Sonae - SGPS SA
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Earnings Call Analysis
Q1-2024 Analysis
Sonae - SGPS SA
Sonae started 2024 on a positive note, reporting a significant increase in total revenues, which rose to EUR 2.1 billion, representing an 11% year-on-year growth. This rise was primarily attributed to strong performances in its major segments, particularly retail, food, and electronics. Additionally, the company’s net asset value (NAV) grew nearly EUR 100 million to reach EUR 4.6 billion, equivalent to EUR 2.38 per share, indicating solid financial health and operational strength.
Sonae MC, a key player in the retail sector, outperformed expectations with a 9.4% increase in total revenues to EUR 1.6 billion. Like-for-like sales grew by 7.6%. Notably, the grocery segment witnessed a robust volume recovery, and market share in the highly competitive Portuguese grocery market improved as the company opened six new proximity stores. This growth occurred despite significant challenges, including inflationary pressures and a competitive pricing landscape. The underlying EBITDA margin for Sonae MC improved by 20 basis points to 8.6%, reflecting successful efficiency gains.
Despite the strong revenue growth, pressure on gross margins was evident, attributed to competitive pricing and adverse foreign exchange effects. The company anticipates ongoing gross margin challenges into the second quarter of 2024, yet recovery is expected by the year-end due to strategic in-sourcing initiatives aimed at enhancing profitability. Investors should note that Sonae does not foresee a loss in market share, maintaining its competitive stance in the Nordic region.
In a strategic move to enhance its portfolio, Sonae integrated Musti, a leading pet care player in the Nordic markets, following a successful tender offer last year. Although Musti did not contribute materially to first-quarter results, its integration marks a significant forward step in Sonae’s growth aspirations. The company is focused on accelerating Musti's expansion in Norway and Sweden, where market penetration remains low relative to Finland, providing substantial growth opportunities.
Energy costs are projected to exert continued pressure on Sonae's margins in 2024. While prices have stabilized, the expected increase in access tariffs from EUR 20 to EUR 40 per megawatt-hour may offset any benefits from lower energy prices. However, Sonae's emphasis on operational efficiency and value proposition aims to mitigate these impacts. Management expressed uncertainty concerning EBITDA margin trends for the upcoming quarters due to fluctuating market conditions, but remains confident in the company’s sales performance.
Looking ahead, Sonae has set a target sales figure of EUR 500 million for several key segments but aims for enhanced sales figures through accelerated investments. Management indicated that dividends may not be distributed in upcoming years as funds will be reinvested to support growth initiatives. Moreover, Sonae's net debt stood at EUR 1.4 billion post-acquisition, which was anticipated, with a conservative approach to leverage—below 2x net debt to EBITDA—underlining a solid financial backbone while pursuing continued growth.
Sonae illustrates resilience with steady revenue growth and a strategic focus on market leadership despite challenges like gross margin pressures and competition. The integration of Musti and strong performance in retail signal positive momentum, while future expansions and efficiency strategies show promise for maintaining an upward trajectory. Investors may view Sonae as a compelling prospect grounded in its strong operational foundation and forward-looking strategies.
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Good morning. We welcome you to Sonae's First Quarter 2024 Results Conference Call. During the presentation, hosted by Mr. João Dolores, Sonae's CFO, [Operator Instructions]. I now hand the call over to Mr. João Dolores. Please go ahead, sir.
Good morning. Hello, everyone. Welcome to Sonae's results conference call for the first quarter of 2024. Besides myself and the Investor Relations team, we have on the call, Cristina Novais from Bright Pixel, Fernando Van Zellerr from MC, LuÃs Mota Duarte from Sierra, and Paulo Simões from Worten. I would like to start by giving you a quick note on our portfolio as we have made important moves this year. The first quarter of '24 was marked by the integration of Musti into our portfolio, following the successful public tender offer launched in November of '23. In March, the consortium led by Sonae reached just over 80% of Musti's share capital with a total investment of roughly EUR 700 million. This operation is an important step in the development and future proofing of our portfolio as we expand into new markets with a leading player in the pet care sector. Musti has been included in our consolidated accounts since March, though still with no material impact in the quarter's results. Already in April, our subsidiary Sparkfood, completed the acquisition of a 99% stake in BCF in France for EUR 160 million, expanding our portfolio of businesses in the food ingredient ecosystem. This company will obviously start being included in our accounts from the second quarter onwards. So moving on to NAV. As usual, our net asset value grew almost EUR 100 million this quarter and reached EUR 4.6 billion at the end of March, which equates to EUR 2.38 per share. This positive evolution was mostly fueled by profitability improvements at MC and Worten as we will see in the next few pages. So let's have a look at our largest businesses in the portfolio, starting with retail and MC. MC showed once again a strong operational and financial performance in the context of a significant reduction in food inflation versus last year and also intense competition in the Portuguese grocery market. Continental was able to increase its market share in this context and further reinforce its leadership position in the quarter, having opened 6 new proximity stores since the beginning of the year. The Health and Wellness and Beauty segment also delivered positive results and fueled MC's revenue growth on the back of strong performances of both wells in Portugal and Eden in Spain. Total revenues increased by 9.4% to EUR 1.6 billion, with like-for-like growth of 7.6%, with grocery volumes recovering quite significantly this year. profitability improved on the back of this solid top line evolution and also additional efficiency gains, which enable them to maintain its price competitiveness in the market. At the end of the first quarter, MC's underlying EBITDA margin improved 20 basis points year-on-year to 8.6% and reached EUR 139 million. As for Worten, it also had a good start to the year, reinforcing its leadership position in the electronics market in the country. Both core segments and new growth avenues maintained a robust performance with Worten leveraging its marketplace, offering new categories and services to increase its share of wallet and customer loyalty. Total