Sonae - SGPS SA
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Good afternoon. We welcome you to Sonae's Quarter 1 2023 Results Conference Call. [Operator Instructions]
I now hand over the conference over to Mr. João Dolores. Please go ahead, sir.
Hi, everyone. Good to have you with us today. Welcome to Sonae's results conference call for the first quarter of 2023. .
Besides myself and the Investor Relations team, we have on the call of Rui Almeida from MC; Paulo Simões from Worten; Luís Mota Duarte from Sierra; and Cristina Novais from Bright Pixel.
As you know, the first quarter of the year was marked by a quite complex macroeconomic context. Geopolitical tensions remain 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 Worten's 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 our BUs, 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 EUR 89 million, again, representing a sort of 10% discount over Sierra's NAV at the end of the year, and we now own 100% of this business.
We also reached an agreement with banking and consumer finance to create a 50-50 joint venture, which aims to become a leading consumer credit operator in Portugal. And finally, Bright Pixel, our corporate venture arm, continued to expand its portfolio of technology companies having executed 3 new minority investments.
Already in the second quarter of '23, the results of the tender offer over Sonaecom were disclosed. We now own 88.8%, almost, the share capital in the company and 90.5% of the voting rights and, therefore, Sonaecom will remain listed and focused on executing its investments and value creation strategy.
Also, together with Balaiko, our Spanish partners, we notified JD Sports of the decision to exercise a buyer 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 EUR 4.1 billion 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 third quarter of the year.
Regarding consolidated results, the group's operational performance was quite solid. Sonae's consolidated turnover increased 12% year-on-year in the first quarter to EUR 1.9 billion, mainly fueled by MC and Worten. Our food retail units continue to adapt to the evolving consumption behaviors in the 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 EUR 1.5 billion 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. Worten was able to reinforce its market position in core categories, but also grow in new products, categories and services. The company's turnover increased 9% year-on-year in the quarter with a like-for-like of 7.5% to EUR 284 million, fueled both by the online and offline channels as the company continued to gain market share in the Portuguese market.
Regarding profitability, consolidated underlying EBITDA increased 11% year-on-year to EUR 137 million with a slightly lower margin than last year. MC was the main contributor to this evolution, given the positive topline 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 EUR 124 million, 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 EUR 161 million, with a positive contribution also from equity consolidated businesses, namely NOS, which was offset by the evolution of nonrecurring items as last year, we had registered some capital gains on assets sold by Bright Pixel.
Direct results decreased EUR 10 million versus last year to EUR 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, Bright Pixel had posted an EUR 8 million gain from an asset revaluation after a financing ramp.
Therefore, net results reached EUR 26 million in Q1 below last year's EUR 42 million. Free cash flow totaled EUR 181 million, driven by a solid display in terms of EBITDA generation, working capital management and also asset sales in the last 12 months. M&A CapEx of EUR 282 million 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 EUR 922 million versus EUR 931 million 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 4 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-EBITDA ratio stood at 2.8x below last year with a net financial debt of EUR 494 million and an average maturity profile of more than 4 years. Sierra's gross LTV ratio reduced to 40% in Q1 this year coming down from 45% last year. And at NOS, net financial debt-to-EBITDA ratio stood comfortably below 2x at 1.7x.
Going forward, the outlook remains volatile. We do expect to see -- 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.
[Operator Instructions] We'll take our first question from José Rito from Caixabank.
Yes. So I have question on Sonae MC. So in terms of like-for-like exclusion in the quarter, you can break down what was volume evolution and also basket price? Second question on Sonae MC, 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 these will be 2 questions on Sonae MC.
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 good call auction. What you are seeing that could change eventually to create further value versus the situation as it is?
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 Rui to take the MC questions.
So look, ISRG is a partnership that has generated significant value for Sonae and for all the partners throughout the last few years. And it's a partnership that we have enjoyed being a part of over the last years. And we felt very comfortable with the 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 the 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 Sonae. 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 would quote in our earnings announcement.
And 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 -- if it's 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.
Rui, do you want to take the MC question?
