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

Good afternoon. Thank you for waiting. Welcome to the earnings call of Aliansce Sonae Shopping Centers to discuss the results regarding the second quarter of 2022. Today with us, we have: Mr. Rafael Sales, CEO; Mr. Leandro Lopes, COO; Mr. Jose Baeta Tomas, CFO; and Ms. Daniella Guanabara, Strategy and IR Investor Relations Officer. We inform you that this event is being recorded. [Operator Instructions] We will have simultaneous webcast, and you can access that through ir.alianscesonae.com.br where it is available for this presentation. The slide will be available at the website. Also we would like to tell you that questions generally be done through telephone. Should you be disconnected, your question can be submitted to ri.alianscesonae.com.br where it is available for this presentation. This slide will be available at the website. [Operator Instructions] Before we proceed, we would like to say that any forward-looking statements that are based on the beliefs and the assumptions of the company management and on -- is based on any information that -- currently available to the company. So any future thoughts are not guarantees of performance. They are involved in risk and premises, and therefore, depend on circumstances that may or may not occur. Investors may well have to understand that industry conditions, general economic conditions and operational factors may also affect the future of the results of the company that may differ materially from those expressed from such forward-looking statements. Now, I'd like to give the floor to Mr. Rafael Sales, who will start the presentation. Please, Mr. Rafael.

Good afternoon, everyone. Thank you for taking part here. And we are very excited for the prospects for the year-end. In June, our proposal for the business combination with brMalls was approved by the shareholders of both companies. Now, the transaction is under the analysis of the Administrative Council of Economic -- or CADE. And we have hired Bain & Company to help us with the integration process and information of the [ clean team ]. In July, we closed 2 important deals for the company. First, we have the sale of Uberlandia Shopping, and secondly, we have the management of Eldorado Shopping, and Uberlandia Shopping was already a part of our disinvestment pipeline. And the sale cap rate was 8.2%, reflecting a valuation that seems extremely attractive, especially given the market conditions. Now furthermore, taking over the management of Eldorado Shopping further reinforces our strategic thesis of synergies and commercial leverages. This is one of the pillars for the rationale, for the merger with brMalls. Additionally, this management brings to our portfolio a very relevant destination for -- in terms of a shopping center for services, for purchasing, for entertainment in the capital, the city state -- the city of Sao Paulo and the capital of the state of Sao Paulo. If we consider the combined portfolio of Aliansce Sonae and brMalls, Shopping Eldorado would be the third largest mall in terms of total sales. Now, let me tell you a little bit about the operating performance. The sales in the quarter have reached BRL 2.9 billion, representing an increase of 46% in regards to 2021, and 21% increase in comparison to 2019. With this acceleration, we actually managed to withdraw more discounts, and offer more discounts, and low levels of discounts over rents since the fourth quarter '19. Rent revenue, therefore, grew -- revenue grew 20% in comparison to the second quarter of '19. Once again, our operational costs have been going down since 2019, which represented this quarter reduction of 13%. Additionally, contributing to the results of the company, we have a cost reduction that was very important for the reduction of the cost of occupancy for our tenants, which reached 10.5% this quarter. Cost reductions are the results of our efficacy in capturing the synergies that stem from the merger of Aliansce and Sonae, and contributed for our net operating income to reach BRL 222 million in the quarter. That is a growth of 57% in comparison to last year and 19% in comparison to 2019. Let's talk about provisions now. The PDA continued to decline this quarter in comparison to the previous quarter, drop being about 33% in comparison to our last report. This is mainly due to a significant drop in delinquency, which was 4.5% in the quarter and was negative in the month of June. In the quarter -- as well in this quarter, the EBITDA reached BRL 185 million and the organic increase considering the same base, we grew 16% if you compare it to the same period in 2019. Now, the funds from operations was BRL 108 million, growing 3% versus 2019, and this effect reflects the acquisition of over BRL 620 million in brMalls shares, with an estimated cap rate of 14%. We consider this an excellent capital allocation. If we exclude the effect of acquisition of shares, the adjusted FFO would have grown 16% this quarter, despite the high interest rates observed all throughout this year. Now regarding our demand for new areas, we signed 173 new contracts in the second quarter of 2022. Therefore, we kept our occupancy rate at a very high level, reaching at the end of the quarter 96.7%. It's the same rate that we had for the fourth quarter of '19. This indicator confirms the strong demand for space in our malls, therefore, strengthening our commercial position for the negotiation in the second half of this year. Now. regarding our initiatives for digitalization of retail. We have some big news for Shopping Leblon. This quarter, we launched Shopping Leblon Online, which is our mall e-commerce with express deliver to -- express delivery -- I apologize -- to the neighborhoods that are closest to the mall and the capital, well, the capital of the center Rio de Janeiro. And we also launched the app, Solar. That application is of our loyalty program from Shopping Leblon, allowing for greater engagement for our customers and meeting our customers in all demands, whether if it's on site, online. We have a strategy that is all around digital. Regarding the evolution of our logistics solutions, Alsotech and alongside with Box Delivery that we managed to sign the first dark store, our partnership with Ze Delivery at Carioca Shopping. And Box Delivery alone exceeded 1 million monthly deliveries just in June. Our sustainability journey. We actually took an extra step -- an important extra step, which is joining the UN Global Impact. Well, several major worldwide leader -- worldwide leading companies have already committed to these premises and the sustainability commitments of the UN Global Impact. And we have -- we are very happy to also manage to commit to our practices, implement our practices so that our communities are not affected, are improved, and we can keep the sustainability of our business. Now, I would like to give the floor to Daniella, and she will continue the presentation. Thank you very much, and I'll see you in the Q&A.

