Sonae, SGPS, S.A.

Good morning. We welcome you to SONAI's first half 2024 results conference call. During the presentation hosted by Mr. Joao Dolores, SONAI CFO, all participants will be in a listen-only mode. Q&A is available after 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 1 on your telephone keypad. If you're experiencing any difficulty in listening to the conference at any time, please try calling from a different device. I will now hand the call over to Mr. João Delores. Please go ahead, sir.

Good morning. Hi, everyone. Welcome to SONAI's results conference call for the first half of 2024. Together with me, I have the investor relations team, as usual, and also Cristina Novaes from BrightPixel, Fernando Van Gley from NP, Luis Matabuart from Sierra, and Paul Simoes from Varden. I would like to start by giving you a brief update on our portfolio, a brief reminder of a number of transactions that were completed recently. We've made significant moves, as you know, in these first six months of the year and are also already in Q3, totaling more than €1 billion invested in new companies that have joined the portfolio. In March, as you know, we integrated Musti into our portfolio following the successful public tender offer launched at the end of 2023, which totaled an investment of around 700 million euros. In April, our subsidiary Sparkfood completed the acquisition of a majority stake in BCF Life Sciences in France, for just over 160 million euros, further expanding its portfolio within the food ingredients ecosystem. And already in July, we finally concluded the Druni and Arnel merger in Spain, creating the largest player in that country in the health and wellness and beauty retail segment, and together with Wells, the largest operation in Iberia. These are important transactions, obviously, that will significantly change the financial profile and also the diversification profile of the group in the coming months. Regarding Druni in particular, as we know, we had this transaction on hold for quite some time. We were waiting for the competition authority authorization, but we were finally able to complete the transaction in the beginning of July. As I said before, it creates the Spanish market leader in the health and wellness and beauty segment with nationwide coverage through a network of more than 470 stores and a strong e-commerce operation. Druni and Adam L. together reached the total combined turnover of over 1 billion euros in 2023, and together with Wells, the full health and wellness and beauty network of MC surpasses 770 stores, and a turnover in 2023 of 1.3 billion euros. So the transaction, as you saw, implied an investment by MC of 148 million euros in addition to its 60% stake in Arnal, which was contributed to the joint venture. Simultaneously, Druni acquired the remaining 40% stake in Arnal from its founding shareholders for 81 million euros. Therefore, the combined entity is now a 50-50 partnership between MC and Druni's founding shareholders. Druni will be fully consolidated by MC and Sonai from Q3 onwards, given the governance rights enclosed in the shareholder agreement. This being said, our NAV had a slight decrease this quarter. This decrease was on the back of lower market multiples when we were in food retail. as our operational performance was quite solid, as we will see, and had a positive impact on NAD. In terms of real estate, Sierra, as you will also see, also had positive re-evaluations of its properties, also with a positive contribution towards the evolution of NAD. Let's have a look now at our largest businesses, starting with NC, as usual. MC continued to show a remarkable operational and financial performance at the beginning of this year in a context of a significant reduction of food inflation and also intense competition in the Portuguese grocery market. In food retail, the company continued to gain market share, continued to grow quite significantly, which is a testament to the ability that the team has had to improve its value proposition and serve customers in a demanding market. On the health and wellness and beauty segment, we continued to grow at double-digit rates, above 10%, both in Arnal and also in Wells, with also an increase in profitability. Total turnover increased by 7.8% to 3.3 billion euros in the semester, with a like-for-like growth of 5.7%. So in the context of very, very low inflation, around 1% inflation, this implied a significant volume increase in the first half of the year. Profitability improved on the back of this solid top-line performance and also additional efficiency gains that were executed by the company. And this enabled MC to maintain its price competitiveness and gain market share as we saw before. At the end of the first half of 24, MCs on the line of EPA margin improved in total 10 basis points year-on-year to 9.3% and reached 305 million euros. Regarding Vorten, the company also improved its market share at the beginning of this year, both online and offline, in a highly competitive and promotional electronics market in Portugal. Total turnover reached 593 million euros in the first half of the year, a 6.5% growth, 3.7% increased like-for-like, with the online channel remaining a key contributor to this level of growth, having increased 14% in sales year-on-year. A quick note also to our services line of business and also third-party additional categories in the marketplace, which continue to register quite strong growth. And iServices in particular has been delivering impressive performance and has expanded internationally in the last few months, already with 18 stores outside Portugal spread between Spain, Belgium, and France. Regarding profitability, Vorten had subdued Q2, and so the