Sonae, SGPS, S.A. (SON) Earnings Call Transcript & Summary

Welcome to Sonae's First 9 Months of 2021 Results Conference Call. Joining the introduction hosted by Mr. João Dolores, Sonae's CFO. [Operator Instructions] I'll now hand over to our host, Mr. João Dolores. Please go ahead, sir.

Thank you. Hi, everyone, and thank you for attending Sonae's Q3 results conference call. I am joined today by Rui Almeida from Sonae MC; Paulo Simões from Worten; Hugo Martins from Sonae Fashion; Luís Mota Duarte from Sonae Sierra; Cristina Novais from Sonae Investment Management and obviously, our Investor Relations team. As usual, I will do a brief presentation with an overview of our performance in the quarter and also in the first 9 months of the year. And afterwards, we will open up the session for Q&A. Starting with the market context, very briefly. As you all know, we continue to live under some restrictions and direct impacts from the pandemic during the quarter, but already with very encouraging improvements over the last few months. The vaccination rates in both Portugal and Spain are quite high. And therefore, the public health context remained largely under control, which enabled a gradual return to normality. Before we dive into the operational performance, I would like to give you an overview of our most recent portfolio management activity. So this was a particularly active quarter for Sonae as we announced a major deal in the beginning of August by establishing a partnership with CVC, in which we sold a 24.99% stake of Sonae MC for initial upfront value of EUR 528 million. We also acquired Gosh, a U.K. plant-based food manufacturer, which allows Sonae to invest in a high-potential sector, while expanding our international footprint and driving a more sustainable future. And in addition and also during the quarter, Sonae MC sold its 50% stake in Maxmat and Sonae IM monetized its interest in Bizdirect and CB4 and also entered in the share capital of CITCON. So now going to the operational results. Starting with Sonae MC. For Sonae MC, this was another positive quarter with a strong delivery from the food formats and also a robust recovery of the nonfood format after a long period of restrictions, which impacted these banners quite significantly. Total turnover grew 5.3% year-on-year and 2.3% like-for-like in Q3, the exact same evolution as in the first half of the year on the back of a very good trading performance of 2020. In food retail, we continue to gain market share and increased our leadership gap, having posted positive like-for-like growth across all formats. The online business also continued to grow having reached a 40% year-on-year increase in the first 9 months of the year, proving that our digital approach is being well recognized by our customers, also translating into higher loyalty levels, which significantly impact store sales. Regarding profitability, Sonae MC maintained a broadly stable underlying EBITDA margin of 10.9% in the quarter on the back of productivity gains and the permanent fine-tuning of its core business processes in spite of some pressures that were felt in terms of energy costs. In the first 9 months of 2021, underlying EBITDA improved 6.1% year-on-year overall to EUR 384 million with a margin of 9.9%. Sonae MC also continued to execute on its expansion strategy with 7 additional Continente Bom Dia stores, the proximity format, but also refurbishing a number of food retail units, while investing in the reinforcement of its logistical capacity and also its technological background. In terms of free cash flow, the company reached EUR 169 million in the first 9 months of the year, an additional EUR 42 million when compared to last year, also driven by the conclusion of the sale of the 50% stake in Maxmat, which represented a cash in of EUR 68 million. This cash flow generation led to a reduction in net debt of just over EUR 100 million to EUR 453 million, even after the dividend payment of EUR 140 million in the second quarter of this year. So total net debt to underlying EBITDA reached an all-time low of 2.9x. Moving on to Worten. At Worten, Q3 was also a quite positive period for the business. Worten ended the quarter with a 7.2% like-for-like growth, clearly showing the company's solid and recognized omnichannel value proposition, including the marketplace and also a significant growth in the services business line, leading to the reinforcement of its leadership in Portugal. In terms of total sales, Worten reached EUR 285 million in Q3, a slight decrease year-on-year of 3%, which is basically explained by the repositioning of the operating in Spain Mainland. On a pro forma basis, so excluding this movement, consolidated turnover increased 8% year-on-year in the quarter. In year-to-date