Yes, sure, will be as well. Thank you José and thank you for your questions because they are very -- 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 public company comparing to a pandemic period where the, I think, in 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 volumes to the problems that we were having last year. And again, in March, it occurs that in March last year, and the crisis in Ukraine, but -- and in fact, what's happened in the majority of the consumers in Portugal started to buy in order to holding the kitchen, et cetera, but they brought a lot to prevent any crisis that might happen in the weeks after. And then, in fact, when we compare this June month comparing to last year, we see that the volumes decreased slightly. In fact, our volumes decreased in the very first quarter, minus 3% -- 3% points.
And answering to your question is the factors which João said a while ago, inflation rate was roughly around 20% in Portugal, but the average basket increased only by 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 level is cheaper comparing to the supplier brands and we are now having the basket of our families being smaller comparing to what has been in the previous year.
That explains that the average basket is growing at a lower pace, but the volumes continue to decrease -- continue to decrease because we are now seeing in the last month that volumes are now stabilizing, and we are doing slightly better in terms of volumes comparing to what happened last year in the second quarter.
But now answering to your question regarding margins. Well, in terms of margins, we did hear. We have 2 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 label in euros has lower margins because the products are 30% to 50% cheaper comparing to -- depending on the categories surely, but are cheaper comparing to the suppliers brands.
And consumers are in a very difficult situation due to the disposable income, due to inflation, interest rates, et cetera, and they're preferring to buy cheaper products with very high levels of cost. We see this situation happening, and we feel very confident because the consumers are preferring to buy our brands because they trust our brands. They trust our products.
But nevertheless, we see that margins are in euros -- that margins are suffering due to that. This quarter, we could counterbalance the decrease in euros due to the fact that these people are now preferring private labels and the trading counterbalance is happening with the benefit that we are getting due to the fact that the energy costs in the total different scenario comparing to what happened last year, where we were -- the prices were so high that we couldn't compare the energy cost comparing to the previous year, but in fact this year due to the fact that we are implementing several measures in order to save -- to save some -- to improve our efficiency gains in terms of energy, in terms of trying to add some of the costs and even the prices -- spot prices are lower. We benefit -- and we benefit from that situation. Could -- and we see that we could counterbalance the costs or the decrease in margins that we see due to the fact that people are now preferring private levels compared to the suppliers brands.
Okay. I understand. Just a question in terms of Easter impact -- any impact in Q1? Or just to clarify if there was any impact of Easter this year?
No. Thank you for the question. In fact, Easter happened this year second quarter -- sorry, second quarter like last year. So there is no big new relevant situation to be spot in fact, what happened is that they would be in terms of seasonality is pretty much the same that happened last year. So the seasonality of Easter this year, like in last year in second quarter.
Okay. And Joao, you mentioned that if JD decides to buy eventually this will be positive in the sense that you will be above the NAV reported. In the case of Sonae buying, is there any vehicles referenced valuation for a potential acquisition?
Look, the value at which JD can buy or sell is exactly the same. But there's a nuance, which is if we sell, we sell at that value, if we buy, we buy at that value. If they sell, they sell at that value, but then we sell back to them the JD banner, which is owned by ISRG. And so which is an important consideration when you calculate the figures at the end of the day.
[Operator Instructions] We are taking the next question from line António Seladas from A|S Independent Research.
I want -- actually I have 2 questions. The first one is related with Sonae MC. Very, very positive margins. So my question is related with costs. The costs over the first quarter, the good proxy for the rest of the year, for the remainder of the year? That is the question you can answer, sorry.
And second question is related with the JD 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 Sonae and your Spanish partner -- the expansion will be outside Iberia, if you can confirm, please?
Thank you, Antonio. So I'll take the sports question one first. But that is not exactly the case. And so we do have a clear growth strategy in the company. And 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 we would -- if we are to remain shareholders in the company, we would explore those opportunities. But I think that this agreement with JD goes much beyond the international footprint of the company. It's more a disagreement on the segment itself. JD has been on public saying that their key priority is to grow the JD banner concept, and there's a segment in which Sprinter and Sports are operating in Iberia, which is much more of a mass market at leisure segment. It's not a segment where they see their priority is going, right?
