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

Good morning. We welcome you to Sonae's First Half of 2023 Results Conference Call. [Operator Instructions] I now hand the conference over to Mr. Joao Dolores. Please go ahead, sir.

Good morning, everyone. Welcome to Sonae's First Half '23 Results Conference Call. Besides myself and the Investor Relations team, we have on the call Cristina Novais from Bright Pixel; Luís Mota Duarte from Sierra; Paulo Simões from Worten; and Fernando Van Zeller, our recently appointed CFO at MC. As you know, the second quarter of the year continued to be marked by a challenging macroeconomic environment, geopolitical tensions remained high and inflationary trends and rising interest rates continued to pressure the disposable income of households. In any case, the Portuguese economy was quite resilient. And our businesses maintained high levels of agility to adapt to changing circumstances, mainly by continuing to partially absorb inflation to protect households and cater to the needs of consumers. As usual, I will start by going through our portfolio management activity in the period. As you know, during Q1, we acquired the remaining 10% stake in Sierra at a 10% discount to NAV. And we now own 100% of the company at this point in time. We also reached an agreement with Bankinter Consumer Finance to create a 50-50 joint venture with Universo, which aims to become a leading consumer credit operator in Portugal. That agreement will be executed up until the end of this year. Bright Pixel, our corporate venture arm in technology, made 3 new investments in Q2, so totaling 6 new minority investments in the first half of the year and already has 40 companies in the portfolio, including 3 unicorn companies. MC in Q2 reached an agreement for the combination of Arenal and Druni in Spain. This will result in a leading health and wellness and beauty player in Spain with about EUR 800 million in turnover, a transaction which increases our international exposure in a sector that is benefiting currently from clear tailwinds. This transaction should be concluded by the end of the year, turning MC into the leading health and wellness and beauty retailer in Iberia with over EUR 1 billion in revenue if you include Wells in Portugal as well. Already in Q3, Sonae received a notification from JD Sports, communicating its intention to acquire the remaining stake in ISRG with an equity value of EUR 1 billion. This transaction implies a EUR 300 million cash-in for Sonae and an estimated capital gain of EUR 175 million. And completion should happen until October. Sonaecom acquired Sonae's direct stake in NOS, a total of 11.3% for EUR 213 million. And Sonaecom now holds a 37.37% stake in the NOS share capital. And this had no material impact on the voting rights in NOS, which are attributed to Sonae. Regarding our key businesses, I will start with retail. And I would like to point out that MC continues to face challenging market conditions with food inflation remaining high, although at lower levels than the beginning of the year. And so in Q2, we saw inflation of around 11% versus practically 20% in Q1. And this, coupled with evolving consumer behaviors, significantly changed the context for MC, where we continued to see trading-down movements, which were quite significant. In any case, MC was able to grow by 13% year-on-year in Q2 with a like-for-like of 11% to over EUR 3 billion in the first half of the year. This was fueled both by food and nonfood formats and Continente continued to expand its market leadership position in Portugal. In terms of profitability, trading-down movements, coupled with the partial absorption of the inflationary pressures in price-driven costs, pressured gross margin. These negative effects were more than offset by a reduction in energy costs and also the implementation of efficiency measures, which enabled us to maintain a very solid profitability level. Underlying EBITDA grew 16% year-on-year and reached EUR 279 million in the first half of the year with a total margin of 9.2% versus 9% last year. MC continued with its expansion plan by opening up 18 new stores, of which 4 new Continente Bom Dia, which as you know is our proximity format in Portugal. As for Worten, Worten also delivered a positive operational performance, being able to increase market share in core categories but also growing well in new product categories and adjacent services. Turnover grew 5% year-on-year in Q2 to a total of EUR 557 million in the first half of the year, which implied a 7% year-on-year growth and a like-for-like of 5.5%. The online channel continues to be an important growth avenue, representing now more than 15% of total sales, underpinned also by the marketplace expansion into new categories. Profitability also evolved positively despite the pressure on operational costs, coupled with a challenging market backdrop with increased promotional activity. Underlying EBITDA increased 6% year-on-year with a stable margin of 4.8% in Q2, leading to an underlying EBITDA of EUR 25 million, corresponding to a margin of 4.5%. As for Sierra, Sierra maintained its growth momentum in Q2, with the trading performance of our tenants in shopping centers significantly above pre-pandemic levels. In Europe, tenant sales increased at a double-digit