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

Good afternoon. We welcome you to Sonae's 9 Months 2024 Results Conference Call. During the presentation hosted by Mr. Joao Dolores, Sonae's CFO, all participants will be in a listen-only mode. [Operator Instructions] I now hand the call over to Mr. Joao Dolores. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us for Sonae's results presentation for the first 9 months of 2024. We are pleased to update you on our performance, strategic advancements as well as on the outlook for the coming months. As usual, besides myself and the Investor Relations team, we have on the call, Cristina Novais from Bright Pixel; Fernando Van Zeller from MC; Paulo Simoes from Worten; and Miguel Moreira, recently appointed CFO of Sierra. I would like to start by briefly recalling the significant moves in our portfolio in the first 9 months of the year, which together surpassed EUR 1 billion in total investment. There are 2 transactions in particular that I would like to highlight. In March, we successfully integrated Musti, the leading pet care retailer in the Nordics into our portfolio through a public tender offer. Sonae currently owns just over 80% of the company and we see Musti as a platform for growth in the European pet care landscape. And in July, we concluded the merger with Druni, establishing the leading health, wellness and beauty retail platform in Spain in partnership with Arenal. This is a platform where we also see significant potential to continue to grow, leveraging a very strong value proposition and distinctive managerial capabilities. Both transactions had an important impact on our consolidated figures, which I will further detail in this presentation. So let's go business by business as usual. Let's start with our largest retail businesses and MC in particular. MC delivered an impressive performance in food retail this quarter while continuing to show strong growth in the health and wellness and beauty division. In grocery, Continente further reinforced its leadership position in a highly competitive landscape in Portugal. Our value proposition continued to merit the preference of an increasing number of customers who are able to fulfill their needs across the most comprehensive and convenient physical and digital footprint in the market. We continue to optimize our assortment and offer the best value to our clients and this was reflected in a significant increase of market share in the first 9 months of the year. In Q3, we added 8 new proximity stores to our network, reaching 18 new openings since the beginning of the year as we maintain a significant pipeline of new stores in catchment areas where we are currently underrepresented. The recent expansion efforts have had a significant impact on total growth that reached 7.1% in the first 9 months of the year. But the like-for-like sales increase was also very positive, reaching 4.4% in a low inflation context, but with a strong performance in terms of volume growth. In the health and wellness and beauty division, this is the first quarter in which Druni's contribution is fully consolidated in our results. Therefore, turnover increased to EUR 668 million with a 10% like-for-like increase from Wells and Adena. Overall, MC achieved a year-to-date increase in revenues of 12.2% to EUR 5.4 billion with a like-for-like growth of 4.9% and was able to improve profitability in both divisions. At the end of the first 9 months of the year, MC's underlying EBITDA margin improved 30 basis points year-on-year to 9.8% and reached EUR 530 million. This was achieved not only through the integration of Druni, which is margin-accretive to MC, but also due to solid sales growth together with efficiency measures that more than offset the investments in competitive prices and inflationary pressures on the company's cost base. Moving on to Worten. Worten had a quite positive Q3 after a slower Q2. The company showed strong top line growth and continued to expand its market share, supported by an acceleration of online sales. These positive results were further strengthened by the expansion of iServices with 25 new stores opened in 2024 so far, enhancing our service offering and omnichannel approach. Total turnover reached EUR 942 million in the first 9 months of '24, a 7% growth and a 3.5% like-for-like increase, with e-commerce sales growing 15.4% year-on-year and already accounting for 16% of total turnover. If we look at total GMV, including third-party sales on Worten's marketplace, it reached EUR 994 million, representing an even higher level of growth of almost 8%. Regarding profitability, Worten's margin was impacted by an intense promotional activity and also inflationary pressures on the cost base, but was nevertheless able to maintain underlying EBITDA at EUR 46 million with a 4.9% margin at the end of the first 9 months of the year, a clear recovery versus Q2 figures. Regarding Musti, the company, as you know, released its quarterly results on November 7th. In the Nordics, Musti maintained its strong market position during the quarter, supported by a growing customer base despite a challenging consumer environment as consumer confidence moderated and discretionary consumption decreased, particularly in Finland, which is the company's main market. We are now starting to see a more positive trend towards the end of the year, but the market is still subdued. Prospects for 2025 are better, both for the pet care sectors in Europe and for private consumption in the Nordics. Therefore, the team remains focused on gaining new customers and maintaining market share in Finland and Sweden, while continuing to expand its competitive position in Norway. Total net sales increased by 3% in the last 12 months to EUR 438 million