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 Fourth Quarter 2021 Earnings Conference Call. Today with us, we have Mr. Rafael Sales, CEO; Mr. Leandro Lopes, COO; Mr. Jose Baeta 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] There will be a replay facility for this call for one week. We have simultaneous webcast that may be accessed through Aliansce Sonae's 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 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. Good afternoon for some. Thank you very much for your interest in Aliansce Sonae results. I'd like to start with a brief look back at 2021. We ended the year better than we started and with good prospectives for 2022. Considering the pandemic that is under control now, we have seen a consistent recovery in activities in our malls and in overall retail in Brazil. Since 2020, we have been patient and sought to understand the best way to overcome the adversities of this crisis without giving up our partnership with tenants. We designed a strategy in which we gradually withdraw discounts during this last year, and we will keep doing that during the start of that -- the year, the current year, softening of course the impact of the occupancy costs over our tenants in order to keep our malls always well fulfilled and capable to delight our customers every day. At the time, driven by our obsession for delighting our customers, as I said, we accelerated our digital solutions, and as a result, the connection of tenants and customers to our platforms form yet another sales lever. Today, we have already -- we already have more than 5,000 tenants connected to our digital platforms and social networks. We are now overcoming pre-pandemic results in a good reason due to that digital strategy. In the fourth quarter of '21, sales have already surpassed the level of 2019, reaching BRL 3.4 billion. With the resumption of activities, our rental revenues was almost BRL 250 million in the fourth quarter of '21, representing a double-digit growth comparing to '19 for the first time since the beginning of the pandemic. With lower -- due, of course, to low -- to a lower level of discounts in the last quarter. As a result, our net revenues totaled more than BRL 300 million and grew by 11% in the fourth quarter versus '19. The beginning of the year also maintained a very strong trajectory with net revenue growth of around 15.5% in January and February together compared to '19. As a result, our efforts to reduce common area expenses and operating costs showed a decrease of 14% in '21 compared to '18 despite the huge inflation accumulated during these last years, which is, in our view, a great achievement to keep our tenants in a health level. This effect is largely reflected in our capture of synergies from the transaction merger between Aliansce Sonae. In the fourth quarter of last year, our NOI reached BRL 242 million, mainly benefited by the drop of more than 60% in provisions versus the previous quarter. The level of provisions is the lowest since the fourth quarter of '19, because of the drop in delinquency, which this quarter was negative. Boosted by the evolution in the company's operating results and its top line, EBITDA and FFO grew 17% and 15%, respectively, compared to the fourth quarter '19. For the year 2022, we estimate to deliver EBITDA between BRL 740 million and BRL 760 million, which is now our official EBITDA guidance for the company for the year 2022. Another positive highlight was our operating cash flow, which reached BRL 590 million in 2021, equivalent to 96% conversion of our EBITDA into cash. Once again, our strong balance sheet, with leverage of onetime net debt EBITDA, gives us room to continue pursuing our strategy of growth, continue investing in our malls and offering complete solutions for our tenants and customers. In '21, the result came out from the tireless work to maintain good relationships and engagement with our stakeholders and consequently generate value for our shareholders. One of the biggest examples in the capture of cost is -- and expense synergy was the -- from the merger, Aliansce Sonae, which has -- this is -- which already represents BRL 30 million per year, in recurring synergies per year. In addition to that, we have already reduced the cost of common area in our malls by another BRL 34 million, which will allow our tenants to continue with sustainable occupancy cost despite the increase in the contractual rent due to the inflation adjustments. The successful integration process between Aliansce Sonae illustrates our execution capacity to deliver efficiency gains after transactions like that. On Slide 2, I would like to draw your attention to our successful capital allocation strategy in the recent years. We increased our concentration in leading malls, reducing leverage and generating more value to our shareholder base. This does not imply a decrease in the size of the company since we have not stopped growing in any year, except for the pandemic period. In '17, Aliansce Sonae has concluded -- since '17, I'm sorry, Aliansce Sonae has concluded 7 divestitures negotiations totaling more than BRL 400 million at an average 7.8% cap rate. Additionally, the company carried out 9 investment transactions in leading assets in their markets totaling BRL 830 million in average -- and in average 7.6% cap rate. All these malls -- all those acquired malls are showing very strong growth in this recovery. In 2019, shortly after merger of Aliansce Sonae, the company defined the opportunity and carried out a follow-on of BRL 1.2 billion. As you can see in this chart, our leverage has been falling since 2017. And during this period, Aliansce Sonae managed to deliver growth without increasing leverage. Even considering the impacts of the pandemic, Aliansce Sonae ended 2021 with a cash balance of BRL 1.3 billion compared to BRL 1.2 billion at the end of '19. This all happened despite having resumed projects of expansions, brownfields, renovations and acquiring land to further expansions, also more significantly, acquiring 21% more stake, additional stake in Shopping Leblon, our most productive asset. Now I will give the word to Dani, who will follow the presentation for you. And I will come back to -- on the next, in a few minutes.