increase in market share and the increase in sales was done at the expense of more pressured profitability. Overall, in the first semester, underlying EBITDA stood practically flat in absolute terms at €25 million versus last year, with a 4.1% margin. We expect the rest of the year to see more solid a profitability profile without tampering, obviously, the growth of the company and the market share gains that the company has been able to achieve in the last few months. As for Moosti, the company released its nine-month results yesterday that run from October to June. In the quarter, the market context was particularly challenging as consumer confidence moderated and discretionary consumption decreased, particularly in Finland, the company's main market. In terms of the nine-month results, net sales increased by 4% to 317 million euros, and the BCA was pressured by the decrease in gross margin due to targeted investments in price and promotional activities, in particular, in the last quarter. Nevertheless, we believe that Moosky's leadership position and unique concept is well-positioned to benefit from the improving economic outlook and market trends in pet care research. The company actually increased its leadership position in share of Wallet in recent months, having added a significant number of new pet owners to its customer base, and we expect performance to improve up to the end of the year. Moving to Sierra. The company has been able to consistently deliver a solid performance in its shopping center portfolio. So when we look at the company's shopping center portfolio, we see tenant sales increasing 5% like the like. Occupancy rates continue to be high, above 98%. And footfall also above last year and also above pre-pandemic levels. If you recall, in the years that followed the pandemic, sales were above 5%. but footfall was still below the pre-pandemic levels, and now we have seen both footfall and sales above that period, which is obviously positive news. I would point out in this quarter the improved asset revaluations, as I mentioned at the beginning. This was due to improved operational performances of the shopping centers, as yields were practically stable this semester. This obviously had a positive impact on indirect results that reached 18.5 million euros, and net results also had a positive evolution, an increase of 17% year-on-year to 45 million euros. So overall, the company's NAV continued to increase, 26 million euros up to 1.083 billion euros at the end of June. A quick note on NOSH, that already reported its results, showing another quarter with very strong operational performance and growth, particularly in its core telco business. In our account, the equity methods that contribute to our results reached 29 million euros in Q2, 24, so an increase of 14 million euros versus last year. And this was fueled by both the operational performance that the company showed and also the significant capital gain of €31 million related to the sale of another portfolio of mobile towers to Celmex in the course. In May, Nosh paid a dividend per share which was 36% higher than last year's ordinary dividend, resulting in a €67 million cash inflow for Sona. Finally, BrightPixel. I would say that this was a stable quarter for BrightPixel. No significant investments in the quarter. A company which retains its practically stable NAV in the quarter and implies a cash on cash of 1.9 times versus capital invested historically. So overall, when we look at our consolidated figures, total turnover grew 11% year-on-year to 4.3 billion euros. This was mainly driven by MC's performance and also the growth that we saw at Morton, as well as due to the consolidation of Moosky in this quarter. And the line of EPA increased by 14% year-on-year to 342 million euros. once again fueled by the resilience of MCE's profitability and also Mucy's integration into the portfolio in Q2. Total consolidated EBITDA actually increased more than that, 18% year-on-year to 410 million euros, obviously benefiting from the performance at the underlying EBITDA level, coupled with a higher equity method contribution, especially from NOS, as was already explained before. This positive operational performance was partially offset by higher depreciations, given the strong investments that we have been making in our businesses, namely in terms of expansion, but also IT, and also increased financing costs and higher taxes. In any case, direct results increased 15 million euros year-on-year to 95 million in the first half of the year, and net results stood at 75 million euros, a 9 million euro increase versus 23 million. In terms of cash flow generation, the group maintained the healthy recurrent cash flow profile. Total net debt increased year on year, but this was exclusively due to the significant acquisitions that were executed in the last 12 months. But we continue to have a quite solid financial position with significant available liquidity facilities and a very comfortable debt maturity profile of close to four years. If you look at financial ratios, our holding LTV reached 16%, slightly surpassing our desired cap of 15%, but this is temporary as we will work to bring this down in the coming months. All our business' financial ratios remain at quite comfortable levels. For the rest of the year, we basically maintain the views that I shared with you in our last call. So we remain confident that our main businesses will continue to deliver solid performances while reinforcing their leadership positions, as we will naturally focus on integrating the most recent acquisitions and driving the value creation plans that underpin these investments. This is all for now. Thank you. You can now open the session to Q&A.