with a like-for-like of just over 1% and EBITDA was down to 14.7%, pressured by a lower gross margin due to price and promotional investments. In October, Musti signed an agreement to acquire Pet City in the Baltics, a first step in expanding the Musti family into new geographies. Moving to Sierra, our real estate business. In Q3, the company maintained strong resilient growth across its European shopping center portfolio. It continued to execute its strategy in the services activity and made significant progress in its development pipeline. Sierra's European shopping center portfolio maintained a strong momentum in Q3. This resulted in a like-for-like growth of 5.2% in tenant sales in the first 9 months of the year with occupancy rates remaining high at 98%. In the 9 months -- the first 9 months of the year, net result increased by about 20%, driven by the strong performance of European shopping centers, enhanced gains from property sales and improved asset valuations. This improved net result was the main driver for the increase in NAV, which grew 1.9% versus the end of the year in 2023 despite some unfavorable FX impacts. A quick note on NOS that has already reported its results to the market, showing another quarter with solid growth, mainly driven by its core telco business and a steady EBITDA margin. In our accounts, the equity method results from NOS reached EUR 71 million in the first 9 months of '24, an increase of EUR 29 million versus '23, fueled by the improvement in operational performance and the capital gain of EUR 31 million related to the sale of another portfolio of towers to Cellnex in Q2. In terms of cash flow generation, the company is having an outstanding year, driven by the improved operational performance, controlled levels of investments and nonrecurring cash proceeds from asset sales, the return of activity fees by Anacom following a favorable court ruling and also some favorable tax impacts. Total free cash flow before dividends reached EUR 332 million in the first 9 months of the year, a 3.5x increase versus '23. Finally, Bright Pixel, with more than 40 companies in the portfolio made a new investment in a cybersecurity company and made also some follow-on investments in the existing portfolio. NAV increased to EUR 343 million and cash invested to EUR 186 million with an expected cash on cash of 1.85x as the company continues to manage well its portfolio of assets and protect value in the existing portfolio. Overall, our consolidated turnover grew 15.4% year-on-year in the first 9 months to EUR 7 billion, primarily driven by growth in our retail operations and also by the integration of newly acquired businesses. Underlying EBITDA increased 21% year-on-year to EUR 611 million as the margin increased 40 basis points to 8.8%, also reflecting the solid contributions from recent acquisitions, namely Druni and Musti. Total consolidated EBITDA jumped 22% year-on-year to EUR 706 million, underpinned by the underlying EBITDA performance and also the higher equity method contribution essentially from NOS. This positive operational performance was partially offset by higher depreciations given the significant level of investment made by our businesses and also higher financing costs. In any case, direct results increased EUR 34 million to EUR 201 million in the first 9 months of 2024. Net result group share stood at EUR 149 million, a EUR 14 million increase year-on-year. Moving on to net debt before dividends paid. We had an increase of EUR 676 million in the last 12 months. This was obviously due to the significant acquisitions that were executed in the last year. If we look at the performance of the original portfolio, Sonae registered a total of EUR 182 million in free cash flow as we continue to generate healthy levels of cash flow across our main businesses. And we continue to have a quite solid financial position with significant available liquidity facilities and a comfortable debt maturity profile with above 3 years in maturity. In terms of main financial ratios, the holding LTV stood at 16%, slightly surpassing our prudent threshold of 15%, but we will be bringing this down in the coming months. All our businesses remain at quite comfortable leverage levels. Looking forward, we remain confident in our ability to sustain growth. Our focus remains on strengthening market shares across businesses, effectively integrating new acquisitions and delivering value for all stakeholders through disciplined execution. With a clear strategic direction and a resilient portfolio, we are well-positioned to navigate the evolving market landscape and continue delivering strong results. In particular, MC will continue to focus on strengthening its market leadership position in the grocery market in Portugal, while ensuring a successful integration of Druni. Worten will work to maintain its market leadership in a very important quarter of the year for the electronics sector as well as boosting its services and marketplace businesses. Musti will consolidate its leadership in the Nordics, integrate Pet City in the Baltics and explore new international expansion opportunities. Sierra shopping centers are expected to maintain their positive momentum while the team continues working on growing the new lines of businesses. NOS will maintain the positive operational momentum in Q4 and adapt to a new competitive landscape in the Portuguese telco market. Bright Pixel will continue to identify, assess and invest in new innovative companies and Sparkfood will be focused on integrating the recently acquired companies into a leading platform for the development and production of innovative ingredients. This is it for me for now. Thank you again for your trust in Sonae. You can now open the session to Q&A.