pace, 15% year-on-year. And shopping centers reported an occupancy rate of 98% throughout the European portfolio, also with improved footfall being registered in the beginning of this year. The services activity also showed a strong performance in the period, fueled by property management on the back of 47 new contracts signed in the first half of the year across several geographies and also the good performance of assets under management, demonstrating the company's ability to add value to managed assets owned by the partners. Net results increased EUR 10 million to EUR 38 million on the back of a strong direct result evolution, although we did record a positive indirect result in the quarter. NAV increased EUR 50 million since the beginning of the year, having again surpassed the EUR 1 billion threshold. Regarding NOS, the company published its results last week and continued to deliver a strong operational performance, with both turnover and profitability improving year-on-year. NOS continues to lead the deployment of 5G in Portugal with a coverage of 90% of the population. And today, the company offers the best mobile network in the country, which has enabled higher levels of growth, particularly in convergent customers. Revenues increased 4.5% year-on-year in the first half of '23 on the back of the telco growth, which grew 3.5% in the first half; and cinema theaters, which continued their recovery path, growing 15% in the first semester of this year. EBITDA reached EUR 353 million in H1 with a 45.5% margin, a 2 percentage point increase versus '22, and net results stood at EUR 81 million. As you know, NOS distributed EUR 0.43 per share in dividends, of which EUR 0.152 was extraordinary dividends following the sale of the towers -- mobile towers to Cellnex in '22. Still in the technology segment, Bright Pixel continued its active portfolio management activity with 6 new investments in H1 with a total CapEx of EUR 32 million, and currently, cash invested totals EUR 166 million in more than 40 companies, and the portfolio is currently worth roughly double this amount. So in a rather volatile period for tech companies, Bright Pixel's portfolio has shown strong resilience. And we haven't registered nor do we expect to register significant changes in valuations up to the end of the year. On a consolidated view, Sonae maintained a strong top line growth in Q2. Total revenues grew 11% year-on-year in the quarter, reaching EUR 3.8 billion in the first half of the year, mainly fueled by the performance of MC. In terms of profitability, underlying EBITDA increased 16% or EUR 23 million year-on-year to EUR 163 million and reached just over EUR 300 million in the first half of the year with a margin of 7.9%, 15 basis points above last year's 7.7%. Total EBITDA followed a similar trend but increased slightly less, 9.5% year-on-year to EUR 350 million, with a positive contribution from equity consolidated businesses, mainly NOS, due to our increased shareholding, which was partially offset by lower capital gains from Bright Pixel this year. Direct results decreased year-on-year to EUR 84 million in the first half of '23 due to increased depreciation following our investment efforts, coupled with higher funding costs and tax expenses. Indirect results also reduced in the first half of '23 mostly due to lower valuation gains in the minority stakes of Bright Pixel in H1 when compared to 2022 and also to lower valuations of Sierra shopping centers when compared to last year. All in all, net results group share stood at EUR 43 million in the second quarter of this year and EUR 69 million in the first half of '23. All in all, Sonae generated EUR 202 million of free cash flow before dividends paid in the last 12 months. This is a quite solid cash flow generation and is a function of the strong operational performances of our main businesses, also our portfolio management activity and lastly, the dividends received from our investment covenants. Consolidated net debt decreased to a bit above EUR 1 billion after dividends paid to our shareholders and partners, which totaled EUR 161 million. The group's capital structure remained solid with a low leverage level and strong liquidity available and a stable debt maturity profile of about 4 years. At the end of June, our holding LTV decreased significantly year-on-year to 7%, so minus 2.4 percentage points versus last year. And at the individual BU level, leverage metrics remained within our defined thresholds. MC decreased its net debt-to-EBITDA ratio to 3x even after dividend payment of EUR 214 million. NOS presented a net financial debt-to-EBITDA after leases of 2x. And at Sierra, gross LTV reduced significantly to 38.7%. Lastly, a brief overview of Sonae's NAV. Our NAV based on market preferences amounted to EUR 4.2 billion at the end of H1, 4% above the Q1 level, mainly fueled by the positive contribution of ISRG's valuation following the recently announced transaction, the operational performance of our retail businesses and the NAV evolution at Sierra, which more than offset the negative evolution in the NOS share price. Going forward, the outlook remains volatile, but we are confident that we will continue to deliver a strong performance in the second half of the year. Thank you, and you can now open the session to Q&A.