terms, total turnover increased 3.6% year-on-year, a 12% like-for-like increase, just over -- reaching over -- just over EUR 800 million in the first 9 months. The online channel continued to perform extremely well, I would say. And at the end of the first 9 months, growth was already above 30% versus 2020, which was already an extraordinary year for our e-commerce operation. So overall, online sales grew by a factor of 3 since 2019. Regarding profitability, underlying EBITDA reached EUR 20 million in Q3 and EUR 51 million up to September, a level of profitability, which is a factor of both our top line positive performance and also the repositioning process that we executed in Spain. Regarding Sonae Fashion, Q3 was marked by a sales performance that was increasingly positive throughout the quarter as COVID-19 related restrictions were gradually lifted. Still, total turnover reached EUR 95 million in the quarter, a 6% year-on-year decrease, which reflects a weaker-than-expected recovery of footfall and sales performance after the reopening of stores in Portugal. In year-to-date terms, and despite all the restrictions to store operations in the beginning of the year, Sonae Fashion's total turnover stood at EUR 230 million, almost in line with 2020, which is a positive sign in our view. In terms of profitability, I would like to highlight that Sonae Fashion was able to post an underlying EBITDA of EUR 8 million in the quarter, which means that the year-on-year evolution in year-to-date terms is still quite positive. As for Iberian Sports Retail Group, the latest quarter showed another very positive set of results, both versus last year but also versus 2019. Total growth versus 2019 actually reached 32% with the online channel remaining an important growth avenue for the company. So total e-commerce sales increased by a factor of 4 since 2019, and this is still before the consolidation of Deporvillage, the acquisition that was made in -- at the end of June, beginning of July, which will only impact revenues in the coming quarter. So overall, the last 9 months registered top line levels above both last year and 2019 figures, as I said before, with total turnover reaching EUR 519 million, with a double-digit increase of 26% year-on-year and of 18% versus the 9 months in 2019. Regarding EBITDA, once again, the top line improvement was able to drive profitability upwards. And in the last 9 months, EBITDA improved by EUR 51 million year-on-year and EUR 20 million versus the same period of 2019. So this resulted in an EBITDA margin improvement to 11.5%. All in all, the contribution of ISRG to Sonae's results in Q3 reached EUR 6.7 million, above both 2020 and 2019 figures. This performance has carried on to August and September with ISRG showing growth and profitability enhancements in line with the ones that we saw in previous months across all channels and geographies. Going forward and looking at Sonae Sierra. Sonae Sierra's operational activity showed a steady progress during Q3, following the improvement of the pandemic context and also the relief of restrictions in our main European geographies. In this context, occupancy rates remain high and tenant sales were already very close to 2019 levels in the European portfolio at the end of the quarter and in some assets, even above 2019 levels. The services business line delivered a positive evolution in the quarter, showing significant signs of returning to a more normalized activity. And if we look on a proportional accounting basis, direct result in Q3 stood at EUR 12 million in the quarter, already practically in line with 2019 and EUR 23 million in the first 9 months of the year, which compares with EUR 5 million last year. Indirect results in the quarter was practically flat as we typically do not revalue assets in Q3. And all in all, net income reached EUR 6 million in the first 9 months of the year, which represents a year-on-year increase of EUR 26 million. NAV increased marginally to EUR 913 million and LTV remained at quite conservative levels. At Sonae Financial Services, the performance was overall positive in operational terms, the main leading indicators showed sustained improvements after the relief and restrictions and also the gradual increase in consumer confidence. The Universo operation continued to increase its customer base and the number of cards issued, the number of users reached circa 936,000, an increase of 23,000 versus the previous quarter. And the efforts to develop the digital front continued. And today, circa 60% of Universo Card clients are already digital users. The market share in the Universo Card continued to increase and reached 14% year-on-year in Portugal year-to-date, which compares to 13.5% for the same period of last year. In terms of financial