Sonae, SGPS, S.A.

Good morning, we welcome you to Sone's first half of 2023 results conference call. During the presentation hosted by Mr. João Delores, Sone's CFO, all participants will be on a listen only mode. There will be an opportunity for Q&A at the end of the presentation. If you wish to ask a question during the Q&A session, you may do so by pressing the star key followed by one on your telephone keypad. If you're 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 the conference over to Mr. João Delores. Please go ahead, sir.

Good morning, everyone. Welcome to SunEye's first half 23 results conference call. Besides myself and the investor relations team, we have on the call Cristina Novais from BrightPixel, Luis Matadouas from Sierra, Paul Simoes from Vorten, and Fernando Van Adler, our recently appointed CFO at ENTI. As you know, the second quarter of the year continues to be marked by a challenging macroeconomic environment. Geopolitical tensions remain high. and inflationary trends and rising interest rates continue 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, namely 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 Bank Inter 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. Brightpixel, our corporate venture arm in technology, made three new investments in Q2, so totaling six new minority investments in the first half of the year, and already has 40 companies in the portfolio, including three unicorn companies. MC in Q2 reached an agreement for the combination of Hernal and Bruni in Spain. This will result in a leading health and wellness and beauty player in Spain. with about 800 million euros in turnover, a transaction which increases our international exposure in a sector that is benefiting currently from clear tailwind. 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 one billion euros in revenue, if you include wells in Portugal as well. Already in Q3, SONAI received a notification from JD Sports communicating its intention to acquire the remaining stake in ISRG with an equity value of €1 billion. This transaction implies a €300 million cash-in for SONAI and an estimated capital gain of €175 million and completion should happen until October. SONICOM acquired SONI's direct stake in NOS, a total of 11.3% for €213 million, and SONICOM now holds the 37.37% stake in the NOS share capital, and this had no material impact on the voting rights in NOS, which are attributed to SONI. 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 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 €3 billion in the first half of the year. This was fueled both by food and non-food 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 prices and costs pressured gross margin. These negative effects were more than offset by reduction in energy costs and also the implementation of efficiency measures which enabled us to maintain a very solid profitability level. And the line of the TA grew 16% year-on-year in Q2 and reached 279 million euros in the first half of the year, a total margin of 9.2% versus 9% last year. MC continued with its expansion plan by opening up 18 new stores, of which four new continence Bombilla, which, as you know, is our proximity format in Portugal. As for Vorten, Vorten 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 €557 million in the first half of the year, which implies 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 €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 and the management, demonstrating the company's ability to add value to managed assets owned by its partners. Net results increased €10 million to €38 million on the back of a strong direct result evolution, although we did record a positive indirect result in the quarter. NAV increased €50 million since the beginning of the year, having again surpassed the €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 2023, on the back of the telco growth, which grew 3.5% in the third half, and cinema theaters, which continued their recovery path, growing 15% in the first semester of this year. EBITDA reached €353 million in H1, with a 45.5% margin, a 2 percentage point increase versus 22, and net results stood at €81 million. As you know, NOSH distributed €0.43 per share in dividends, of which 15.2 was extraordinary dividends following the sale of the Towers mobile towers to Celnex in 2022. Still in the technology segment, BrightPixel continued its active portfolio management activity with six new investments in each one, with a total capex of €32 million and currently cash invested totals €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, BrightPixel'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, Sonai maintained a strong top-line growth in Q2. Total revenues grew 11% year-on-year in the quarter, reaching 3.8 billion euros in the first half of the year, mainly fueled by the performance of MCI. In terms of profitability, underlying EBITDA increased 16% or €23 million year-on-year to €163 million in Q2 and reached just over €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 €350 million, with a positive contribution from equity-consolidated businesses, namely NOSH, due to our increased shareholding, which was partially offset by lower capital gains from BrightPixel this year. Direct results decreased year-on-year to €84 million in the first half of 2013, due to increased depreciations following our investment efforts, coupled with higher funding costs and tax expenses. Indirect results also reduced in the first half of 2023, mostly due to lower valuation gains in the minority stakes of Bright Pixel in H1 when compared to 2022, and also to lower revaluations of Sierra Shopping Centers when compared to last year. All in all, net results group share stood at 43 million euros in the second quarter of this year and 69 million euros in the first half of 2023. All in all, SONAI generated 202 million euros 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 companies. Consolidated net debt decreased to a bit above 1 billion euros after dividends paid to our shareholders and partners, which totaled 161 million euros. The group's capital structure remains solid with a low leverage level, strong liquidity available, and a stable debt maturity profile of about four 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 remain within our defined thresholds. MC decreased its net debt-to-BTA ratio to three times, even after dividends payments of 214 million euros. NOS presented a net financial debt-to-BTA after leases of two times, and at Sierra Gross LTD reduced significantly to 38.7%. Lastly, a brief overview of StoneEye's NEV. Our NEV, based on market preferences, amounted to 4.2 billion euros 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 NEV evolution at Sierra, which more than offset the negative evolution in the knowledge 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 for Q&A.