If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. And our first question comes from the line of João Pinto from JB Capital. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my questions. A couple of ones on Muxi. The first one, can you give us some color on the main drivers behind the recent slowdown in demand and also on MUSTI, do you expect pressures on gross margin to stay in the second half and if this is being driven by a step up in the promotional activity from competitors? My third question on MC, can you give us some color on gross margin evolution in the second quarter and how the competitive environment is evolving, especially in what relates to promotional activity. And finally, on fashion, we've noticed that you do not report it as a separated segment anymore. Is there any development for this unit? Many thanks.

Thank you, João. I will take the mostly questions first and also the fashion ones, and then I'll hand it over to Fernando to cover the MC questions. So on mostly, as you know, the company presented its results yesterday. Just to share with you the main sources of slowdown in the market context. We have several dimensions here. So first of all, we have a general global trend. slowdown in the pet care retail service sector, which we feel is circumstantial, which has to do with the big bump that we saw in terms of growth during COVID in pet ownership and pet spending. And we are seeing a global slowdown in demand in the pet care retail sector this year, but it is expected to rebound globally by 2025. But more specifically, in the markets where Musti operates, we have some local dynamics, obviously. Finland is facing, in particular, a tougher macro context. We have the impact of the war in Ukraine and the fact that the country has been forced to cut commercial relations with Russia, and obviously Russia is a neighboring country and that has an impact on macroeconomic activity. And we are seeing a slowdown in private consumption, mainly in what concerns discretionary consumption. And so that has obviously an impact which we also expect to be temporary if you look at the main projections in terms of macro outlook for not only Finland but also Sweden and Norway. They are more positive going into the end of this year and the beginning of 2025. And so these are some of the drivers that are impacting the sales slowdown in these countries. We see it more in discretionary spending and less in food, but this is obviously something that we will have to monitor closely up until the end of the year. Again, we know that the underlying trends are there. We know that the market went on quite strong, and we feel that the market will rebound and the company is very well positioned to take advantage of that market rebound when it happens in the next few months. In terms of pressure in gross margin, it's true that given this slowdown in private consumption and some trading down that customers were doing in the last few months, the company has been forced to be a bit more aggressive in terms of pricing and promotional intensity. That has had an impact on gross margin, but we feel that was the right approach. given the fact that for us it's important to make sure that we continue to be the leading player with the highest market share and have the strongest share of wallet as well in terms of consumer spending in pet care. So it was a conscious investment, but we are already seeing some positive signs in July in terms of bounce back and gross margin, and we expect this to normalize by the end of the year. Regarding the fashion segment, the reason why we decided not to report, not to give as much highlights to this segment in our earnings announcement, it already occurred a few quarters back. is merely in terms of communication, trying to focus the market's attention to the largest business units in the portfolio. So we decided to focus more the highlights on the largest business units, and we provide all information regarding the smaller business units as well, as you know, in the invested case. But I can give you a quick highlight on what's happening there. Overall, It's a tough market context at this point in time for fashion banners overall, but the good news is that our banners have been able to improve their profitability level over the last six months. And so we are seeing a strong rebound in terms of operational performance and profitability with a strong focus on efficiency and having profitable sales in each of the three banners. And so if you look at the financials, you will see a strong recovery there, which we expect to continue until the end of the year. Okay.