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

Starting with Sierra. You say in the release that you're expanding the pipeline, namely in Spain. Can you update us on your CapEx plans overall? How does it split between commercial and leasing? And what type of returns do you expect and how they differ between both areas? My second question on Musti. You mentioned recovery is anticipated in the near future. Do you see opportunity to repair gross margin in the short term? Or do you intend to keep investing on prices to drive demand? And finally, on MC, can you update us on how many stores do you plan to open per year in the cosmetics segment in Spain now that you have integrated Druni? And if you could quantify basket inflation in the Q3 would be great.

Very good. Thank you, Joao, for the questions. I'll take the Musti one first and then I'll hand it over to Fernando and Miguel to cover the MC and Sierra question. So on Musti, as you know, the context for the pet care sector in Europe this year has been quite challenging across most countries in Europe. And you can see that from what different players and operators are reporting in terms of performance. There's a bit of a hangover after the increased pet ownership during COVID, during the pandemic. And also, we have specific macro impacts in the countries in which we operate, namely in Finland, which is undergoing a bit of a recession in terms of private consumption. That being said, Musti has been quite resilient in its performance and continues to sustain its market leadership position and actually increasing that market leadership position in several markets. And now we believe that we are already seeing some positive signs going into the end of the year in terms of growth. So like-for-like growth, in particular, is recovering well. We are seeing positive like-for-like in Finland for the first time in a few months. And 2025 in terms of macro backdrop is expected to be a better year overall in the Nordics as well. So we do expect positive signs. In terms of gross margin, what we are seeing is obviously a pressured gross margin versus historical figures. We also expect gross margin to recover and improve in the following months. I would say probably still at a lower level than we saw historically about 12 to 18 months ago because we do feel that it is important to sustain our competitive position in these markets at this point in time. And so I would not expect gross margin to return to the highest level that we saw in the last 18 months, but we do expect a significant improvement in the next 3 to 6 months. I will probably hand it over to Fernando now to cover the MC question.

Okay. Thank you very much, Joao. In terms of the questions, I'll start with inflation, the basket inflation for grocery in MC. In the third quarter, we have seen more or less a full inflation of around 1% in our basket, which is relatively similar to what we have seen year-to-date. Obviously, when you compare with the national statistics for food inflation, please bear in mind that there is an impact from the reversal of the VAT measure. But in MC in the grocery space, we're seeing about 1% of food inflation. In terms of the openings of health and wellness and beauty, just to give you a sense, year-to-date 2024, we have opened 17 Druni stores plus 4 Arenal stores, so about 21 or 21 stores year-to-date. Our plan for the upcoming years is probably to be around 20 to 25 stores in health, wellness and beauty in Spain over the coming years.

Okay. Miguel, do you want to take the Sierra one?

Well, regarding Sierra and thank you for the question. We keep our investment management vehicles that we already know in the market. We keep our shopping centers activity with a strong performance with a very positive evolution on sales and also regarding occupancy rates. So we are very comfortable with our operational performance. We are now launching a new opportunity for Sierra. As part of our strategy, we are expanding our portfolio into a new segment. And as you saw in the news in Spain, it's a residential project in the north of Spain that we will develop through a partnership in which we will participate not only as an investor, but also as a service provider, leveraging, obviously, our proposition -- our value proposition as an integrated platform for operations in the real estate market.

If I can follow up, do you have any plans, can you quantify in terms of CapEx, how much do you want to invest in this new area?

Well, it's our -- one of our strategic pillars of developing the company and growing the company, but we don't disclose exactly the number that we are going to invest in this area. So it's a relevant part of it.

And we will now take our next question from Jose Rito of CaixaBank.

So my first question on Druni. I will guess that now you are in the integration phase of both companies. We have already some targets in terms of new stores. The question is, what can you detail in terms of strategy going forward? Is the strategy to continue to expand in Spain? Over the long-term, how much stores can be added? Any reference that we can use? And also related to this, is the format expectable for other countries, other geographies? That will be my first question. Also in the case of Musti, just to understand a little bit the strategy behind the Pet City acquisition. What is the idea is to grow now organically in the Baltics region? Is this idea? And could also the company looking at other geographies? What is the strategy for Musti? And finally, in the case of Sierra, if you can provide a little bit your view regarding yield evolution for the real estate market. And if apart from these residential projects, if you are looking at other areas such as we have been seeing in Spain, other players investing in data centers, this is something that you are also looking?

