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

Good afternoon. We welcome you to the Sonae's 9 Months 2022 Results Conference Call. Today's presentation is hosted by Mr. João Dolores, Sonae's CFO. [Operator Instructions] I'll now hand the conference over to Mr. João Dolores. Please go ahead, sir.

Hello, everyone. Welcome to Sonae's results conference call for the third quarter of 2022. As usual, besides myself and the Investor Relations team, we have on the call Cristina Novais from Bright Pixel, Hugo Martins from Zeitreel, Luís Mota Duarte from Sierra, Paulo Simões from Worten, and also Rui Almeida from MC. As you all know, the last months have been quite challenging as the geopolitical and macroeconomic instability continues to provide a challenging backdrop with significant impacts on our businesses and on our daily lives. Energy prices persisted at very high levels and supply chain disruptions were exacerbated by the war in Ukraine and continues to impact both our businesses and our customers. As such, the inflation rate acylated again in the quarter, driven by energy, but especially by food inflation reached new heights at the end of September. We saw inflation of around 15% in food retail in Q3 and 11% in total in the first 9 months of the year. It's worth mentioning that the growth in consumer food prices has been much lower than in food production prices showing that retailers have been absorbing parts of the purchase price increases in an effort to protect families and their relatives. Additionally, reference interest rates return to positive ground and started already to impact consumer budgets. As a consequence, equity markets suffered a significant hit in Q3, and Sonae share price fell roughly 30% from June to September. We've since seen a solid recovery in the last few weeks, and our share price has increased substantially and is now close to EUR 1 per share again, which still represents a large discount versus the intrinsic valuation of our assets as we will see in a minute. So regarding our portfolio management activity, Bright Pixel continues to actively manage its investments with around EUR 20 million invested in portfolio expansion and also a number of follow-ons in existing assets. In Q4, already, the sale of Maxive to Thales was finally concluded and will represent an important level of cash proceeds for the group. Also, as you know, at the end of Q3, Sonaecom announced the termination of the partnership ZOPT, a move which is fully aligned with our intention to remain a reference shareholder of NOS and to ensure adequate conditions for the company to deploy its strategy. In the quarter, we also continued to increase our direct shareholding in NOS, and we now own a stake which is equivalent to 37.4%, split between Sonaecom and Sonae. And we are confident that this level of shareholding is adequate for the level of economic exposure and influence we want to maintain in the company. Sonae's net asset value amounted to almost EUR 4 billion at the end of September, 3% above the level we saw at the end of June. This was mainly backed by the operational improvements in our businesses and also by the increased NAV at both Sierra and Bright Pixel. Sierra's NAV increased 3% versus June, overcoming EUR 1 billion, mainly driven by the positive direct result in the period, a positive FX evolution and also capital gains from asset sales. Sierra's direct result performance was driven by a good set of operational indicators, which continue to recover well from pandemic levels, with shopping center retail sales remaining significantly above 2019 levels, which shows the quality and resilience of the company's real estate portfolio and also the services business lines, which performed quite well. Concerning Bright Pixel, the active NAV stood at EUR 457 million at the end of September, implying a 10% growth versus June, which reflects the impact of recent acquisitions as well as the positive evolution of the value of existing investments. NAV continues to be more than double the amount of invested capital in this stock holding. NOS had a negative contribution to Sonae's NAV evolution in the quarter, as the pressure on equity capital markets also weighed on the company's share price. But in any case, NOS had a quite solid performance in Q3 with strong growth and improving profitability. Now let's take a look at our consolidated results. Sonae's consolidated turnover increased 15% year-on-year in the quarter, surpassing EUR 2 billion, mainly fueled