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

I have two ones on MC on margins. If you could share the gross margin evolution in the first half, it would be my first question. And my second question would be, how should we think about EBITDA margin in the second half of the year? It seems that pressures from volumes and mix have eased based on the difference between like-for-like and food inflation. We are also seeing a big deceleration in terms of food PPI while electricity prices are driving to some savings. So if you could guide us through the different moving parts for margin, it would be great, and if you foresee the same margin resilience in the second half of the year.

Thank you, João. As for your questions, they're both on MC, so I will hand it over to Fernando to take them.

Sure. Thank you, João. Just in terms of profitability for the first half and just breaking it into parts, so as you know, we see the like-for-like spread split between price, volume and mix. And as you rightly said, and as Joao Dolores mentioned in the beginning of the call, we have seen a significant decrease in the growth of inflation -- food inflation in the second quarter versus the first quarter. And obviously, that has a huge impact. Then we have on the mix part, and contrary to what you said, we still see the same level of pressure in mix and people shifting more to more affordable product. And on the third part, as you mentioned, in terms of volumes, yes, we are seeing an improvement in the second quarter compared to the first quarter. It's also important to mention that compared to last year, we had a pressure on the first quarter, which was related to both COVID in January 2022 and the beginning of the war in March '22, which obviously impact positively the volumes in last year in these 2 months and obviously makes the comparison difficult for the first quarter of 2023. And so obviously, we are seeing a more healthy volume evolution in the second quarter compared to the first quarter. Now going into the margin, as you asked, obviously we are seeing gross margin contraction in the first semester. I will break it down in two components. The first one is price investments. We have been quite focused on price investments in the first semester. Joao mentioned in the beginning of the call the food inflation. The food inflation for the market that Joao mentioned is higher than for Sonae MC. So we are really investing in price and absorbing part of the inflation that we are seeing. And obviously, that has an impact on gross margin. And that's the majority of the impact. There is also part of the impact related to the trading-down and people shifting to more affordable products with lower margins, obviously. On the flip side, we are seeing a benefit from the energy cost. As you all know, energy costs decreased in this semester. And obviously, that has a positive impact in our margins. And also we have been implementing efficiency measures across the company to make sure that we are focused on profitability. So all in all, what we are seeing, and as you rightly pointed out, we are seeing stable EBITDA margin which is slightly increase in the semester, a negative impact from gross margin from what I said, which is compensated by the energy cost reducing and the efficiency measures we have put in place. And obviously, we don't give guidance for the second semester. We see a more benign inflationary environment in the second semester. But in terms of margins, it's difficult to say yet where we end up. Obviously, the energy costs will increase because the part of the benefits that we have in the first semester in the access tariffs will go away. And so we'll continue to be focused on executing the plan and making sure that we do our best also investing in price but also maintaining our focus on margins.

Our next question comes from José Rito of Caixabank.

So I have two questions on Sonae MC. The first one is basically a question regarding the margin increase that we had in the second quarter. So conceptually, why are you allowing the EBITDA margin to increase? So my question is why not further reinvest and mitigate the risk of other players winning market share? I know that you increased market share in the quarter -- in the half, but still you have a very high EBITDA margin. So why not reinvest this, maintain broadly stable margin and further accelerate the like-for-like and market share? That will be my first question. Then the second question on the energy weight as a percentage of sales this quarter versus last year, how much was energy as a percentage of sales versus last year? And then I have a question on Sierra. So how much was the yield expansion across the different markets in the first half this year?

Thank you, José. So maybe I'll hand it over first to Luís to tackle the Sierra question. And then I'll ask Fernando to cover the two MC questions. Go ahead, Luís.

Sure. This one is very simple. The impact of an increase in net initial yields in our portfolio across Europe was around 32 basis points.

Okay. Fernando, do you want to tackle the two MC questions?

Sure. So thank you very much again. Just elaborating a bit more on the price and investment in price on your first question. So as I mentioned, food inflation, we are -- our food inflation in MC is lower than what is in the market. So we are really, as I mentioned, investing in price. And so that's our key focus, to remain obviously competitive in the market. As well, your question around our competitive positioning, as you know, we are the market leader. Over this semester, we have consolidated our market position despite obviously these important efforts in the investment in price. And so obviously, this is an important balance we need to make. Our focus is ensuring that we also, in this difficult environment, help the consumers mitigating a little bit the impact of the inflation. And so that's why we are absorbing obviously part of this inflation. But we are relatively comfortable in the levels we have seen in the semester. For the energy costs, we are not able to disclose the percentage. As I mentioned, it's obviously a relevant impact in the first semester, which more or less offsets the investment in price and the decrease in the commercial margin.