Thank you, Rafael. Good morning, everyone. Now on Slide 5, we bring you an update on the synergies of Aliansce Sonae business combination. Despite the challenges imposed during the last crisis, we have already managed to capture BRL 30 million in operational synergies. And by 2024, we will reach the level of BRL 80 million. In addition, we have already reduced common area costs in our malls by BRL 34 million, which allows our tenants to have a more controlled occupancy cost at the level of 10% despite inflationary pressure. Moving now to Slide 6. We present a case study with groups of malls that already present much better results when compared to the premerger period, already evidencing the capture of revenue synergies. It is worth mentioning that all malls were transferred to Aliansce Sonae based on the NOI and EBITDA results that were -- that they were generating at the time of the merger. Therefore, the GLA base did not make the slightest difference to this business combination. Our first example is from high-performance malls in the northern region of Brazil. In this region, Aliansce Sonae has the leading malls in Amazonas and Pará, which allows for gains in scale in negotiations with tenants, suppliers and advertisers. Since the second half of 2018, the increase in sales per square meter of this group was 20.2%, the total sales growth was 23% and with an increase in NOI of almost 30%. Therefore, it is possible to prove that even in high-performance malls, we are able to extract synergies due to the scale we have in our current situation in Aliansce Sonae. Now let's talk about the assets that were excluded from Aliansce Sonae's core assets in the presentation of the business combination proposal with brMalls. There are 2 reasons that explain the separation of these malls. One is the case of a mall that is still under a ramp-up phase, and the other is 3 turnaround cases, which are already successful and are being negotiated for divestment. Passeio das Águas is already performing according to the company's leadership concepts regarding the criteria of competitive position, demographic density and purchasing power in addition to being located in the growth vector of the city of Goiânia. The mall is a mall that has a relevant GLA of more than 70,000 square meters and has nearly 60,000 square meters already occupied. However, its indicators per square meter are still lagging against other assets. The mall's 53% NOI expansion from the second quarter of '18 to the second quarter of '21 includes the effect of Aliansce Sonae's post-merger management. Passeio das Águas is the 10th mall in terms of total sales in Aliansce Sonae, reaching BRL 297 million in the second half of '21. This result is already similar to the brMalls mall in Goiânia, which sold only 4% mall in the same period and it is currently a mall complete mature. Moving now to the group of modes that Aliansce Sonae target for divesting, which are Londrina, Uberlândia and Vila Velha. After the merger, these malls under went an intense turnaround process. Sales per square meter of this group increased by 21%, while NOI almost tripled between the second half of '18 and the second half of '21. This group of assets represent 13% of Aliansce Sonae's GLA, but its contribution to the NOI was 3.5%. Aliansce Sonae has already demonstrated that it was able to sell assets that undergo a turnaround process such as West Plaza, Santa Úrsula and Vila Velha, which we have already sold half of our position. Now we are also in the process of selling Londrina and Uberlândia. In addition to that, we have just announced the total sales of our stake in Via Parque Shopping, which is one of the challenging assets in our portfolio, that despite being large did not have the potential to be the leader in that region of Eugenia. We believe that this ramp-up period was essential to create more favorable conditions for the divestment of these assets without the need for a fire sale. In Slide 7, we show that we always report individual rent revenue and total revenue for all the company's assets which is based on audit figures that is reconciled in our income statement as well as our NOI and EBITDA. We were asked about the companies in the sector, opening sales by mall and that the sales figures would show a more productive portfolio. However, we understand that the most assertive way of analyzing productivity is with comparable and audited data that follow at least similar parameters. Each company has its own sales calculation criteria, which are completely understandable, but they are not fully comparable. Here, we simply demonstrate that for many years, Aliansce Sonae has been reporting total revenue and rent revenue per mall in an even more detailed way than, for example, any malls company in the world. A key fact is that we are not aware of any retailer that reports revenues and sales on a store-by-store basis as this would provide a huge opportunity for any competitor to outline its competitive strategy. So the fact that we report revenue, which is accounting and audit data is already a good comfort for