by MC, but with important contributions also from the other retail businesses, which led to a 10% growth in the first 9 months to EUR 5.5 billion. MC continued to reinforce its leadership position in the context of rising food inflation that more than offset the decrease in volumes in the food format. Nonfood formats continue to benefit from the normalization of consumption after the pandemic restrictions back in 2021. So total turnover increased 16% year-on-year in Q3 with a like-for-like evolution of 13.3% in business. Worten had an important contribution towards our consolidated top line performance, with a double-digit growth to EUR 315 million in Q3 and a like-for-like of 8.5%, fostered by the positive contribution of seasonal category sales, and in year-to-date terms, the positive trend of the last 2 quarters pushed turnover to grow 4% in total and Worten to continue to reinforce its market share in the Portuguese market, both online and offline. As for Zeitreel, in Q3, we continued to witness a recovery to pre-pandemic levels. Total turnover grew by 8% year-on-year in Q3 to EUR 102 million with a particularly positive contribution from retail operations. A quick note regarding our online sales. So despite the deceleration of e-commerce sales in the market, our businesses continue to develop their digital value propositions, and Sonae's overall online sales actually grew year-on-year in Q3, as we continue to lead our markets in both the physical and digital channels. Consolidated underlying EBITDA increased 7% year-on-year to EUR 181 million, however, with a lower margin versus last year, driven by the cost pressures that we are seeing across all businesses, mainly in what regards energy, and also due to the investment in prices to ensure the most competitive offerings in the market. MC, in particular, saw its operating margin decreased by 100 basis points to 9.9%, and was the main driver of the group's 64 basis points decrease in underlying EBITDA margin. Still, our businesses were able to sustain these pressures with an outstanding level of resilience and a clear long-term perspective on our value propositions and also our competitive positions. Consolidated EBITDA reached EUR 224 million in Q3, 5% below last year, mainly due to the pressure on our operating profitability and also to the capital gain from the sale of Maxmat back in 2021. Therefore, our EBITDA margin contracted by 2.4 percentage points to 11% in the quarter. Direct results in Q3 stood at EUR 101 million, a decrease of EUR 14 million year-on-year, following the EBITDA contraction we saw before, and indirect results was slightly above last year in the quarter and benefited mostly from Bright Pixels portfolio revaluations. Therefore, net results in total reached EUR 92 million, 4% below last year. Overall and despite the challenging context and also the strong level of investment in the quarter, both operational and financial investments, the group registered a healthy level of cash flow generation that reached EUR 81 million. Consolidated net debt actually increased year-on-year, but this was well expected given the level of M&A CapEx that was deployed in the last 12 months, namely with the acquisition of Grosvenor's 10% stake in Sierra, the investment in NOS, the acquisitions and follow-on investments of Bright Pixel, and also the investments made by Sierra to execute its strategy. Our financial position allows us to continue to invest to reinforce our value propositions to ensure our portfolio companies have the tax conditions to succeed and also create value in the long run. If we look at our key leverage ratios, these remain at quite conservative levels. MC and NOS continue to have investment-grade leverage levels. Sierra continues to show a prudent level of loan-to-value, and Sonae zone LTV remains well below the 15% threshold. The group's capital structure remains quite solid with comfortable liquidity levels, and we are fully financed until early '24, with an average cost of debt of around 1%. So going forward, the outlook remains uncertain, obviously. Energy supply, particularly of natural gas, will remain a source of concern in most countries, while inflation rates are expected to stay high for a while, forcing central banks to continue to raise interest rates. However, given our financial position and the quality of our portfolio and our team, we continue to be well positioned for what's ahead. Thank you. That's it from me for now. You can now open the session for Q&A.

