Sonae, SGPS, S.A.

Good afternoon, we welcome you to tonight's QualiOne 2023 results conference call. During the presentation hosted by Mr. Joao Dolores, tonight's CFO, all participants will be on listen-only mode. There'll be an opportunity for question and answer at the end of the presentation. If you wish to ask question during the question and answer session, you may do so by pressing the star key followed by one on your telephone keypad. If you are experiencing any difficulty in listening to the conference at any time, please make sure you have your headset fully plugged in, or alternatively, please try calling from a different device. I now hand over the conference over to Mr. Joel Dolores. Please go ahead, sir.

Hi, everyone. Good to have you with us today. Welcome to SANAE's results conference call for the first quarter of 2023. Besides myself and the investor relations team, we have on the call Rui Almeida from MC, Paulo Simões from Vorten, Luiz Mota Duarte from Sierra, and Cristina Novaes from Bright Pixel. As you know, the first quarter of the year was marked by a quite complex macroeconomic context. Geopolitical tensions remained strong. We continue to witness significant inflationary trends and also rising interest rates, which continue to put pressure on the disposable income of households. In Portugal, food inflation reached roughly 20% in the quarter, and we saw inflation also affect our cost base, most notably in what concerns salaries. Nevertheless, our businesses proved once again their resilience, and adapted quickly to mitigate these impacts, namely by absorbing parts of the inflation levels to protect households and continue to deserve the preference of consumers. Before we cover the results of RBUs, as usual, I would like to give you a quick note on our portfolio management activity. In the quarter, we continued to make some important moves, namely by acquiring the remaining 10% stake in Sierra for 89 million euros, again representing circa 10% discounts over Sierra's NEV at the end of the year, and we now own 100% of this business. We also reached an agreement with Bank Inter Consumer Finance to create a 50-50 joint venture, which aims to become a leading consumer credit operator in Portugal. And finally, BrightPixel, our corporate venture arm, continued to expand its portfolio of technology companies, having executed three new minority investments. Already in the second quarter of 2023, the results of the tender offer over SONICOM were disclosed. We now own 88.8% of the share capital in the company and 90.5% of the voting rights and therefore SONICOM will remain listed and focused on executing its investment and value creation strategy. Also, together with Balaico, our Spanish partners, we notified JD Sports of the decision to exercise a buy or sell option, which is foreseen in the existing shareholders agreement of Iberian Sports Retail Group. We expect an outcome of this process during the second half of this year. Now, considering the latest portfolio movements, the operational performance of our businesses, and also the evolution of market multiples, our total NAV increased by 2.6% to 4.1 billion euros at the end of March. This evolution was mainly driven by the good operational performance of MC, the NAV increase at Sierra, coupled with the acquisition of a 10% stake at the 10% discount, which I mentioned before, and also the share price performance of NOS in the first quarter of the year. Regarding consolidated results, the group's operational performance was quite solid. Sonai's consolidated turnover increased 12% year-on-year in the first quarter to 1.9 billion euros, mainly fueled by MC and Vorten. Our food retail unit continued to adapt to the evolving consumption behaviors in a context of abnormal food inflation and high interest rates, which again pressured household disposable income. The focus of our team at MC was on adapting its product offering, and offering the lowest possible prices to consumers. In the quarter, MC's total turnover increased 13.5% year-on-year, with a like-for-like growth of 11.8% to 1.5 billion euros, with a growth of 8.9% in hypermarkets and 17.4% in supermarkets. We also continue to clearly lead the market in online sales, which is an important strategic driver for the company. Vartan was able to reinforce its market position in core categories, but also grow in new product categories and services. The company's turnover increased 9% year-on-year in the quarter, with a like-for-like of 7.5% to €284 million, fueled both by the online and offline channels, as the company continued to gain market share in the Portuguese markets. Regarding profitability, consolidated underlying EBITDA increased 11% year-on-year to 137 million euros, with a slightly lower margin than last year. MC was the main contributor to this evolution, given the positive top-line performance, significant efficiency gains, and also lower energy prices, offsetting the efforts to absorb parts of the inflationary pressure that we felt, also a different product mix, and clear trading down movements on the part of consumers. In Q1, underlying EBITDA at MC reached 124 million euros with a stable margin of 8.4%. If we look at total EBITDA, we see a similar trend as EBITDA increased by 9% year-on-year to 161 million euros with a positive contribution also from equity-consolidated businesses, namely NOSH, which was offset by the evolution of non-recurring items. as last year we had registered some capital gains on assets sold by BrightPixel. Direct results decreased €10 million versus last year to €32 million due to some asset impairments and increased depreciations following our investment efforts coupled with higher funding costs and tax expenses. Indirect results also reduced as we didn't see any significant asset revaluations in the period. If you recall, last year, BrightPixel had posted an 8 million euro gain from an asset revaluation after a financing round. Therefore, net results reached 26 million euros in Q1, below last year's 42 million. Pre-cash flow totaled 181 million euros, driven by a solid display in terms of a BPA generation, working capital management, and also asset sales in the last 12 months. M&A CapEx of 282 million euros was fully financed by operational cash flow and also cash proceeds from asset sales. If we look at our balance sheet, total net debt decreased to 922 million euros versus 931 last year, and the group's capital structure remained solid with a low level of leverage, significant liquidity levels, and also a stable debt maturity profile of around four years. At the end of Q1, our holding LTV decreased year-on-year to 7.4%. Regarding our business units, the leverage ratios also remained at conservative levels. MC's total net debt-to-BPA ratio stood at 2.8 times below last year, with a net financial debt of €494 million and an average maturity profile of more than four years. Sierra's gross LTV ratio reduced to 40% in Q1 this year, coming down from 45% last year. And at NOSH, net financial debt to EBITDA ratio stood comfortably below two times at 1.7 times. Going forward, the outlook remains volatile. We do expect to continue to see inflationary trends and rising interest rates, and this should continue to impact the disposable income of households. and so we must continue to have the ability to manage this situation and adapt to this uncertain environment. As a holding company, we will continue to support our portfolio companies to quickly adapt to this demanding context and future-proof their business models, always with a focus on social and environmental responsibility. Given our solid financial position, we have the ability to sustain harsher times, but also to capture investment opportunities that may arise in the near term. Thank you very much for listening, and you can now open the session to Q&A.