any investor. Moving now to Slide 8. Considering the most positive expectations for 2022, we decided for the first time to provide guidance for some metrics of our results. We expect to deliver EBITDA between BRL 740 million and BRL 760 million, which means a growth between 20% and 23% compared to 2020. For our real estate development segment, we have contracted a PSV of BRL 1.8 billion, which estimated a cash generation of BRL 260 million by 2028. And as already mentioned, we expect to reach BRL 80 million in operational synergies by 2024 as a result of the Aliansce Sonae merger. As we all know, the management of Aliansce Sonae sent a business combination proposal to brMalls. In the next slide, we are going to show some of the merits of this proposal. And then we are going to move on to clarify some points and doubts that we have heard from investors over the past few weeks. Moving now to Slide 11. We can see that the business combination between Aliansce Sonae and brMalls creates a national-wide portfolio with a leading position in the country's main markets. It will be a company with top-notch governance, combining a corporation structure with key strategic shareholders with a long-term view. It will be the most liquid company in the shopping mall sector and the only one in the Novo Mercado level of governance. It will have the scale to invest in digital experience, dictating trends in the shopping mall and retail segments. Because of its scale and reach, it will be the reference partner for consumers, retailers and real estate developers. It will be a leaner and more efficient organization with great potential for synergies. And it will always respect the pillars of sustainability. On Slide 11, we show the strength of the combined -- of this combined company's result, which will raise almost BRL 40 billion in sales and BRL 1.7 billion in NOI. Another positive factor is the capillarity of presence on a national scale, with high-performance malls but with a low overlap between them. On Slide 12, we can see that the combined company will have significant relevance in the sector compared to its peers in number of malls and scale, and will be an indispensable partner for large retail chains, which will have a relevant part of their stores in the combined company's portfolio. On Slide 13, when we announced our proposal to the market, we had shown a first potential for synergies of BRL 210 million. After that, we have hired McKinsey, which has a study in a granular way our synergy potential, confirming some but also having more positive views on others. We decided to keep the BRL 210 million in synergies that we expect for this business combination. Now I will pass the floor back to Rafael, who will address some points that were raised by investors while we were talking to them over the past few weeks.

Thank you, Dani, returning here to the call. On Slide 15, let's start by understanding the size of each company and the potential of the combined entity and how powerful is endeavor will be after we create this huge platform of retail and services and entertainment to our customers. Considering the number of managed malls, managed GLA, number of tenants in the portfolio and the level of sales, we can conclude easily that there is a great similarity in scale and operational complexity. We have had a lot of feedback on the difference in productivity between portfolios that brMalls disclose sales per square meter of their core portfolio. We made the same calculation for our portfolio, reaching very similar values and numbers for that comparison. However, when you see Slide 16, in the shopping mall industry, sustainable sales should be -- when you have sustainable, also sustainable and reasonable level of costs, should lead to better results not only for the tenants but also for the EBITDA and FFO of the shopping malls. In an operation of similar size and sales productivity, Aliansce Sonae has been delivering consistently better EBITDA margins than brMalls. Since 2020 post-merger, even during the years of the pandemic in which companies tested the strength and the health of their portfolios to the extreme, brMalls, despite reporting much higher revenues and much higher sales, had an EBITDA at the same level of Aliansce. And our EBITDA margin, it was 1,400 bps better than that of brMalls in 2020. In '21, we had a confirmation of how our margins are better. In the fourth quarter, we even had an EBITDA, total nominal, higher than the EBITDA of brMalls despite brMalls reporting higher sales than we report. In addition, one of the most interesting analysis we have here in terms of potential synergies of the combination of the 2 companies is how much scale tends to benefit in some lines of the business. In the case of SG&A as we chose here, to demonstrate, you can see that in the column on the side, while we managed 38 malls with BRL 116 million in SG&A, brMalls managed 31 malls with BRL 210 million as they reported last week on their total sales, total results and total SG&A for the year. SG&A at brMalls represents almost 18% of the revenues of