Ladies and gentlemen, the Q&A session starts now. As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad. Our first question comes from João Pinto of JB Capital.

Hi, good morning, everyone. Hi, good morning, everyone. Thanks for taking my questions. I have two on SunIMC 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 a bit the margin in the second half of the year? It seems that the pressures from volumes and mix have eased based on the difference between like for like in 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 would be great. And if you foresee the same margin resilience in the second half of the year. Many thanks.

Thank you, João, for your questions. They're both on empty, so I'll hand it over to Fernando to take them.

Sure. Thank you, João. Hi, 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 likes spread spread split between price volumes and mix and as you rightly said and as ron dolores mentioned in the beginning of the call we have seen a significant decrease uh in the in the growth of inflation uh food inflation in the in the second semester quarter versus the first quarter and obviously that has a huge impact then we have on the mixed parts and contrary to what you said we still see the same level of pressure in mix and people shifting more to more affordable products. 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 have a pressure on the first quarter, which was related to both COVID in January 2022 and the beginning of the war in March 2022, which obviously impacts positively the volumes in last year in these two 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 margins as you asked, obviously we are seeing a gross margin contraction in the first semester. I will break it down in two components. The first one is price investment. We have been quite focused on price investment in the first semester. Joel mentioned in the beginning of the call the food inflation. The food inflation for the market that Joel mentioned is higher than first on IMT. 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 costs. As you all know, energy costs decreased in this semester. Obviously, that has a positive impact in our margins. Also, we have been implementing efficiency measures across the company to make sure that we are focused on profitability. All in all, what we are seeing, and as you rightly pointed out, we are seeing stable EBTA margin with a slightly increase in the semester, a negative impact from gross margin from what I said, but 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 inflation environment in the second semester. But in terms of margin, it's difficult to say yet where we end up. Obviously, the energy costs will increase because 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.

That's very clear. Thank you very much.

Our next question comes from Jose Rito of Cecta Bank.

Hello, hi, good morning to all. So I have two questions on SunIMC. 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 risks of other players winning market share? I know that's... You increase market share in the quarter, in the half, but still, you have a very high EBITDA margin, so why not reinvest these, 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 percentage of sales this quarter versus last year. How much was energy as percentage of sales versus last year? um and then i have a question on on sierra so um how much was the yield expansion across the different markets in uh in first half um this year thank you thank you today uh so maybe i'll i'll hand it over first to louise to tackle the sierra question and then i'll ask for another to cover the two mc questions go ahead please

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

Okay. Fernando, do you want to tackle the 20 prices? Sure.

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, our food inflation in MCD 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. Joao, your question around our competitive positioning. As you know, we are the market leaders. Over this semester, we have consolidated our market position, despite, obviously, this important effort 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, but 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.

Okay, thank you for that. Okay, thank you.

Thank you, Jose. And as a reminder, ladies and gentlemen, if you do have a question, please signal by pressing star 1 on your telephone keypad. The next question comes from Antonio Saladas of AS Independent Research. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking my questions and thank you for the presentations. I have three. The first one is related with UNIVERSE. You mentioned that the new partnership should start at the end of the year. Nevertheless, CTT just presented figures and non-performing exposure at Banco CTT has increased. And one of the reasons apparently was exactly the credit card loans. So my question is, should we be worried about any kind of impact at SENAI figures related with this performance on credit card loans? First question. Second question is related with North State that now that you changed to SENAI Comp. So in fact, Through Sonaicom, you are diluting your position, which for me is a little bit weird because I guess that you believe Sonaicom has a higher implicit value than the current stock price. And finally, related with Sierra, again, another quarter with CapEx. So I don't know if you can... explain in which sectors are you investing, so for us to have an understanding of what you are looking for, and also if you can explain why the net asset value went up by 4%, I think, quarter on quarter. Thank you very much.