results, Sonae FS delivered a total consolidated turnover of EUR 9 million in the quarter, in line with last year and normally slightly below 2019. In terms of profitability, results are still subdued given the transition stage, which we are living in, going into the new business model with Banco CTT. A special note to MDS which has been posting very positive results with significant increases both in top line and operating profitability when compared to 2020 and also to 2019. So all in all, in proportional terms and considering the 50% stake in MDS, turnover for the first 9 months of the year stood at EUR 49 million, slightly below last year. Underlying EBITDA was practically given the transition stage I mentioned before at Sonae FS with Banco CTT. Moving on to Sonae IM. Q3 was another quarter with important developments in the portfolio management front with the conclusion of the sale of Bizdirect and CB4 during the quarter, which resulted in capital gains of around EUR 10 million. And also in the first 9 months of the year, Sonae IM concluded the acquisition of a minority stake in a new company, CITCON, which specializes in technology for retail. In terms of operational performance, Sonae IM recorded better top line and underlying EBITDA figures versus 2020. And in the first 9 months of the year, total turnover increased by 6.4% year-on-year to EUR 43 million and underlying EBITDA also continued to improve. So today, with a total cash invested of EUR 150 million in the current portfolio as of September, the company's NAV amounts to EUR 324 million. Moving on to NOS. NOS continue to post a solid operational performance in the telco segment, and the media and entertainment segment was marked by a strong recovery due to a steady return of people to movie theaters. Turnover amounted to EUR 366 million in Q3, 5.6% above last year. The second consecutive quarter of growth since the fourth quarter of 2019, leading to a turnover increase of 3.1% year-on-year in the first 9 months, just above EUR 1 billion. Profitability followed the same trend with an EBITDA increase in Q3 of 6.6% year-on-year; and in year-to-date terms, 1.4% to EUR 478 million which leads to a margin of 46%. Net income increased by EUR 2 million year-on-year to EUR 46 million in Q3 and increased by more than 50% in year-to-date terms, to EUR 120 million in the first 9 months, which obviously implies an increased contribution to our accounts. The company continues to show a conservative leverage profile with a net debt-to-EBITDA after lease payments of 1.7x and maintains an investment-grade profile. I would obviously like to highlight that already in October and after 200 days of bidding the auction for the allocation of the 5G frequencies ended with NOS acquiring the largest fraction of the spectrum released and in all possible bands, which positions the business very well to lead the 5G revolution in Portugal. So in consolidated terms, turnover surpassed EUR 5 billion in the first 9 months of the year, an increase of 4.7% year-on-year, mainly fueled by the positive contributions from Sonae MC and Worten as well. Similarly, underlying EBITDA increased 6% year-on-year to EUR 415 million in the first 9 months, above last year by EUR 22 million. Total EBITDA in the first 9 months of the year was positively impacted by the capital gains that I mentioned before related with the sale of Maxmat and Sonae MC, and also the sales of Bizdirect, CB4 and Arctic Wolf which happened in Q2 at Sonae IM. All in all, EBITDA reached EUR 531 million, standing significantly above last year, driven by the better underlying operational profitability, but also obviously by the significant level of capital gains and the recovery of equity method consolidating businesses. As a consequence, direct results reached EUR 169 million as of September versus EUR 40 million last year, while indirect income also improved versus 2020. All in all, net income reached EUR 158 million this year, significantly above last year's figure, but also significantly above 2019. In terms of operational cash flow, Sonae portfolio released a total of EUR 120 million during the last 12 months. If we add to this, the free cash flow generated in our portfolio management activity, Sonae's free cash flow before dividends paid stood at EUR 555 million in the last 12 months, which after the dividend payments, which occurred last May, led to a significant decrease in our consolidated net debt to EUR 858 million at the end of September and to an all-time low LTV of 9%. This solid capital structure is obviously complemented with a comfortable financing position with a low cost of debt of 1.1% and an average maturity profile of 3.4 years. So this is it for me for now. And I will now open the session to Q&A. Thank you very much.