Thank you. As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad. We will take our first question from George Rito from Cash Your Bank. The line is open now. Please go ahead.

Yes. Hi. Good afternoon. A question on Sun IMC, so in terms of like-for-like solution in the quarter, if you can break down what was volumes evolution and also basket price. Second question on Sun IMC, if you can detail what was the margin evolution year-on-year in the division, and also in terms of energy weight in percentage of sales this quarter versus last year. So this will be two questions on SONAMC. And then in this whole situation with the partnership with JD, if you can detail a little bit what was the rationale for the exercise of the food call option, what you are seeing that could change eventually to create further value versus the situation as it is. Thank you.

Very good. Thank you very much for your questions. I can maybe take the sports partnership question first, and then I'll hand it over to Louis to take the MC questions. So look, ISRG is a partnership that has generated significant value for Sonai and for all partners throughout the last few years. It's a partnership that we have enjoyed being a part of over the last years. And we felt very comfortable with a strategy that was being followed, which is a strategy of growth in several geographies, not only in Portugal and Spain, as you know, but also now as well outside Iberia. The rationale for exercising this option that we have in the shareholders agreement has a lot to do with the changes that have occurred at JD, at the JD group level. I cannot elaborate a lot on what has happened because JD itself is a listed company. But what I can tell you is that there was a significant change in management last year. There was a change in CEO in the JD group. And the current management of JD has a different stance on the strategy of this company than we and also the Spanish family have. And so given this different view on the strategy of the company, And given that we came to a point in which the different views became, I would say, unreconcilable, we decided to exercise this option that we have in the contract to be able to clarify positions. And so what will happen is that either JD will take full control of this company or ourselves and the Spanish family will do so. And so this means the end of the partnership as we know it, and it means that the parties will go their own ways. Both scenarios, I think, are attractive for SunEye. So the one in which we end up selling, obviously, the valuation at which we will sell will be an interesting valuation and one that is significantly above the NAV that we report in our earnings announcement. If the decision is for JD to sell, we will take control of an asset which we like where we see growth potential and where we would be following the same strategy that has been followed up until now. And so this is, in a nutshell, what's happening. We will need to wait for the decision to occur. This should occur up until the summer, until early July. And so we will wait for that decision to occur, and then we will be able to elaborate a little bit more on the future of this company, whether it is under our ownership or not. Would you want to take the MC question?

