lines as well? I noticed like parking is still below pre-COVID levels. So any color on that would be helpful. And then second question on your financial expenses. You had this -- the impact from the swap -- the fair value of the swap. I just want to understand, is that just onetime? Is that something that should be recurring from here? Just if you could help us think about that.

Thank you for your question and for your interest again, our results. Yes, capacity is still below the potential because we were still seeing the ramp-up of flow of clients. We are seeing October, which are -- October was a better inflow. So we are expecting to be -- to have a better overall public in our malls. So we are quite confident that this will revert into good revenues and parking revenues. This quarter, we also see improvement in parking revenues already. So it's gradually coming back to a normalized level. But vaccination in Brazil is in a pretty high percentage of the population, considering the average number of other countries, compared to -- we have -- in fact, the Brazilian population, in a recent research, is the one -- is the most -- among the G20 countries, is the one that has the largest amount of intention to vaccinate. So we believe that people really trust in vaccination here. So this will be an important drive for results, certainly, and we are already seeing that. And moving to theaters, for example, in October, had a very good improvement in occupancy, which is a good sign for us, not just for the theaters in the shopping malls, but also for the overall willingness to be in a public area for entertainment, soccer games already back with public. Spectacles, music spectacles, are also happening, and we are seeing good demand for that. And we are seeing also, good demand for our events in our malls, for example, art presentations, other kind of activities that we do in the mall. So it's an overall potential good recovery for revenues. As you mentioned, we had a very similar rent revenue of '19 with -- well, much below, in terms of parking and in terms of variable rent. We also had a very low number, compared to '19. We have only the same number of '20. So that's also a potential of growth. Of course, the rent -- minimum rents have been increasing, as you could see, in the same area rent [indiscernible] same-store rent explanation. So far, we are very optimistic as this quarter could be a very important turning point for next year. And I will give the word for Danny to explain the swap accountability -- counting.

Tito, this is Danny. Thanks for your question. You mentioned about the swap on our financial results. when we issued our new debt, the TRI of BRL 150 million, this debt was originally linked to inflation, to IPTA, but we decided to swap that debt to CDI. So when you see the BRL 18.9 million in our financial results, this is a noncash impact of the difference between -- not even the rate, but also the flows of the debt, over its maturity. So it's a noncash effect on our financial results.

And the swap, just for clarifying the swap cost and it's [indiscernible] floating rates plus 1.23, which is quite below the average of the AAA current level. Of course, so we decided to take this kind of opportunity for the balance sheet.

All right. And just to make sure I understood. Was that just a onetime adjustment? Or is that -- will adjust every quarter? I didn't quite get that, sorry.

Every quarter, we're going to have an adjustment.

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

I'd like to thank you, everyone, for your interest in our results. Our IR team is available for further explanations and to comment in more detail on the results. Thank you. Hope to see you soon. Bye-bye.

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