[Operator Instructions] Our first question comes from João Pinto from JB Capital.

Firstly, on capital allocation, what do you intend to do with your own shares? Will you keep them to use as liquidity to invest in the future? Or would you consider a cancellation? Secondly, also on capital allocation, following the Sonae MC deal, I imagine you're looking for alternatives to invest. We know you are not in a rush, but can you tell us if you are already seeing good candidates to acquire, including the sectors or nothing in the pipeline at the moment? Third, on Sonae MC. Like-for-like [indiscernible] can you tell us if it remained positive in October? And also on Sonae MC, can you give us some color on OpEx pressures and the competitive environment? And how do you see margin evolving next year?

Thank you, João, for your questions. I will take the first one, and then I'll let Rui to comment on the Sonae MC one. So in terms of capital allocation and starting with the shares. own Look, the TRS cancellation was basically a financing decision. And so as you know, the equity swap that we had with Banco BPI was the financing arrangements and obviously, with the significant cash proceeds that we received in recent months. We have to optimize our credit facilities, and this is one of the operations that we decided to terminate given the analysis that we made. So these shares in all honesty these shares were already in accounting terms, they were already considered as own shares, and they were also in practice, our shares -- as we were exposed economically to the variation of the shares. And so in that regard, nothing really changes for us. So basically, we terminated a financing arrangement and those shares are -- remain as our own shares. And so we do not have any changes in the outlook and the possible usage of these shares going into the future. And so, in the end, the straight answer to your question is no, we do not plan to cancel these shares. Regarding the cash proceeds for -- from the CVC transaction and the alternative possible uses for those cash proceeds. I mean, you're right. I think we have discussed this in the past. We do not have or we didn't have at the time of the transaction, any specific use for those cash proceeds. And that was not the main rationale to do the transaction. And we will remain, as I said before, very disciplined in looking at alternative investment opportunities, and we will look at opportunities that make sense for us with a long-term perspective. Obviously, we do have identified opportunities in our current portfolio to invest and we will continue to invest in our current portfolio. And we are also looking at opportunities outside of the current portfolio. We just announced recently the investments in Gosh, which is a sector which we like. The food and ag tech sector is a sector which we believe it has a lot to do with Sonae. It has a lot to do with who we are. It's -- and we are -- we will continue to look for opportunities in that segment, but also in other segments that somehow relate to us and where we feel that we have a right to play. But whenever we have something to announce, we will obviously do it. Rui, do you want to take the Sonae MC questions?

Sure.And just beginning by October, the performance in October was very positive, pretty much similar to the evolution that we presented in the like-for-like in the third quarter, it was okay. And we feel very confident to the rest of the year, continue to present a very solid set of results. Going to the other question related to the market environment. Well, we'll continue, for sure, as aggressive as it is today. But we feel very confident to maintain the benchmark levels of profitability that we are presenting, and we are continuing to present in the market. Feel very confident due to the efficiency programs that we are developing internally, which came to us with a very good results.

Rui, just a follow-up on that one. Are you seeing inflation in negotiations with suppliers and energy costs, logistics, what do you see? Anything relevant?

Good point. Yes. Well, up to now what is happening is that, in fact, the energy costs and transportation costs, these costs are increasing heavily, but not yet having a dramatic point of view in terms of the cost structure. But if the costs continue to evolve the way that we have seen and we are witnessing in the last months, I assure that all retailers will need to consider those cost evolutions in the prices that they are offering to the customers obviously.

Our next question comes from José Rito from CaixaBank.

So a question on Sonae MC and also the clarification on the like-for-like momentum and margin. Just a quick question on the online sales performance that has been quite strong this year despite the fact that last year was also a strong period for the online channel. If you can share some data on this channel economics, namely if it is already margin positive? And if it not -- if it is not what is needed for this part of the business to start to have a positive contribution to the [ BTI ]. So that will be my first question. Then on Worten, we saw this strong like-for-like in the quarter. And the question is if this was driven by Portugal or Spain or only Portugal and what categories has been driving growth? And also on Worten. In terms of marketplace strategy, if you can shed any insight namely the percentage of GMV, any midterm targets if this is margin accretive or not? And finally, I think that Joao mentioned that the online channel has also been performing very well. The question is if you are seeing lower sales densities in stores in Portugal?

Very good. Thanks, José. Let's do this in order. And I'm listing a bit of noise. So I'm not sure. If everyone can mute. Okay. Better enough. So let's take this in order. Let's start with Rui on Sonae MC questions, and then Paulo will take the Worten's.

And the question is very striking. In fact, as I -- generally, as we see the online business in our company, we see them -- we see that the business as an omnichannel approach, meaning the customers of the online are basically the same customers we have in the offline business. And when we look to the online business, we look to the customers. We have in the online portfolio. Meaning, we look to the EBITDA of those customers, and they are offering us very high levels of EBITDA. Meaning, they are very profitable, meaning that the online is also very profitable to us. Yes, the online business, as it is, well, if we only consider the acquisition and the purchases that our customers do in the online, we are fighting to -- well, we are almost fighting to breakeven in terms of EBITDA. But those customers, the same customers go to our stores. And in fact, they combine the levels of EBITDA that they offer us are much higher than the average that we get from the regular customer. So we see that this operation has been very profitable, in fact, I don't know if I answered to your question.