Yes, sure. Thank you as well. And thank you, Jose, for your questions because they are very important. I think they are very important to explain our performance. In fact, regarding volumes during the first quarter, we lost some volumes due to the fact that in January, as I mentioned in the previous call, We were comparing ourselves, the performance of the company, comparing to a pandemic period where the, I think, 2022, we were in the middle of the pandemic, and we were benefiting from that situation. This year, we are not having that type of situation, and we lost some volume to the the performance that we were having last year. And again, in March, it occurs that in March last year, the crisis in Ukraine, in fact, what happened is the majority of the consumers to buy in order to hold the kitchen, et cetera, but they bought a lot to prevent any crisis that might happen in the weeks after. And then, in fact, when we compare these two months compared to last year, we see that the volumes decreased slightly. Our volume decreased in the very first quarter, minus 3% of points. And answering to your question is, in fact, as was well said a while ago, inflation rate was roughly around 30% in Portugal, but the average basket increased only by 3%. 16% or so, 15% to 16%, due to the fact that the majority of the consumers are now buying more private label, as you may understand that private label is cheaper comparing to the supplier's grants, and we are now having the baskets of our families being smaller comparing to what has been in the previous years. That explains that the average basket is growing at a lower pace, but volumes continue to decrease. Continuous to decrease because we are now seeing in the last months that volumes are now stabilizing and we are doing slightly better in terms of volumes compared to what happened last year in the second quarter. But now answering to your question regarding margins, well, In terms of margins, this year, we have two situations. And coming back to the previous question that you raised, yes, in fact, we are now seeing a lot of trading down movements happening. And this, as I explained in the previous calls, has an impact in terms of our margins, as you may understand, because the private level in euros has lower margins because the products are 30% to 50% cheaper comparing to the A, depending on the categories, surely, but are cheaper comparing to the supplier's grants. And consumers are in a very difficult situation due to the disposable income. due to inflation, interest rates, et cetera, and they are preferring to buy cheaper products with very high levels of quotes. And we see this situation happening, and we feel very comfortable because the consumers are preferring to buy our brand because they trust our brand, they trust our products. But nevertheless, we see that margins in euros, margins are suffering due to that. This quarter we could counterbalance the decrease in euros due to the fact that people are now preferring private levels and the trading down phenomenon is happening with the benefit that we are getting due to the fact that the energy costs are in a totally different scenario comparing to what happened last year where the prices were so high we couldn't compare the energy costs comparing to the previous years. But in fact this year, due to the fact that we are implementing several measures in order to improve our efficiency in terms of energy, in terms of trying to add some of the costs, and even if the spot prices are lower, we benefit from that situation, and we see that we could counterbalance the costs or the decreasing margins that we see due to the fact that people are now preferring private levels compared to the supplier's brands.

Okay, I understand. Just a question. In terms of Easter impact, any impact in Q1? Or just to clarify if there was any positive impact because of the earlier Easter this year.

Thank you for the question. In fact, Easter happened this year in the second quarter. Sorry, in the second quarter, like last year. So there is no big, no relevant impact uh, situation to be, to be, uh, to be, to be spot. In fact, what happened is that they, in terms of seasonality, pretty much the same that happened last year. So, the, the seasonality of, of Easter is this year, like in last year, in second quarter, quarter.

Okay, thank you. And John, you mentioned that, uh, If JD decides to buy, eventually this will be deposited in the sense that it will be above the NAV reported. In the case of Sonai buying, is the NAV a good reference valuation for a potential acquisition?

Look, the value at which JD can buy or sell is exactly the same.