Well, good morning, everyone. In terms of MC and commenting a little bit on the competitive pressure, as you asked, in terms of promotions, we're seeing the level of promotion relatively stable in the first half of 2024. And I'm talking about the first half because when you split between the first quarter and the second quarter with the change of the Easter in the first quarter this year versus the second quarter last year, it's hard to compare on a first half basis. But when we look at the promotions, we're seeing a stabilization in terms of penetration. In terms of price pressure, as mentioned by Joelle, we continue to see a very competitive market and all the competitors pushing really on price. And so, as mentioned on previous calls, we'll continue to be very focused on price leadership in the market. One important point around the trading down, so we have seen in the first half of 2024, in terms of the trading dams, so the penetration of private level is relatively stable versus the first half of last year. And therefore, in terms of gross margin, we have been seeing relatively broadly stable gross margin in percentage terms in the first half of 2024 versus the first half of 2023.

Thank you very much. Thank you very much.

The next question comes from the line of Jose Rito from Kaiser Bank. Please go ahead.

Yes, hi. Hello. Good morning to all. So first question, a follow-up on the Moosky. Just to understand a little bit better on the dynamics of the market. So you are seeing a slowdown. My question is, When you decided, when the company decided, when I decided to buy, most people were already expecting this slowdown. Always this is something that's not expected and therefore nothing but on the price plate. Then a second question on Vorten, with quite relevant volatility in terms of EBITDA evolution or quarter-on-quarter. How do you explain this and related to this? Wasn't the Euro Cup eventually positive from a sales perspective? And then a final question on the fact that you have been adding some relevant stakes in retail companies. You mentioned more than one dealer for Zoni. And at the now, we have the acquisition of Musti. The question is if the group is looking at the potential organization given the relevant changes on the structure over the last six months. Thank you.

Thank you, Zey. So I will cover the first question on MULTI and also the last one, and then I'll ask Paulo to cover the larger questions. If we were already expecting this level of slowdown in demand when we decided to do this acquisition, we were expecting a slowdown in 2024, yes, to be quite frank, not as much as the one we have been seeing in the last quarter. It was a bit above what we were expecting, but again, we don't feel that it's going that it hinders our investment case. So we still feel that the company is doing the right things and it's going to rebound in terms of profitability in the next few quarters and we believe that the investment case remains solid and the value creation plan that we designed to sustain the transaction is still one with which we feel comfortable. In terms of the last question, if we plan to reorganize somehow the portfolio, We don't have any short-term plans to reorganize the portfolio. We feel that we have a good structure in place with strong management teams involved in each business unit, and we feel that these businesses are managed at the right level and we have good governance in place and good oversight of the performance of each business unit. Obviously, Sonai takes a dynamic stance on its portfolio, and if we feel that we need to change something in the future, we will. But at this point in time, we feel that we have a quite stable portfolio, and our focus is on making sure that the management teams in each business have the conditions to drive growth and value creation in each asset. So we don't have any short-term plans to make any structural review in terms of organization. Paolo, do you want to take the working question?

Yeah, sure. Good morning, everybody. Thank you for the question, Jose. So the second quarter was, in fact, lower on profitability. We have several impacts in the quarter. We faced mild weather in Portugal with lower temperatures, especially in the second half of June. with the maximum temperature below last year by six degrees, and the minimum by three. And that impacted our seasonal sales, especially in air conditioning, fans, and ventilation, and refrigerators. And that has an impact on profitability. Also, we have a small effect. And in addition, we have the entertainment market has suffered from last year as well. The decrease in the entertainment market is justified by the PS sales, PS5 sales last year that were very, very high. And this year, PS5 is already matured. So the sales are low, and that decreased significant sales in the entertainment. It's true that zero had a positive impact on the TV market. The market on that segment increased around 3%, but that was not enough to compensate these effects that I've mentioned. And so that's one of the impacts. In addition to that, we've been investing in growing eye services internationally. And that has also some growth costs. We have increased central costs to support the international growth. We have also opened 15 stores in the first half of this year. 10 of them international stores. And those stores have ramped up in profitability and the beginning is not positive. So we have negative impact by those openings in the first month. And that has impacted the profitability overall also. In addition to that, the promotional activity in the quarter was very significant. which has impacted also the margin. And those are the main impacts for the second quarter in profitability. Looking forward, we expect this to normalize and recover profitability in the following quarters of the year.