Okay, Jose. Thank you for your questions. So I'll start with the Musti one. So as I mentioned, the idea with Musti is we see still a lot of potential to continue to grow in the Nordics and to gain further market share. And there's a lot of potential for value creation, expanding organically in the markets -- the original markets of the company when we acquired it. But obviously, we also see it as an interesting platform to grow into other geographies. And we feel that the market in Europe is an interesting -- there's an interesting landscape for consolidation right now. And so we are obviously looking at potential opportunities to take the Musti value proposition into other countries and to bring the know-how and the capabilities that we have in that business to drive growth across other geographies. But the rationale for the Pet City acquisition was a bit the start of that journey. And so it's a natural extension of our current geographies and there's a lot of synergies that can be extracted by operating a pet retailer in the Baltics from Finland. So there are several synergies in terms of structure, logistics, obviously, sourcing, procurement synergies which are by now clearly identified and which we will try to extract as soon as possible. We found in pet care an interesting company, which is relatively small, but located with presence in all 3 Baltic states. And we feel that we have the potential now to bring the best out of the existing store network and online presence. And there's a potential to continue to expand that brand organically within those markets. And so we will explore those options and we feel that it's a nice first acquisition to start our international journey and a very sensible one to start that journey. When we look at other geographies, as you can imagine, we've looked at the wider European landscape. Consolidation has started to happen. There are other players with larger size who have consolidated the sector in a number of different countries. But there are still a number of players operating in specific geographies where we feel that the Musti value proposition could be an interesting one. And so we are looking right now at different opportunities. The idea is to obviously make sure that we do it with a lot of care, thinking very well on how to fund these movements and obviously, within our defined leverage thresholds and the way that you know we manage our leverage and our balance sheet. But we are currently quite active in looking at opportunities in the space. Fernando, do you want to take the Druni one?

Sure. In terms of Druni, as you know, health, wellness and beauty is one of our key pillars in terms of growth avenues going forward. For Druni and Arenal in Spain, in particular, we are quite focused now on the integration. As you know, we are merging 2 companies of a relevant size. Druni has about 400 stores, Arenal has 70 stores. And so the current focus that we have is really on the execution on the integration, not only in terms of the full footprint, but also in several other aspects such as logistics, commercial, even the different channels they have, online, offline. And so the current focus of our team is really on making sure we have a smooth transition in this integration of 2 different companies and 2 different cultures. And so that's really the key focus as of now. The business is performing extremely well, as you saw in the numbers. In Q3, both companies have -- or the combined company has a like-for-like of more than 2 digits, more than 10%. And so the growth is quite healthy. And the focus is really on making sure the integration goes well at the same time as we maintain the growth momentum in the business. Obviously, a key part of this is making sure that we continue our expansion in the offline channel. As I mentioned, our plan has between 20 to 25 stores per year over the next 5 years, the foreseeable future. And in terms of online, it's also a very relevant channel in this operation with about 10% of the sales and we will continue to focus on providing a very strong omnichannel offering to our clients. And so really, just to summarize in terms of Druni, really focused on the integration, but also in maintaining the current growth momentum of the 2 companies and the combined company together in the Spanish market. In terms of international expansion, I think it's too early to say. We truly believe this is a very strong format in Spain, but also a format that in European standards has a very distinctive value proposition. But for now we have a lot of work to do on the integration and the growth to deliver the plan we have and then we can discuss and think about other growth opportunities.

Well, regarding Sierra and the question about residential or living projects, we are taking the benefit of a strong demand on the market, especially in Portugal and Spain. And we are approaching the market with 2 different solutions with build-to-rent and build-to-sell and we are looking to opportunities both in Portugal and Spain and these are our key priorities. We have projects in the pipeline. We are studying them and trying to launch them as soon as possible, taking benefit of this momentum in the market. Regarding the other options like data centers that you mentioned, we are expanding our portfolio, as we mentioned before. And data centers is obviously one kind of the opportunities that we are looking for. But it's not -- it's something that we are studying. It's not clear at the moment if we should invest on that. And we are obviously not sure if we have the right to play on that market, but we are studying. And if there is an opportunity obviously we will take the value of it.

I think there was a question on yield expectations.

Sorry. On the yields, we don't have a clear expectation on that. We expect them to be stable until the end of the year. If there is any benefit on the NAV, our conviction is that it will be from the operational excellence on the shopping centers and on the operational side and we are not expecting any benefit from the yields. And so we expect them to remain stable.