Okay, okay. Understood.

But there's a nuance, which is if we sell at that value, if they buy at that value, if they sell at that value, but then we sell back to them the JD banner, which is owned by SRG, which is an important consideration when you calculate the figures at the end of the day.

Okay, thank you. Thank you, Jose.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We are taking the next question from line Antonio Saletas from ES Independent Research. The line is open now. Please go ahead.

Hi, good afternoon. Actually, I have two questions. The first one is related to an IMC project. Very, very positive margins. So my question is related with costs. The costs over the first quarter, they are a good proxy for the rest of the year, for the remainder of the year. That is the question. If you can answer. Sorry. And the second question is still related with GD Sports partnership. I think that you mentioned that you are very pleased with the current strategy. Namely, from my understanding, because your expansion outside Iberia. So I guess that if SENAI and your Spanish partner will buy, the expansion will be outside Iberia. If you can confirm, please.

Thank you, Antonio. So I'll take the sports question first. That is not exactly the case. And so... We do have a clear growth strategy in the company. That growth strategy is primarily concentrated in Iberia. And so we still see a lot of room to grow in Iberia, both offline and online. And specifically, there are some regions in which we are underrepresented, particularly in Spain, where we still see a lot of potential to grow. That being said, we also see some potential to grow internationally. And if we are to remain shareholders in the company, we would explore those opportunities. But I think the disagreement with JD goes beyond the international footprint of the company. It's more a disagreement on the segment itself. JD has gone public saying that their key priority is to grow the JD banner concepts. And this segment in which Sprinter and SportsZone operate in Iberia, which is much more of a mass market at leisure segment, is not a segment where they see their priorities going. So I think that's the main point of disagreement. And we do believe in this segment. We have seen the results in the recent past, and we still see a lot of potential to grow. And actually the brands themselves, the international brands, the main ones, also see a lot of potential in this segment. So that's more... the issue than the geographical footprint of the company. That being said, we do believe that there is growth potential both within Iberia and also outside Iberia. Okay.

Just to follow up, sorry to insist on this point. You mentioned that the multiples, if you sell or if you buy, well, the value of the transaction will be the same if you are selling or buying. However, if you are buying, you will sell the segment exposed to the segment that GD likes. So my question is, I guess that the multiples will be the same.

Again, the valuation methodology is the same. I cannot disclose much more detail because this is confidential information. But the valuation methodology is the same. But when we are able to disclose the final transaction, we will do so.

Okay. Thank you very much.

Or do you want to take the question on the costs in Q1 for MC?

Sure, sure, sure. Hi, Antoni. Well, regarding what will happen in terms of costs for the rest of the year, I think it's too soon to give you a proper answer. But I could say that up to now, at least for the second quarter, I would tend to say that it will be pretty much the same comparing to what happened in the very first quarter. But for the rest of the year, well, looking back to what happened in the last quarters or even in last year or in 2021, things are so volatile. And I would like to say that if you don't mind, it's too soon to give you a proper answer. I don't know. But what is happening, for instance, in terms of inflation, What we are witnessing these days is basically the inflation is now decreasing. The prices we are having, for instance, in mid-May are pretty much the same level of prices that we were having in end of March, meaning that inflation month-on-month is pretty much new. The problem is that when we are comparing the inflation year-on-year, we continue to have high levels of inflation, as João said in the very beginning. Inflation will start at least from what we are seeing and we are yeah, accommodating, et cetera. And we are basically feeling that the inflation will start to decrease comparing what we have in previous years. But in terms of costs, Yes, in terms of cost only, the level of cost during the second quarter, third quarter, and fourth quarter will be the same that we had in the very first quarter of this year. We are pressured on that situation with the impact of the increase in terms of wages, like you all said in the very beginning. Other issues, like for instance, I don't know, probably safety costs. They are also increasing due to the fact that the wages that I've been given this year, but the remaining lines of the cost structure, like for energy, it's just to give you a preference. And I apologize for not being more assertive on those issues.

Thank you. But the annual increase in wages was done over the first quarter, or should we expect more increases over the rest of the year?