Okay, thank you. So, no more growing costs over the coming quarters, or eventually it will just affect something?

No, we don't expect the cost base to increase vis-à-vis what we have seen in the second quarter. So, the cost base should be stable going forward.

Okay, thank you. Just a follow-up on my question on the list reprint. I will try to rephrase myself, but basically, my question is, how do we introduce plans to increase visibility on the retail part and on the fact that you made relevant acquisitions recently? So how can you show to the market the investments that you made?

Sorry, I don't know if I got your question correctly. So how do we increase visibility on the recent investments that we've made in terms of their performance? Is that the question? Yeah, yeah. We will obviously report on the different individual segments. We have already started to report obviously the results on Musti, which is a listed company and provides a lot of information to the market as well. On the health and wellness and beauty side, we will report separately. As we have started this quarter already, we will report separately from now on the food retail division from health and wellness and beauty division. So you will have detailed information on the different segments. And we plan to provide also more information on Sparkfood going forward. We're still at the beginning of this journey. We made investments very recently, but we plan to start publishing more detailed information on Sparkfood as well Okay, thank you.

Thank you.

Before we take our next question, as a reminder, please press star 1 if you would like to ask a question. And our next question comes from the line of Antonio Saladas from AS Independent Research. Please go ahead.

Hi, good afternoon. Sorry, good morning. Thank you for taking my questions. Most of them were okay answers, so I have two. Basically, on Moosty, I noticed that there's no executive member on the board from Sonae, so just if you can explain what is the reason, because it's not, I would say it's not normal. And secondly, on Sonae MC, apparently many volumes that are driving the growth in the Portuguese market on food So if you can confirm it, and if there's any explanation, because according to, in a particular statistical institute, the ones that have been growing very fast in May and June, which is weird. So if you can provide more color on this, and if you should expect this kind of performance over the second half. Thank you very much.

Thank you, Antonio. So on the question, If you recall, the acquisition that we made was done in partnership with three individuals, so two members of the board and the CEO of the company. And this was, for us, a very important element of this transaction, so the fact that we had people that knew the company well and the management team in particular that wanted to join us in making this investment, in committing their own resources and capital to invest together with us, and obviously well incentivized to generate value for all shareholders in the company. So we feel quite comfortable with this setup. We know the management team. We have gotten to know the management team quite well up until now, and we have full trust and confidence in the management team's capabilities to run the company and generate the value that we are expecting. Obviously, we have a board member which is composed of some people, myself, Claudia, and we have regular touch points with management team and regular interactions to discuss strategies, to discuss key decisions, that need to be made, and we also have been able to establish synergies between Musti and our own retail businesses and establish bridges between the several retail businesses in the portfolio, and we have people working with the Musti team from our legacy retail businesses to make sure that these synergies are extracted and that we are able to add more value and help the company grow even further. So we are, although we don't have any formal executive member at the board of Musti, we do have a very strong and solid interaction with Musti's management, and we feel quite comfortable with the way in which we are tracking performance and working with the team to execute the valuation plan there. Do you want to take the MCD question? Sure.