Okay. Understood. So just a follow-up on Druni or Arenal Druni, which product category is performing strongly? So on this like-for-like double-digit, what has been the main product category for this growth, if you can share?

Okay. So look, when we look at Druni, we see 2 main segments, right? We have the perfumery and we have what we call the mass market, which is mainly cosmetics, right? And so we are seeing a very strong performance in both segments, obviously, with a little bit of over-performing in terms of the cosmetics, but both are performing extremely well. When you look at Arenal, the product mix is slightly different. It has a higher pharmacy component, which is a smaller part of -- a very small part of Druni's business. And obviously that's one of the key levers of the integration and the value creation. And in Arenal, we are seeing more or less the same trend with pharmacy also growing at a very healthy level. But I would say there is no clear underperformance or over-performance of one category versus the others. The cosmetics and the procurement in pharmacy are all performing extremely well in both businesses. Arenal has also a very small drugstore component, which is probably the area where we are growing the least from all of them, but across the others, very healthy growth.

[Operator Instructions] We will now move on to our next question from Antonio Seladas of AS Independent Research.

Just 2. First one on Bright Pixel. It seems that the asset rotation stopped or at least is slowing down. Meanwhile, stock markets are at record high. So maybe you can explain the dynamic behind and why the asset rotation is not doing so well? And second question is related to your portfolio at Sonae. So should we expect more acquisitions in the coming quarters? Or do you believe that the acquisitions done recently or over this year are now enough and -- are you going to stabilize the portfolio?

Okay, Antonio. Thank you for your questions. I'll take the portfolio one first. And then I'll hand it over to Cristina to answer the Bright pixel one. We do not expect any major new acquisitions in the near future. So we are happy with the portfolio configuration that we have right now in terms of main businesses within the portfolio. Obviously, part of the strategy of each of the business units entails also inorganic growth. And so we will probably continue to see some inorganic moves within our businesses, some bolt-on acquisitions, but that's part of the strategy in terms of investment and growth of each of the businesses. But we do not expect any major new business lines or major acquisitions in the near future. And now I'll hand it over to Cristina. Cristina, can you take the Bright Pixel one?

Of course. Thank you, Antonio, for the question. Well, what I can say is that we continue in a market that is surrounded by huge uncertainty. So we keep our activity and we are not decreasing our activity. Of course, our investment activity is not a linear activity. So we can invest a lot in a quarter and then the rest of the quarter, we keep growing our pipeline, but not executing investments. We executed one investment in this third quarter. And already in the fourth quarter, we did another one that will be disclosed in the next day. So we are increasing our activity. And we -- this year, we do not expect to achieve the same level of last year, but we keep pursuing our strategy and we remain confident in the next month, we will increase our investment. In terms of valuation, we keep confident in the value of our portfolio. Our main companies are performing very well and the market will open in the next months as we hope so. And we are not expecting relevant impacts in terms of valuation.

Just a follow-up question, actually 2. You are mentioning that the market should open, but it isn't opening. It's not opening and the stock markets remain at very high levels. So that is -- I don't understand why the market -- the IPO market is not open, so?

Well, I would like to know also. But I don't know if you see, but yesterday, Klarna disclosed that they will do the IPO, so we are expecting a good moment, but let's see. We'll have to wait. It's not explainable. We would like to know.

Okay. So just regarding the first question on the inorganic growth, you are talking about Musti, I understood, or do you think that MC could also do more acquisitions or any acquisition?

Look, Antonio, to be very honest, as you know, we are quite active in looking at investment opportunities across all of the businesses, right? So Worten has acquired smaller bolt-ons recently. Sierra has acquired services companies to boost its services offering in several geographies. MC, as you know, has also made a number of acquisitions. So it's -- I mean, it's hard to pinpoint specific prospects for M&A in any of the businesses. As you know, we keep looking for opportunities to expand and grow our existing offering to better serve our customers. But my point is that I wouldn't expect any sizable, large acquisitions, at least at the same level that we saw in the last 12 months, namely particularly with Druni and Musti. We are looking at all the businesses in Musti for sure, but also in other businesses at potential acquisitions with smaller companies.

There are no further questions coming through. [Operator Instructions] There is no further questions in queue. I will now hand it back to Mr. Dolores for closing remarks.

Okay. Thank you very much for listening. Thank you very much for your questions. We hope we have been able to clarify all of them. And we will speak again when we present our annual results in March 2025. Thank you, and see you all soon.

This concludes today's call. Thank you for your participation. You may now disconnect.