Thank you, Rafael. Have a wonderful afternoon, everyone. Now in the next slide, we can see that the occupancy rate of the company actually closed the first quarter of '22 at 96.7%, reaching the same levels of the fourth quarter '19, reinforcing that the demand for the space in our malls remains high. Specifically, Passeio das Aguas Shopping registered a growth of 7.7 percentage points in its occupancy rate, in the second quarter of 2022, if you compare to the second quarter of '21. The leasing, the commercial team continues to achieve consistent results. We signed 173 contracts, aforementioned in the second quarter. Among the highlights, we have the UCI Cinema chain and 3 malls of the portfolio, namely Manauara, Metropole and Plaza Sul. And among the highlights, for the recent openings, we have Centauro at Carioca Shopping, Lacoste, and Shopping Leblon. This is a flagship for Latin America Lacoste, and Outback restaurant at Caxias Shopping. The next slide. We can see that in the second quarter of '22 the sales performance continue to be in an upward trend, and once again, exceeded the levels in the same period of 2019. We reached BRL 2.9 billion in total sales in reals, expansion of 46% in comparison to the second quarter of '21, 21% in comparison to the second quarter of '19. Malls in different regions posted double digits growth in the same period, underscoring the strength of Aliansce Sonae portfolio at a national level. The highlights were the growth in sales of the second quarter of '22 in comparison to the second quarter of '19 -- were Shopping Leblon and Parque Shopping Belem, 49.1%, 48.6%, respectively, Parque Shopping, Maceio, 45.8%, Boulevard Shopping Belo Horizonte, 30.7%, and Manauara Shopping, 29%. On the next slide we have the company's cash flow. Aliansce Sonae presented a robust operational cash flow in the first quarter of this year, sufficient to meet its -- our obligations. We can see in the graph that the chart 77.6% of the -- that is linked to the CDI index, 7.3% is fixed rate, 15.1% is linked to inflation. The company leverage remains at a low level, 1.1x the net debt over the EBITDA. The next slide. We can see that the company's net delinquency, which is 4.5% in the quarter, 3.3% below second quarter of '21 -- Especially in June '22, the delinquency was negative, indicating a strong recovery in -- of overdue receivables. PDA over the quarter represented 3.1% of the net revenues. Next slide. We can show you some of the achievements and important campaigns which are aligned with Aliansce Sonae's sustainability pillar. We started a project of guided visitation at MAM, the Museum of Modern of Arts -- Museum of Modern Art -- I apologize -- in Rio de Janeiro for students from Instituto Reacao in Rio de Janeiro. In these tours, the children and teenager have the opportunity to get to know the museum together with educators, expanding horizon through art. In the last quarter, Aliansce Sonae sponsored the Livros nas Pracas project, what's in the neighborhood. Project a mobile library that circulates through vulnerable communities in Rio de Janeiro where there are no public libraries nearby. Books are borrowed for free, free of charge, and the collection has around 2,000 books, and 80% of those composed by Brazilian authors from all ages. The action also made available audiobooks, works in Braille, and with enlarged fonts for people with low vision or impaired vision. Last already -- last but not least, Rafael mentioned that we joined the UN Global Compact. The global impact has a voluntary initiative that provides the guidelines for the promotion of sustainable growth in citizenship through committed and innovative corporate leadership. We, at Aliansce Sonae, are committed to turning 10 universal principles in human rights, labor, environment, anti-corruption, part of our strategy, culture and day-to-day operations. And we engage in cooperative projects that advance the broader development goals of the United Nations, specifically the sustainable development goals, also known as SDG of the 2030 agenda. Thank you very much, and let's take it to the Q&A.

[Operator Instructions] Our first question is from Bruno Mendonca from Bradesco BBI.

So, Rafael and Daniella, I'm wondering about the sales aspects and the breakdown per asset. You mentioned the malls that were better, Leblon, Belem, Maceio, BH Belo Horizonte. But on the other hand, some assets are very relevant to you where the sales were under average, such as Carioca, Bahia, Bangu. What is the reason for that slower recovery? And what kind of opportunity do you envision in those assets? And I'd also like to consider the occupancy cost. Is there a difference in these assets that are growing slower, if the occupancy cost is different or not? I'm trying to identify any opportunities that you might have in those assets, that have a slower growth, meaning the ones that haven't catched up yet?