[Operator Instructions] Our first question comes from José Rito from CaixaBank.

Yes, good afternoon. So I have one question on Sonae MC. What is your view in terms of food inflation over the coming months? Should we expect that food inflation continues to increase? And on these environments, any reason to assume that EBITDA should not grow over the next quarter? So we have been seeing that despite the margin dilution, the top line has been more than offset in this and EBITDA has been increasing. So some view on how to expect this to evolve over the next quarter? And finally, on energy hedging, if you have already contracted anything going into 2023. So that will be my questions on Sonae MC, then I can come back later.

Okay. Thanks, José. So I will hand over to Rui to tackle the first question on MC.

Well, regarding the first question, it's very difficult to absolutely answer that question because, frankly, we don't know. Well, we are, as João said a while ago, the inflation rates continues to increase in Portugal. In fact, during the last -- in the third quarter, we reached 15% in terms of food inflation in our stores and also in the market. Last year that we are witnessing in our stores, the inflation rate is not decreasing, continues to -- the prices continue to go up, maybe very aggressively in last month. Frankly, we don't know what will happen in the future. But what we can see is very important is the inflation in the producer side is much higher compared to the inflation on the consumer side. How we generally measure the inflation in our stores is basically the inflation on the consumer side, which in the last quarter was pretty much 15%. But if we measure the inflation according to the data that the National Institute of Statistics in Portugal is providing us, the inflation in the price index from the previous years is much higher. It's almost reaching levels of more than 25%. So, yes, the inflation is not giving any sign that it will start to slow down. It is giving some signs that we will prevail for very high in the future as well once again. And we need to cope up with that situation in the future. But at least again, frankly, we don't. We are now looking to the market. We are reacting to what is happening in the market. And as I mentioned a while ago, again, we are absorbing part of the inflation that -- we retailers are absorbing part of the inflation that is now -- we are having in the market. Production is increasing more than we are seeing at the seller side. In terms of EBITDA figures. Well, frankly, we -- as I mentioned to you in the very beginning of the year, we fight to continue to increase -- it is our ambition to continue to increase the EBITDA figures at the maximum, optimizing all the operations that we have. If the margin -- the EBITDA margin will decrease as a percentage of turnover, probably because we are focused on EBITDA margin in euros and that's probably what will happen. And we -- again, we are continuously be focused in EBITDA in euros and in free cash flow in euros as well. And again, we are focused on maintaining our assets very well profitable and very attractive. What we'll have in the future? Now frankly, it's very soon to give you a clear about what will happen in terms of EBITDA figures. In terms of energy, for 2023, we will have roughly 55% of our energy totally hedged in our portfolio of assets.

Sorry, on the energy, it is 25%, how it compares to '22? How much was the percentage that was hedged at the beginning of the year?

Sorry, I didn't understand. Could you repeat your question, please?

You mentioned that 25% is hedged in 2023.

No, 2023 will be 55%.

55%. And how much was this year at the beginning of 2022?

It was about 20%, as I mentioned, in the very beginning of the year.

The next question comes from the line of João Pinto from JB Capital.

On Sonae MC, on the 100 basis points fall in EBITDA margin in the third quarter, can you tell us how much of it was gross margin growth? I'm just trying to understand the different drivers of trading down and price investments versus OpEx inflation. Also, could you elaborate on the trading down in Portugal which changes you're seeing in the consumer behavior? And finally, on capital allocation, you have increased your position this year in NOS. Do you plan to increase further? You're happy with your position? I mean just to better understand your capital allocation.

Thank you, João. I'll take the capital allocation question first, and then I'll hand it over to Rui to answer the 2 questions on MC. So as I mentioned at the beginning, we currently have a position in NOS, which is roughly around 37.4% direct and indirect stake in the company, and we feel comfortable with that level of exposure. We feel that level of economic exposure together with the level of influence that we have in the company is sufficient for us to ensure that the company has the right conditions to execute its strategy. And so our short-term plan is not to further increase our exposure to the company right now. Rui, do you want to take the MC questions?