That's very good. I think so. So should we move on to Worten. Paulo, you mind?

Okay. Good afternoon to you all. Thank you, José, your questions. So regarding the like-for-like and the geographies performance, we saw positive like-for-like performance in all our geography. Strongest like-for-like in Portugal, but -- sorry, in Spain Mainland, in fact, because we focused the operation in online and in-store but mainly online, and we have been investing heavily to guarantee that to continue to grow. So on a like-for-like basis, we were able to grow significantly in Spain, especially on the online channel. But all geographies were positive in terms of like-for-like sale performance. Moving on to the marketplace. Regarding the GMV percentage, it's still small, but it's growing very fast. And we have high ambitions for this business model. We believe it's going to be one of our main growth avenues in the long run. So we are preparing the company to expand in terms of new categories and repositioning the brand, so that we are able to expand our business to these new categories and enlarge the marketplace contribution to our profitability. If it is profitable? Yes, it is. As you know, the marketplace business model is quite simple, I would say. So we charge a commission to our sellers. We don't have stores. We leverage the online infrastructure. So it's certainly accretive to the EBITDA of the company. And moving on to our store performance, given the good performance of the online channel. And second, in the third quarter, our market share -- our offline market share grew, also our stores are performing very well. We see positive like-for-likes in our stores, gaining market share, so very healthy operation offline. Notwithstanding the fact that we see the consumer electronics markets slightly contracting in Iberia. On Worten our store performance has been positive. So everything is going for now very well. And I think I covered all the questions from Jose.

Our next question comes from Artur Amaro from CaixaBank.

I have 2 questions, if I may. I would like to know if it's possible to disclose the market share of Sonae MC and Worten since you've been repeatedly gaining market share? And if possible, the number 2 and 3 in terms of players. And I also understood that this partnership with the CTT has changed the business model of Sonae Financial Services. So when can we expect positive EBITDA for this division?

Very good. Thank you, Artur. I'll take the last one on the partnership with CTT and then I will ask Rui and Paulo to comment whatever they can disclose on the competitive positions in both Sonae MC and Worten. So regarding the partnership with CTT, as you know, as we've discussed before, it's a change in business model. And so previously, with a partnership with BNP, we had a commission, which was -- which we charged upfront for the generation of credit, of loans. And so -- and now we are basically building a credit. We are building credit along the time. And so this means that we will take a while until we reach run rate in terms of the credit production. And so we have this initial value in terms of credit production, which translates into lower results. Going into your question directly, this is temporary, and we expect to reach positive levels of EBITDA in the next few quarters and reach the same level of profitability at least that we had historically in the next 12 to 18 months, depending, obviously, on the evolution of the business and obviously, also the restrictions that are still in place and that also affects our financial services activity. Rui, Paulo, can you shed some light on the question that Artur post, please.

Yes. Okay. Sure. This is Rui. So starting by the question regarding the market share. Well, this is a very difficult issue to interpret because there are several institutions -- well, there is no institution giving us the proper figures for market share in Portugal. What we generally use is some internal research regarding the market share evolution and also the information from Nielsen. Nielsen generally gives us the market share variation. And in fact, we are growing in terms of market share, 30 basis points comparing to 2020 and roughly almost 1 percentile point comparing to 2019, which is amazing. Well, for instance, the other [indiscernible] in Portugal [indiscernible] is growing 20 basis points in terms of market share according to Nielsen, but it's losing 2 percentile points against 2019. Well, then we have other players losing market share like, for instance, Intermarché is losing market share. Minipreço. is losing market share. Auchan is losing market share. And Lidl growing market share, is growing roughly 40 basis points in terms of market share and reaching approximately 10 percentile point in terms of market share. And ourselves, 9 to 10 percentile point in terms of market share. Ourselves, we believe that we have approximately 24% of market share. And we continue to grow market share, and we feel very confident to assume that we -- according to last figures, we [indiscernible] will continue to gain some market share.