And so I think that's the main point of disagreement. And we do believe in the segments, 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 a 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 sell the segment exposed to the segment that JD like. So my question is, I guess, that the multiples will be decided. So...
Yes, 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.
Rui, do you want to take the question on the costs in Q1 for MC?
Sure, sure, sure. António, regarding the what will happen in terms of cost of the rest of the year, I think it's difficult to give you a proper answer.
What -- I could say that it's up to now this quarter in the second quarter, I would tend to say that the -- all agreement are the same comparing to what happened in the very first quarter. But for the rest of the year, well, having -- looking back to what happened in the last quarters or even in last year in 2021, things are still volatile. And we can decide if you don't mind, it's difficult to give you a proper answer.
But what is happening, for instance, in terms of inflation, what we are working seeing this 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 per month is pretty much new, comments that when we are comparing the inflation year-on-year, we will continue to have high levels of inflation as Joao said in the very beginning. Inflation will start at least from what we are seeing, and we are accommodating, et cetera. And we are basically feeling that inflation would start to decrease comparing what we had in previous years. But in terms of costs, yes, in terms of cost the level of costs during the second quarter, the third quarter and the 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 Joao said in the very beginning. And the issues like, for instance, I don't know probably safety costs. They're also increasing due to the fact that the wages that are increasing this year as the remaining lines of this construction like energy -- just to give you a conference. The projects are being more effective on that -- in those issues.
The annual increase in wages was done over the first quarter? Or should we expect more increases over the rest of the year?
Was already done in the very first quarter. And we -- up to now, we don't see any -- what we see, not in our agenda to do an increase as we did in the very beginning of this year.
We will take our last question from line João Pinto from JB Capital.
I have 2 for Sonae MC and 2 regarding the view with JD Sports. On Sonae MC, sorry, if I missed this, but can you quantify the positive impact from the lower energy prices on the margin at 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 quarter?
And on the deal with JD Sports, first, the sports, the JD Sports that you would sell back to JD Sports in case you end up acquiring the company, how much do they represent of Iberian 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 stake or there's a possibility of you acquiring the entire 50% stake of JD Sports?
Thank you, João, for your questions. Again, I will take the sports ones first, and then I will ask Rui to cover MC. And so regarding ISRG, JD Sports banner in Iberia weighs around 30% of sales and results of the company. So 70% is Sprinter and Sport Zone 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 base-case scenario. And this would still need to be finalized with our partners. But what you can assume is that Sonae would be the majority shareholder in the business. That's obviously a hypothetical scenario still because we still have to wait for the decision from JD Group to occur.
Rui, do you want to cover the MC questions?
Yes, sure. 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 last quarter last year, same quarter last year, the benefit is around 1 percentage point after stock turnover. And in fact, the -- 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 total consumer goods turnover in our portfolio of products. And the first quarter of 2023, we had more than 35 percentage points in terms of weight of the fast moving consumer groups turnover.
What happened during 2022 is the weight of the private level increased steadily during the year. And we reached by the year-end, we reached a level -- very high levels comparing what we had in the previous year.
Yes, the private level continues to increase, but not the same well, we are hoping that we are expecting not growing at same pace that we did during the last quarters of 2022. What I mean is that, in fact, we have -- we see some benefits from the energy cost this year. We see that the trading down phenomena is here to stay. We see that in the weight of the private level in our turnover, we 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 efficiency gains and also with the good performance that our formats continue to have.
Having said that, as we said last in during the last calls, it's very difficult to the state -- to say what will be the margin for the company at year-end. But we will continue to say is that we find and we will think that we -- our target is to continue to increase our margin in euros. In terms of margin, it would 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, it will depend on the evolution of the private level weight in our turnover. But again, comparing to what happened last year, the weight of the private level in our total -- turnover was very significantly higher comparing to what happened in 2021.
Are you listening me?
That's sorry. The network, Paul, is not working. I don't know with -- Sorry, I don't know where I was frankly, I don't know because I missed the -- the network 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 that it was increasing last year. And we think that we will reach higher levels of private level -- of weight of private level during the year, but yes, we feel that we could having some benefits from efficiency gains to mitigate the some deterioration in terms of margin due to the trading [indiscernible].
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.