Sure, sure, sure. Well, 2 questions, 2 very important questions. I will start by the trading down. Well, trading down for us is sort of things that is happening. Well, the first measure that we are witnessing in terms of trading down is our private label is gaining some weight. And in fact, comparing to the third quarter that we had in the last year, the private label is accounting for more 3 percentage points in terms of weights in our portfolio of products. And again, speaking only of fast-moving consumers goods because we -- as you may know, we have -- it's very difficult to give you a figure for private label in terms of cash proceeds and also in the [indiscernible]. Because covering the vast majority of the brands are totally controlled by buyers. So that's the figure. And I'll just give you some figures that are possibly consumer goods in order to have you very -- at least simple figures to compare to other players because when we compare to ourselves to other players it is only in faster consumer goods. And what is happening in the private label in our stores is the weight of private label in our resource is increasing significantly. But again, it's very difficult to give you proper figures regarding the trading down, for instance. In terms of fish, well, we are witnessing that there are certain types of fishes like sole, bass, bream, et cetera. We are selling less than we were selling in terms of kilos comparing to last year. Since they are double fishes and one more expensive efficiency and people are trading down those consumption -- that consumption of fish for less expensive fishes. But for instance, in terms of meat, we are witnessing that people are preferring to buy pork instead of buying beef, that's another issue that, for instance, we are witnessing in our stores. But again -- in terms of fruits, people prefer to -- well, they don't buy much tropical fruits and grapes comparing to what they were buying last year, and we are seeing that situation. And as you may understand, those fruits are more expensive and give us much more levels of EBITDA figures in euros comparing to what we were having last year. But again, we are selling quite well, and we are doing quite well, and we are increasing the level of customers in our stores. And we are doing quite well, and we are appreciating very much the value proposal we are offering and consumers are also appreciated the value proposal they are receiving, and this combination is quite positive for us. In terms of gross margin, I'll just give you some figures. In the last quarter, we decreased our EBITDA margin by 1 percentage point. Half of that figure is pretty much explained by the increasing -- very dramatic increase in prices in terms of energy due to the weight of energy that we have in company. And then we also have efficiency gains that completely are a part of the decrease we have in commercial margin in terms of -- due to the investment in prices that João mentioned a while ago, in order to continue to be more effective in our value proposal and also due to the fact that the trading is down -- because due to this trading down effect, mainly due to the fact that we are selling more at private label. And as you may understand, in commercial terms, the gross margin is pretty much difficult to quantify and to measure. But the fact that the -- our product label is less expensive comparing to the suppliers' grant and the operation costs to deal with those products in our stores are pretty much the same, the EBITDA margin of the product label is much lesser comparing to the suppliers' brand. So it's one of the reasons that we -- our margin is being impacted by this drilling down phenomenon. But again, the majority of this impact in terms of EBITDA is related to the energy costs we supported during the third quarter of this year.

And if I may, just one question on Worten because we saw a great acceleration between the second quarter and the third quarter. I would like to know to add some color on the drivers for this good sales performance in the third quarter.

Sure. Paulo, do you want to take that?

Yes. Well, the main driver were, as João already mentioned, were the seasonal category sales. We have a particularly hot summer that really drove significantly. So that was good. Also, inflation helps in terms of value of euro sold, it also helps. And those are 2 drivers inflation and seasonal categories. And sorry, last one, which is important, we gained market share. So it's also important to say we have been able to gain market share in all geographies, both online and off-line. So it was a good performance also operational from the company, of course.

Yes, I would stress the third point. I think it's important to mention that Worten has been gaining market share, both offline and online. And the execution of its strategy, which leverages an omnichannel experience with an expansion of categories also in the marketplace and a very strong offering in terms of services, has been quite instrumental and successful in ensuring the performance of the business in the last couple of quarters.

The next question comes from the line of António Seladas from AS Research.

Three questions. The first one -- the first 2 are related with Sonae Sierra. So we can provide some breakdown on capital spending or explain why the figures were so why? Second question is related with the yields that have been increasing. Should we assume that NAV will go down by the end of the year or not necessarily because your execution has been also, well, strong, very nice, very strong? The third question is related with cost about Sonae MC, and I'm sorry to insist on this issue, but it's important, as you can imagine. So from my understanding, if you can explain, you cover 55% of the energy that you are going to consume in 2023 or already hedged. So does it mean that your energy bill will go down versus taking consideration, for instance, the current energy prices, or not necessarily?

Okay. Thank you, António. I will hand it over to both, Luís and Rui to take the questions. I would just mention that, regarding this last question, I mean, it's no certainty that our energy bill will go down, obviously, because half of our energy consumption is not hedged, and we don't know what the evolution in the market price will be. And so obviously, we are more protected. We are more confident also because we are not only hedging a significant part of our consumption, but we are also deploying a number of energy efficiency measures, which are quite important. And we are increasing, for instance, the deployment of voltaic panels in our facilities as well. And so this all contributes to hedge the risk. But obviously, we do not know what's going to happen in the market in the next year. And our actual energy bill at the end of '23 will be very much dependent still on what happens in the market. But I will ask Luís to comment on the Sierra and also for Rui to comment on your questions.

Well, from my side, I don't have anything to add to your commentary, to be correct. And again, yes, we -- the most important for us that we set up several PPAs, power purchase agreements. We can -- we are totally committed in order to give some commitment in terms of energy. And in terms of energy, we are basically buying agreement by green energy. The power purchase agreements are based on solar energy, wind energy and also the energy so that it's totally due to that situation, and we set up several agreements with several companies in order to buy those -- in order to have those power purchase agreements set up for the next 5 to 10 years.