Thank you. Thank you very much for the question. In terms of volume, as you mentioned, a very positive evolution in terms of volumes in our grocery business in the first half of 2024. As you may know, we have increased our volumes by around 3% in the first half of the semester. And as Joelle mentioned in the introduction as well, we have gained market share. And so, Obviously, we are gaining healthy volumes growth, but the market is not growing at the same level as we are. That being said, as you pointed out, it's correct to say that the volume growth is healthy in the first half for the entire market. We won't expect the same level of growth for the volumes in the second half. The reason being, as you recall, in the first half of 2023, we had a very high food inflation, a double-digit food inflation. Over the years, the food inflation has decreased, and so there was less pressure in terms of prices. Obviously, when we look at the comparison versus last year, the very high foot inflation had a negative impact on volume. This year, with the foot inflation of about 1%, obviously that helps on boosting a little bit the volume growth. We should not expect the same level of volume growth in the second half. The first half was obviously helped by this more benign foot inflation environment. Also, as you mentioned, in May and June, it was a particularly strong month in terms of volume growth. also because some calendar effects which help a little bit, but that being said, overall, development growth was strong in the first half in the market, but mainly for MC with increasing market share.

Okay. I just have a follow-up question that could be answered by some MC, and that relates with the pet food industry. Yesterday on the call of mostly, on conference call of mostly, some food distributors are performing well on pet food, and that could be a reason why mostly is not performing so well. I don't know if you could provide some color on this about how is performing the pet food on your stores, and if you notice any change on the trends, on the main trends. And of course, if you wanted to add more color in terms of multi directly.

Yeah, I can comment on most of them. Fernando can comment specifically on MC. So you're right. In the context of a more difficult macro backdrop and a decrease in private consumption, there is a trading down phenomenon. And in that trading down phenomenon, food retailers in particular have an easier life. And so you have some customers buying cheaper products and trading down and going to food retailers. That being said, in our estimates, we have not lost market share in any of the markets in which we operate. But obviously there's a more intense pricing competitiveness, and that's why we have to be a bit more aggressive in terms of gross margin and in terms of prices. But whenever there is a tougher macro environment, it's true that the trading down effect in pet food favors grocers in each market.

Okay, very good. So in terms of MC, as you know, the Portuguese market in terms of pet food is very different from the Scandinavian one, so I wouldn't try to do a lot of comparison between both. And what we have seen in terms of pet food evolution is more or less in line with the different categories. So a strong volume growth, and I would say that is the main criteria. Pet food, as you know, is not a huge part of our business. It's an important category within our business, and we haven't seen a very different trend from pet tools compared to the other categories. That's what I would like to highlight, but again, I would reinforce that it's a very different dynamics from what is being seen in most.

Just to add to what I said before, Antonio, this being said, we truly believe that the underlying sector trends are quite positive for specialty retail and pet care, right? And so When we see the premiumization and the humanization of pets and the upsell in terms of types of products that pet parents, pet owners are providing their pets with, we see that as a very positive trend for specialty retail. And also the level of advice that is given in specialized formats is increasingly important for pet owners. And so we, although circumstantially this might be a more favorable context to grocers in the Nordics, we maintain our efforts to maintain market share, and whenever the market rebounds and we see it rebounding up to the end of the year, the trends are quite positive for specialty retail still.

Okay. Thank you very much for the answers.

Thank you, Antony.

There are no further questions on the call, and I will now hand over for some closing remarks.

Thank you. I think we have a question that came up on the chat from Emmanuel Figueiredo, which I will read, and then I'll hand it over to Fernando to answer. So we say that we want market share in the food retail sector in Portugal. The question is, can we share... What's our estimates of the grocery share in Portugal that MC has? Fernando, do you want to quickly take that one?

Sure. Thank you, Emmanuel, for the question. As you know, there is multiple sources around what the market share is in the Portuguese market, Nielsen, Campar, and all different sources. Our best estimates for the grocery market share of MC in the Portuguese market is around 27%, and as you mentioned in your answer, we have seen a positive market share evolution in the first half of the year, both in the first quarter and in the second quarter. MC has performed well in a very challenging market, and we were able to expand our market share, which I think reinforces the strength of the developer position and the strategy that the company is following.

Very good. Thank you, Fernando. Thank you, everyone, for your questions, and thank you for listening. For those of you who are going on holidays, Happy holidays, and we will see you again in our Q3 results conference call. Thank you very much. Thank you.

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