So just a little follow-up, Rui. So the gap between you and player #2 in this case, has been widening [indiscernible] over the last...

Exactly. Yes, yes. Well, yes, because it's very simple. If we compute for instance, the sales, we announced to the market and the sales that we used, basically, sales from our hypers and supers divisions, we -- the difference between those 2 players are increasing every year, and we are gaining market share. And we in this year, will continue to gain some market share comparing to the figure that we were having last year.

Regardless of the sources, we have been widening the gap versus the second player in the market in the last 2 years quite significantly. Paulo, do you want to take the Worten question?

Sure. Thank you for the question, Artur. So regarding Worten market share, we also use some references based on market research, mainly a panel of retailers that work with Gfk [indiscernible] that cover [ not just standalone ] retail also covers the large majority of the market. Understanding it doesn't cover all the markets. So we have to do some estimates and some extrapolations to which our estimates and it's our own estimate of market share. So it's not -- as Rui was mentioning. It's also the case in Worten, we don't have any official number of market share. So regarding Worten in Portugal, we have around 30% market share and we are market leaders.

30%?

30%, yes, our estimates and we are market leaders, clearly. In the Canary Islands, we are co-leaders with the Media Markt, and we have a very small operation in Spain. Regarding the overall market share in Portugal, which is what impacts more our results, we have gained around 1.8% market share in the third quarter, and year-to-date, 1.3%.

And by the way, can you just give us a little idea of how much is the percentage of market share of player #2 in Portugal?

No, we don't have that information.

I think it's also fair to say that our online market share is very close to our offline market share. And in some quarters, it has even surpassed our offline market share in recent time.

It was a case again in the third quarter. But it's very similar one with the other.

Our next question comes from António Seladas from A|S Independent Research.

Congratulations for the figures. I have 2 questions. First one is related with ZOPT, if you have any information that you can provide us regarding the judicial process. When it could finish or what are your thoughts about it? And the second question is still related with your financial structure that you mentioned that is quite solid. It's probably solid than ever. Should we consider next -- or it makes sense to consider an extraordinary dividend by March, April next year, if you don't buy anything until the first quarter or not?

Thank you, António. So on ZOPT, the answer is quite straightforward one. It's no. We don't have any developments on the judicial front. So unfortunately, the situation remains the same. Again, as we said before, the company has not been affected by this by any means. And so the company, as you can see by the results, is still operating -- continues to operate normally in executing its strategy. And the 5G option was a very important milestone in terms of strategy execution and something that we wanted to ensure, to ensure that the company would come out of the auction as a leader in terms of the spectrum acquisition. And so that's the most important thing for us. Obviously, we would like to do this situation to evolve and to enable us to execute what we have announced to the market already over a year ago. But unfortunately, up until now, we do not have anymore developments to communicate. Regarding the financial structure and the possibility of an extraordinary dividend. Look, this is obviously, as you know, it's -- we are still far away from the end of the year. It's not Sonae's practice to distribute extraordinary dividends as long as we have interesting investment opportunities to allocate our capital. And I would use that as your base case scenario going forward. We have a very steady and stable dividend policy. We believe that it is a very attractive one with a very interesting dividend yield. And so I would not expect an extraordinary dividend. But it is a question to be discussed at the end of the year. And obviously, it's -- we're still in November. So -- but I would take that assumption as your base case.

Okay. So regarding ZOPT, your intention to break down the joint venture. It still remains valid?

Yes, yes. So we have not changed our intention, not only our intention but also the agreement with our partner to do so. And so we have reached an agreement over a year ago with our partner to dissolve the partnership, and that's still is our intention. And so -- but obviously, we would like to do it and making sure that we have no issues with judicial authority and that the solution can occur in the smoothest way possible. And that's why we have been patiently waiting for that possibility to occur. But up until now, things are still a bit tied up.

There are no further questions from the participant lines. I will now hand over the floor to Mr. João Dolores.

Okay. So if there are no further questions being posed, I would like to thank you all for listening and for placing your questions. And next time we speak, we'll be on the back of the yearly results, which we continue positive that we'll maintain the positive trend that we've seen up until now. So thank you very much for listening and see you next time.

This concludes today's event. We thank you for all your presence today. Ladies and gentlemen, you may now disconnect your lines.