Okay. So -- but nevertheless, the prices are below current stock prices, I guess?

Exactly, for those PPAs, exactly. They are below the recurring prices. Yes, it's true. But the problem is that, quite frankly, we don't know what will happen in the other 45% of the consumption that we will because of the spot market. I mean, again, in the spot market we don't know what will happen. It will happen in average -- in terms of average that we will pay next year. But again, we have 55% hedged for the year.

I understand. So it's just asking if we assume the energy -- the current energy prices will stay for 2023. I guess that your energy will go down. Okay.

Yes. That's what we are expecting.

Okay. Good afternoon, António, to your first question, I mean, we set out a strategy roughly a year ago. And what you're seeing now is the execution of that strategy. We're making investments across the different growth strategies that we had identified. We're talking about growth investments/growth CapEx in the typical areas like in development and investment management, which can be vehicle investment vehicles for other types of real estate-related investment strategies. So it's growth and it's completely core to our strategy. The other area, I would say -- sorry, the other question is a much more difficult question because looking at purely the fundamentals. If we look at shopping centers, today, we are seeing month after month the highest sales that we've ever seen in our shopping centers. We are performing significantly above 2019 levels. We have real growth in our centers. So from a resilience point of view, from a COVID impact point of view, we're very comfortable that the shopping centers have returned and have exceeded 2019 levels on a consistent basis, and we're seeing that throughout on a month-on-month basis. So from a risk profile point of view, shopping centers have been intact and recording strong performance. If we look at more macroeconomic figures, if you look at the spread of yields against the risk-free rate, and yes, we've all seen the risk-free rate increase, but we have also seen the risk-free decrease over time and yields have not followed that. So if we just look at yields and shopping centers compared to the risk-free rate, we are very close to what the average spread has been over the last many years. If we also look at the spread of shopping center yields against other real estate sectors, we are at record spreads, which means that there is a significant gap between shopping center yields and other asset classes, which, in reality, what I'm saying purely looking at fundamentals there is a strong argument to say that shopping center yields should not be affected by the current market dynamics. Having said that, given sentiment and given general macro sentiment, we are expecting yields to expand in our December valuations, but I have to emphasize that it's a reflection of sentiment and of simplification rather than anything related with fundamental performance of this asset class.

The next question comes from the line of Artur Amaro from Caixa BI.

I think most of the questions have been answered. Just a quick one, if you can give us an opinion about the current fuzz regarding the possibility of the Portuguese government creating a special tax on abnormal profits, whatever that means for the retail sector? So that would be my first question. And the second one, if I understood correctly, you said that 55% of your energy costs are covered for next year. So if we assume that the energy prices won't go up much more, could we see a stabilization of the EBITDA margin next year? And that would be my second question.

Okay. Thank you, Artur. Maybe I'll cover the first question, and then I'll ask Rui to comment on your second one. On the first question, look, we still don't know how this tax will be implemented and what the impact for Sonae will be. What I can tell you is that we do not recognize the concept of abnormal or excessive profits. We are not seeing extraordinary profits in any of our businesses that results from taking advantage of the inflationary context. On the contrary, as you saw, we are feeling a tremendous pressure on our cost base, and we are seeing margins actually deteriorate. So I think we should really demystify this idea. We continue to operate in an extremely competitive market, where all the players are fighting for market share and trying to offer the best value for money to consumers. And this context, together with very high energy costs, places a huge pressure on profitability. So the image that some people are trying to create, I believe, is simply not true. And I would also add that the food retail sector was essential to support the country during the pandemic period with very difficult operational challenges, additional costs, and we are now being faced with another very challenging context, and we are trying to mitigate the impact of inflationary pressures on consumers, as we rightly pointed out. So talking about excessive profits really makes no sense to us. I will ask Rui to cover the topic on energy cost. Rui?

Artur, thank you for your question. Well, in fact, as I mentioned a while ago, we have roughly 55% of our energy consumption for next 3 to 4 year. Yes, if we -- if the prices in spot markets are to maintain in the next year with the prices that we have today, yes, we have a sort of an advantage, a very significant advantage, for next year. If the margins will stabilize or increase, frankly, we don't know because it will depend on the market evolution, what the reaction -- what will happen in terms of evolution of prices, trading of phenomena, et cetera, et cetera, et cetera. But we, in fact -- I tend to agree with you. We have an advantage comparing in terms of energy prices comparing to this year. Yes.