last year, while Aliansce is just below 13% of our revenues of last year. On Slide 17, here in the next slide, we present a sanity check where our analysis is being done well or not. We are talking about the cash test. If the company is a good cash generator and you have the business that reports very large sales and revenues has difficulty transforming the sales into revenue, into results or into final bottom line. Aliansce Sonae has been converting over 90% of its EBITDA into cash consistently over the years, including during the pandemic years; while brMalls presented much lower numbers, including in 2021. With lower cash generation the Aliansce reported despite the reports of brMalls of higher revenues and higher sales. Aliansce Sonae's greater efficiency shows a great opportunity for the business combination since Aliansce is much more efficient in several aspects and especially on those that generate direct value for the shareholders. On Slide 18, another very robust example is the FFO, which is the final profit made in shopping malls. During 2020 and '21, Aliansce had a higher FFO than brMalls. Even in the fourth quarter, Aliansce's FFO was 49% higher than the total FFO of brMalls, showing once again ability to generate direct value to shareholders, which is a very robust and strong. Another front that was questioned is the Slide 19, there is the level of debt that a new company would have because of the cash component payment that we are proposing for the merger with brMalls into Aliansce. This is once again a misplaced the information, as brMalls is a company that has leverage of 3.7x net debt to EBITDA currently, which is higher -- with a higher funding of cost than what we have in Aliansce Sonae. We have just issued a 5-year -- for example, we have just issued a 5-year bond with a cost of CDI plus 1.4% in extreme uncertain scenario, with politics war and interest rates volatility taking a good part of the attention of the market currently. And last year, brMalls was at an average rate of 100% -- 100 bps higher than our last debt raise. The total leverage of the new -- it's important to highlight, though, that the total revenue -- total leverage of the new company using our estimates and the consensus for brMalls projections would be 3.1x net debt/EBITDA, which already represents a much lower level compared to the current levels of debt that brMalls shareholders have today. On Slide 20, we approach governance. Aliansce Sonae's proposal maintains the corporation structure of brMalls and leasing on the Novo Mercado of the B trade. ALSO's controlling shareholders are leaving the controllership of Aliansce Sonae to become reference shareholders in brMalls. The fourth -- the 4 largest shareholders of the combined entity would hold 23.5% of the capital, which is very similar to the 25% there already existed in the 4 largest shareholders of brMalls. That's before the upsizing of our offer of merger. The proposal also suggests the creation of a Board with 9 seats, which will be democratically elected by the shareholders' meeting, how it should be done in every company in the stock market. That's a competence of shareholders to appoint directors of their company. In terms -- in the Slide 21, I'd like to comment in addition to the governance discussion another point that was brought -- we have some discussions that were raised after our proposal of merger with brMalls. Some say they pitch that company's without a reference shareholder have a much clearer agenda of generation -- value generation for their shareholders. However, history does not show this. If we look back since May 27, when the current management of brMalls took -- started managing the company, and compared to it nowadays, you can see that all companies in the sector performed better than brMalls throughout this periods of almost 5 years. We believe it's a quite a long period, and it's enough to measure the performance of any company, especially in a relative basis comparing to their peers and competitors. Even if we look at the pre-COVID period when things were much better, the performance of brMalls was in line with the performance Iguatemi and Multiplan, both companies were controlling shareholders, and was much less positive than the performance Aliansce Sonae had in the same period. So I think the story that the company without reference shareholders had a clear value creation agenda is a fallacy. We continue to understand that reference shareholders with the right incentives, the long-term view and the complementary skills add value to the management. So now I will open the floor for questions and answers, and then we'll be available to that.

[Operator Instructions] Since we have no questions. 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.

Again, thank you, everyone, for your interest in Aliansce Sonae. We have many questions in the Portuguese Q&A. So I suggest you to look at our report with the translated version of the questions, and I hope you have a good rest of day. Stay safe. Bye-bye. Thank you.

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