Very good. Thank you, Antonio. So I will take the first two questions on Universo and Nosh, and then I'll have Luis to cover the third one on Sierra. So on Universo, the short answer to your question is no. You should not be worried. And so the operational activity of Universo is actually quite sound and solid. We have continued to increase the number of credit cards that we have in the country, albeit at a slower rate than we've seen historically, but that's part of the business reaching a more mature level. But we see production continuing to increase and we're seeing activity continuing to be quite solid, obviously impacted by the current context. And so we see a change in consumption patterns, but overall the activity doing well. The transition from CPP to Bank Inter will happen throughout the rest of the year. And that implies, first of all, making sure that we have everything aligned with the Bank of Portugal to ensure that we have all the authorizations needed to reach the agreement and then progressively we will transition the credit book from CPT to the new joint venture up until the end of the year. So that's the plan if everything goes according to this plan we will have a smooth transition but in terms of activity and operations everything is on track with what we were expecting. Yes, we concentrated our participation in Sonicom. I think we've always said that this was our goal. So after we did the tender offer on Sonicom, we said that our goal would be to concentrate our investments in telecoms and technology within Sonicom, which is our subholding dedicated to these two businesses. We did the transaction at an arm's length valuation. We considered the average price of the last six months. And so we executed that operation recently and we feel that's the right structure for organizing the portfolio. And so obviously, ultimately, we basically maintain the same level of voting rights and influence in the company. It was just a matter of reorganizing the portfolio. And I will hand it over to Luis to cover the Sierra questions.

Okay, very good. On the first question around CapEx, two-thirds of the CapEx figure that you've seen has to do with our development projects. As you know, one stream of our strategy is clearly to increase our activity in development, particularly mixed-use development. We are seeing significant opportunity in that market, and we are investing in that market. So there are two main activities at the moment related to this, which drove the CAPEX spend in the period. One has to do with the office tower that we're building next to Colombo, and another one has to do with the high-end residential projects that we have acquired and that we are developing at the moment in Lisbon. Another quarter of the CAPEX has to do with other growth projects across the portfolio, particularly with food markets that we're doing in Italy, for example. but also with additional asset management initiatives that we are doing across our shopping center portfolio. That's the question on CapEx. In terms of the increase in NAD, the increase in NAD has three main factors. The first one is directly related with a strong operating performance that we have recorded across all business lines. The second one has to do with an increase in valuations. So despite the 30-bis increase in yields, That was more than offset by the strong operating performance of the assets, but also of the effect of inflation. And the third element on the NAV increase has to do with FX. It's around 15 million euros, 1.5 of the top 15. That has to do with our exposure to currency in Brazil and Colombia.

Okay, thank you. Just Thank you very much. Just a follow-up question on Universo. I read on the news that you will start offering saving products. Is that right?

Sorry, Antonio, I didn't get the question. Could you please repeat? Sorry, I didn't explain well.

I read in the press that Universo will start offering saving products, partly through a partnership with an insurance company, but it was just a press news

Yes, that's part of our strategy to continue to offer a wider range of products to our customers. And so we are looking to extend our reach beyond just consumer credits, extending it to insurance, extending it to savings. And so that's part of the strategy that we have there. It's still early stages in those new business lines, and I think the goal here is to start to explore those new areas of activity with more intensity whenever we have the JV formed at the end of this year. Okay. Thank you very much. Thank you, Antony.

As there are no further questions, I would now like to hand the call back to Mr. Delores for additional or closing remarks.

Okay, so thank you very much for your questions. Thank you very much for listening. For those of you who are going on holidays, I wish you a good holiday period, and we will be back with the Q3 results in November. Thank you very much, everyone.

That does conclude today's conference call. We thank you all for your participation, and you may now disconnect.