Okay. Just another quick one, if I may. Can you give us an idea of how much -- what's the percentage of the promotions on yourself? I remember by the time of the IPO, the figures that were available is that roughly, we would have something around 55% of promotions...

Yes, yes, on the figures, I pretty much kept basically maintaining that 55% in our company. And others on the market are pretty much designed 50% or slightly better or less than those figures, but we maintain those figures. We are maintaining those figures in terms of policy and in terms of best proposal we are offering to our customers.

I believe we have a question on the chat. And the question is from Theresa [indiscernible]. Is it possible to share the current levels of MC and Worten market shares and their recent evolution? So I will may be ask Rui and Paulo to briefly comment on the recent evolution of the market shares of both businesses. Rui, you want to start with MC.

Sure. Sure. As I mentioned in the previous conference calls with investors, it's very difficult to give you a proper figure regarding the market share. There are several -- there are no -- well, there are several institutions that are offering some kind of figures, and we follow generally Nielsen figures to measure the evolution of our market share. And in fact, in the past 9 months of this year, we are raising -- our market share is increasing by 30 basis points compared to last year, which is fantastic, and we are increasing market share. In fact, while the figures that we are getting is -- even we are increasing market share in a like-for-like basis, which is -- again, which is very positive. To give you a proper figure about our market share, well, according to the internal research that we do, our market share is roughly above 24%. But again, there are no institution that is providing us with a very scientific trigger regarding the market share. We have some figures, particularly on the poll or it depends on the sample that they are getting and the correct figure for market share will be very difficult. We don't have much accurate information from all competitors -- all players in the Portuguese market.

All right. Paulo, do you want to touch upon the Worten's evolution in terms of market share?

Sure. So we have some difficulty, as Rui was mentioning. It's very difficult to have a clear market share number. Anyway, as mentioned in the past, Worten is around 30% market share in Portugal, and it has been gaining market share consistently as far as our estimates are telling us. So we usually follow the JFK panel, which is a subset of the market. It doesn't cover the full market, then we try to estimate also market is evolving. And the kind of market share in 2022 is around 0.4 percentage points. And this follows, again, of around 1 percentage points of last year. So quite good performance of the company in terms of market share gain, as I mentioned before.

Thank you, Paulo.

The next question comes from the line of José Rito from CaixaBank.

Yes, I, again. So I have 3 new questions. The first one on NAV for Bright Pixel. If you can provide NAV evolution, excluding new investments. So I would like to have a sense of how much was the like-for-like evolution, if possible? There's always capital increases, new investments, assets being sold. So if you can say how much was the NAV evolution excluding all these M&A activity. And also related with this, what could be the impact on the energy of Bright Pixel, related also with the rise in interest rates, we have been seeing a decline in asset evaluation, startups, with layoffs. So my question is, if this could also impact the NAV of Bright Pixel? That will be my first question. Second on the food tax, this has been also a business that has been under pressure and the trading down is also affecting this kind of categories. If you can provide all gross sales that have been evolving? And if you think that recent decline in evaluations in the market could also be an opportunity to further increase Sonae's role in the food business? And final one, Sierra question on what is included in the business plan in terms of investments. So we saw the increase recently on the net debt, just to know exactly how much could be the increase going forward in terms of new investments?

Okay. Thank you, José. So I'll may be ask Cristina to answer a couple of questions on Bright Pixel first, and then we'll take the one afterwards.

Okay. Thank you. Well, the first one relating the NAV evolution in the quarter, we have increased more or less EUR 30 million, and it's nothing related with Maxive. Maxive was already adjusted in the last quarter with the acquisition that was already aligned. So it's -- the value was the same at the end of the quarter. And related to the second question from the market perspective and -- in fact, winter is there, of course. We know that there's great uncertainty in the market. But up to now, our NAV hasn't been affected by that. As you know, we have a very conservative approach in our investment. We never played the game of 2021 with high valuations, and we like, of course, for that. We never play that game. We are very conservative, and we have a very quality portfolio. So up to now, we don't have any impact on NAV. On the contrary, of course, we have been investing in recent rounds in our companies and our portfolio companies, and all of them were higher than the last run. So we are improving our NAV. But in certain market, it is there, and we don't know what the future will come. But as to now, we have good signs. Liquidity in the market is still very high. Our segments are very hot with cybersecurity, digital. So up to now, we are confident and we believe that, in fact, with this hold on in the market, we will have great opportunities with that.