In fact, I would say that the recovery isn't the same for all the different stations, all the different shopping malls. Some markets, in fact, recovered faster. So we can see that some of the shopping malls here in Rio de Janeiro are still a little slower in recovery. But I think it's worth noting that in 2019, those shopping malls had stronger performance than the average even. So I think that the basis for comparison is a bit contaminated, so to speak, by that. In general, we can see that shopping malls in many different regions are recovering well. So in some of them, we are intervening, such as Shopping Bahia, some -- we're doing some renovation work, some works in -- at the mall. Now things are getting back to normal as well. So we're expecting lower growth sales in July than the quarter. But similar to what we see in other retail segments, there was a slowdown in the speed of growth. So, we had 14% growth. And the shopping mall with a lower growth, it had a higher occupancy cost. But in terms of occupancy, you can see that even in the shopping malls that you've highlighted, they have a high occupancy rate. So we don't have any vacancy issues. Quite on the contrary, we have a high demand. So, it's natural that, that would reflect on the results and sales, as the market heats up in those -- in each of those regions. Would you like to add? Leandro is going to add a comment.

I'd just like to reiterate what Rafael mentioned. We don't have a general pattern, I'd say. I'll mention 2 cases, Plaza Sul and Metropole. They're shopping malls in the city of Sao Paulo. And given COVID, we're changing the movie theater operations. So we signed a contract with UCI movie theaters. And when you compare that to a shopping mall that doesn't have -- that the movie theaters aren't operating at, that affects the sales. We're going to have an expansion with 30 stores. All of them have already been sold with Centauro [ Hering ] and those stores will be implemented. So, we took advantage of this moment and put some plans into practice. So we're expanding the Carioca mall, starting the parking lot in Franca, and that really adds a lot to the shopping mall. I can't say it's a pattern. There are some specific cases where we decided to take this opportunity to invest in these shopping malls, and they will soon produce more in the second half now with these inaugurations, with the parking lot in place, and the new movie theaters.

Our next question is from Pedro Hajnal from Credit Suisse.

So actually, I have one question. As you mentioned in your presentation that the discounts reached the lowest level since 2019, I'd like to understand your mindset. So, what would be the next steps for that gap in price increases in rent, so getting closer to inflation? I know that there are sales as well. So, I'd like to know if you -- what would you consider these sales levels to net those discounts? Or is anything that you can do at the company level, maybe efficiency like in the management costs that could be transferred over to rent or turnover and the positive spread? So, I'd like to understand what kind of triggers that you would have for rents going forward?

In fact, all of the elements that you mentioned are elements that lead us to lower the discounts much more, and increase revenues. So, in the last quarter, the increase in revenues wasn't as fast as sales growth, given some important elements such as the store turnover. We signed many contracts and brought in new operations, and they have a minimum period to stay with us. And we also have positive spreads in general. So, we're very optimistic that the same-store rent that we see and same area rent, would give us better revenues by increasing the rent, given the occupancy cost, as you could see. They're very sustainable. They're even low. So the discounts in some shopping malls are already much lower, and others that are still not growing their sales that much, the discounts are still a bit higher. That's why I'd say that they're not homogeneously spread out in the portfolio in terms of discounts. So, in general, the cost -- the common area cost reduction has been beneficial not only to maintain cost -- low occupancy cost, but also so we can recover rent. All of that is within the plan, but we don't expect to keep cutting down on the common area costs. We've already done that effort because of the synergies with Aliansce and Sonae and this combination, and we'll still capture some more during the year. But now we will have inflationary pressure after so many years of inflation that we've been seeing. So, based on the point of view of recovering rent, we should see that increasing during the year, as they've stayed with us for a minimum period, and see recovery in sales.

Perfect, Rafael.

Next question is from Daniel Gasparete from Itau BBA.

I have a question if you see an upside in terms of traffic and sales -- I'd like to understand those 2 indicators. So if traffic could increase even more, or sales, or should we see something similar to June?

In fact, we have a lot of scheduled events for the second half to bring in more traffic and recover that. It's still 10% lower than it was in 2019. But the sales -- even though we have -- still don't have enough the traffic the same, the sales have increased. So, we have promotional activities and events in the shopping malls to bring in more people. We have many cultural activities as well, and that's really good to bring in the traffic, different shows, concerts. So we've been doing that in the different malls. But sales are going -- moving as fast as they were in May and April. There was also specific case of temperature, of the weather. So we saw more sales in apparel and fashion in May because it got colder. The weather got colder. It was pretty cold. So, obviously, we saw people buying more clothing -- winter clothing. And at the end of the month, or actually at the end of the quarter, we no longer saw that demand. And it got hot again now in July. So, that would naturally affect apparel sales. And that's one of the lines that have been growing more in terms of sales in the past months. So, we see a growth of 14%, 15% on top of 2019, which is a reasonable figure in our opinion. And some lagging malls are getting close to the average now. So, in general, I'd say we're healthy with a good occupancy, and that will enable us to capture the sales and traffic in rental pretty soon.