It was already done in the very first quarter, and we, up to now, we don't see any, or at least not in our agenda, to do other increases as we did in the very beginning of this year.

Okay. Thank you very much. Thank you.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take our last question from line Joel Pinto from JB Capital. The line is open now. Please go ahead.

Hi, everyone. Thanks for taking my question. I have two for SunIMC and two regarding the view with JB Sports. On SunIMC, sorry if I missed this, but Can you quantify the positive impact from the lower energy prices on the margin of MC as a percent of sales? And do you think that the lower energy prices will be enough to offset the trading down effects and have a stable margin for the remaining quarters? And on the deal with JD Sports, first... the stores, the JD Sports that you would sell back to JD Sports in case you end up acquiring the company, how much do they represent the Viberia Sports Retail Group sales? And the second question, if you have to acquire, will you and your Spanish partners acquire in the same proportion of your current stakes, or there's a possibility of you acquiring the entire 50% stake of JD Sports? Thank you very much.

Thank you as well for your questions. Again, I will take the sports ones first, and then I will ask Coy to cover MC. So regarding ISRG, JD Sports banner in Iberia weighs around 30% of sales and results of the company. So 70% is Sprinter and SportsZone together. In terms of the scenario under which JD decides to sell its stake in the company, if we acquire the same proportion of our partners, acquiring the full 50% is probably not the best case scenario. This would still need to be finalized with our partners, but what you can assume is that would be the majority shareholder in the business. But that's obviously a hypothetical scenario still because we still have to wait for the decision from JD Group to occur. Rory, do you want to cover the MC questions?

Yes, sure. Thank you, Joao. Hi, Joao. Well, thank you for your questions. Regarding the energy costs, well, in terms of energy costs, the benefit that we are having this quarter, comparing to what happened quarter last year, the benefit is around one percent of a point of turnover. And in fact, what happened is in terms of private level, during the first quarter of 2022, we were having roughly 30% of weight in terms of the private level, in terms of the total fast-moving consumer goods turnover in our portfolio of products. And the first quarter of 2023, we had more than 35% points in terms of weight of the fast-moving consumer goods turnover. What happened during 2022 is the weight of the private level increased um sadly during the during the year and the we reached uh by the year end we reached uh levels very high levels comparing to what we had in the previous year uh yes the the product level continues to increase but not the same well we are hoping that we are expecting not growing at the same pace that that did during the last quarters of 2022 What I mean is that, in fact, we see some benefits from the energy cost this year. We see that the trading down phenomenon is here to stay. We see that the weight of the climate level in our turnover will start to continue to grow but at a lower pace. And we think that we need to counterbalance this impact in our P&L. Continuing as we are doing today with the energy efficiency gain and also with the good performance that our farmers continue to have. Having said that, as we said during the last calls, it's very difficult to state or to see what will be the margin for the company at the year end. What we will continue to say is that we fight and we think Our target is to continue to increase our margin in euros. In terms of margin, it will be very difficult to say what will be the final figure and what will be the trend. Obviously, it depends on the cost evolution and definitely will depend on the evolution of the private level weight in our total. But again, comparing to what happened last year, the weight of the private level in our turnover was very significantly higher comparing to what happened in 2021. Hello?

Yeah, well, you're on. Hello? Are you listening to me? Yes, yes.

I'm sorry. The network probably is not working. I think I don't know what you... Hello?

Yes, we're here with us.

Sorry, I don't know where I was. Frankly, I don't know because I missed the network. It was probably not so good as I was expecting. But again, I was basically saying that the weight of the private level, it continues to increase, but not at the same pace as it was increasing last year. And we think that we will reach higher levels of weight of private level during the year. But yes, we feel that we could have some benefits from the efficiency gain to mitigate some deterioration in terms of margins due to the trading down phenomenon.

Thank you. Thanks, Floyd. That's very clear. Thank you very much. Thank you as well.

Thank you. It appears no further questions at this time. I'll hand it back over to your host for closing remarks.

Very good. Thank you very much for attending this call and for all your questions. We will be together again when we announce our Q2 results at the end of July. Thank you very much and talk to you soon. Bye-bye.

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