I would also add that -- I'm not sure if that was your question, but I would also add that the increase in NAV is driven by both new investments and also revaluation -- upward revaluations of current assets. And so -- and the revaluations of our existing assets plays an important role in the evolution of the NAV in the last 12 months. Okay. Regarding -- maybe I'll take the one on cost, and then I'll ask Luís to cover the question on Sierra. So [indiscernible] has been performing well. So what we have done since we've acquired the company as we have them executing a value creation plan to grow the company from the current level or from the initial level of sales to a level of sales, which is significantly above the initial one, and we are trying to do that at this moment in time. Early signs are good, so we are seeing sales increase month by month. We are getting new listings and new supermarket chains. We are getting access to new accounts in terms of food services. And so we are quite confident that the value creation plan that we designed or developed at the time of the acquisition we will be able to achieve that. Our goal is to go in the U.K. mainly, although we have launched the product as well in Portugal, but our main market is the U.K. So we will continue to invest significantly in the British market where we see the highest potential for growth. And we will probably, next year, have more news on this asset to share with you with more granularity. I will ask Luís to cover the Sierra question now.

Sure. On Sonae Sierra and on your question around future investments. So a couple of context points to start with. First, I mean we will and we are firmly self-funding, meaning that we are investing capital to the extent we have excess cash sitting on our balance sheet and to the extent we generated, and we generate it through operations, through asset sales and through profits from the investments we make. The types of investments that we make today with this strategy is obviously in development, as I mentioned and on these developments. These typically are done with a degree of leverage standard for these types of investments, which tends to be in the order of, say, 50% to 60% LTC. We invested on our balance sheet, and we invested typically in partnerships with other investors. But these are investments on our balance sheet. On the investment management side, we tend to either co-invest in the vehicles but with small positions. Therefore, it's not very cash -- it doesn't require significant cash investments. And the third stream of CapEx investments tends to do with M&A, M&A to the extent that it adds to the growth and the strengthening of our core competencies. And of course, in our nature, we always keep an opportunistic eye for different opportunities so that might arise particularly in the market conditions as we expect them to be going forward. So our level of investment will really depend on the level of our capital recycling policy, but we are in a net investment position as we speak. We have a meaningful amount of cash sitting on our balance sheet, which we are investing as we speak but investing in growth initiatives and always conscious of the current market conditions that fit perfectly with our prudent and conservative style.

Okay. Understood. But I would assume that major asset sales are expected in 2023. So we should still be in the phase of ramp-up of this strategy in the sense that we will still, let's say, consume net cash. You are saying that you are self-funding, you have the cash, but net debt will continue to increase over the coming quarters, right?

That is exactly right, yes.

The next question comes from the line of António Seladas from AS Research.

Sorry, it was a follow-up question, a little bit on Sierra with capital spending. But I guess that you already answered it. So we should expect more of these figures of capital spending in the coming quarters is what I understood from your prior answer?

That is exactly right because it's perfectly in line with our strategy. Having said that, look, in the current volatile market conditions, we have to be prudent, and we will continue to be prudent. So on one hand, there might be opportunistic approach to those investments. But on the other hand, we will also keep an eye on the evolution of those conditions. But the short answer to your question is yes, we will continue to invest, and we will be net cash conservative over the next 12 to 18 months.

There are currently no questions in the queue. [Operator Instructions] There are no questions on the phone lines. So I'll hand the call back over to your host.

Thank you very much. Thanks, everyone, for all the questions and for attending our Q3 results call. Just as a final note, we are living under turbulent conditions, but I believe the performance of the group has been quite resilient, and we are happy with the performance that we've had over the last few months, and we are confident as well in the next few months going up to the end of the year. And so we will speak again in the full year results conference call in March. And so I wish everyone a good end of the year as well. And let's be in touch in March. Bye-bye. Thanks.

Thank you for joining today's call. You may now disconnect your lines.