turnover reached EUR 310 million in the first quarter and 9.3% growth and a 5.3% like-for-like increase, with the online channel continuing to be a key contributor to this growth, having grown 17% year-on-year and already representing roughly 20% of total sales. Just a quick highlight Wise services. That delivered robust top-line growth while continuing to expand both in Portugal and also in foreign markets. The company is currently operating already in Spain, Belgium, and France and has significant plans to continue to increase its presence in other geographies. Regarding profitability, Barton's strong sales performance, coupled with the ongoing cost efficiency measures, led underlying EBITDA margin to improve 40 basis points year-on-year to 4.7%. Moving on to real estate. Sierra delivered strong results in Q1, once again, mainly fueled by the solid performance of the shopping center portfolio. Indeed, this portfolio delivered once again quite impressive results. Tenant sales increased year-on-year by 7.4% like-for-like, driven by the macroeconomic conditions and also rental contract inflation adjustments as we continue to have practically full occupancy in our shopping centers around 98% occupancy in total. The services area delivered a 5% year-on-year growth, driven by the contribution of new vehicles such as the CTT real estate vehicle and also new RS in Germany and new development projects continue to progress well. All in all, direct results increased in the quarter to EUR 14.7 million, a 3.4% year-on-year increase, and NAV reached EUR 1.1 billion at the end of March, slightly above the year-end figure. In terms of balance sheet, Sierra's gross LTV continued to reduce and reached 37.9% at the end of March. Just a quick note on our telco and technology businesses. So starting with NASH, as you know, not already published its results some days ago, showing once again a solid operational and financial performance. The company continued to grow in the Telco segment, both in B2C and B2B, where it continued to gain market share and also had a very positive quarter in the media and entertainment segment, particularly in the cinema exhibition business. Net results were significantly influenced by an additional reimbursement of activity fees by Anacom, and this has a significant impact, both on the net income of the company and also in the equity method results that consolidates at Sonae. The dividend of $0.35 per share relating to '23 results was already paid in April and resulted in a total cash-in for Sonicom of EUR 67 million. As for Bright Pixel, the company continues to develop its investment activity. It currently has a portfolio of 43 companies in total. In the first quarter, it didn't execute -- did not execute any new investments, but it continued to manage its portfolio of existing investments. And at the end of Q1, NAV was quite stable, so which shows the resilience of the portfolio of investments that we have. So NAV stood at EUR 344 million and cash invested at $177 million, reflecting a cash-on-cash of the existing portfolio of around 2x. Moving on to consolidated figures. Our turnover grew 11% year-on-year in Q1, reaching EUR 2.1 billion, mainly driven by AMC and Worten that benefited from a resilient consumption momentum. Underlying EBITDA increased by 15% year-on-year to EUR 158 million, mostly driven by profitability improvements at MC, which led underlying EBITDA margin to improve by 30 basis points to 7.6%. Total EBITDA followed a similar trend, increasing by 13% year-on-year to EUR 180 million, benefiting from the underlying EBITDA performance, obviously, coupled with the higher equity method contribution essentially from NOS, which more than offset the sale of ISRG and its contribution in the first quarter of 2023. Looking at the bottom line. This very positive operational performance was partially offset by higher depreciations following our business investments in the last few months and also increased financing costs related to higher interest rates and also higher debt level, leading direct results to reach EUR 33 million in the quarter. Indirect results benefited from some small foreign exchange rate impact in Bright Pixel's portfolio shareholdings. All in all, net result group share stood roughly stable year-on-year at EUR 25 million. In terms of cash flow generation and debt. In the last 12 months, Sonae generated a solid operational cash flow of EUR 112 million. This is a reflection of the strong operational performance of our main businesses despite the significant investments that we are doing to accelerate our footprint, namely in food retail in Portugal and also due to some important refurbishment efforts in our existing stores. When excluding Musti's acquisition, consolidated net debt decreased by EUR 224 million year-on-year. Obviously, with the investments in Musti led total net debt to increase to EUR 1.4 billion at the end of Q1, which was well expected. The group's capital structure remains solid with conservative loan-to-value significant liquidity facilities available and a comfortable debt maturity profile of about 4 years. Looking forward and as we take a look at the rest of the year, we remain confident that our main businesses will deliver solid performances while continuing to reinforce their leadership positions. MC and Worten will remain focused on reinforcing their market shares and also delivering further growth and profitability. Musti will accelerate expansion in the Nordics while integrating itself within the Sonae ecosystem and looking for new international expansion opportunities. At Sierra, shopping centers should maintain the good momentum, while services are expected to grow further supported on existing and new investment vehicles together with new accretive developments that are being launched. Bright Pixel will continue to pursue and invest in innovative start-ups to grow in this portfolio and also manage its existing value in its current portfolio. In addition, and after Musti, we have already announced the completion of BCF, as I mentioned at the beginning, the BCF acquisition and should be closing the Duni transaction as well in the health and relating beauty space in Spain soon as we get the approval from the Spanish Competition Authority. So we will be focused in successfully integrating in the group, all the recently acquired companies. This is it for now. Thank you, and you can now open the session to Q&A.
Thank you. [Operator Instructions] Our first question comes from João Pinto from JB Capital.
Starting with Sonae MC, could you please quantify the calendar effect? There's an additional trading day, if you could quantify them would be great. Also on Sonae MC, can you update us on consumer trends? Are you seeing any changes to trading downtrends? Do you see signs that consumers are getting stronger? Then on Musti, can you share any targets for store openings this year and for the next couple of years? And finally, in terms of net financial costs and comparing to the EUR 35 million reported for Q1, what's the reasonable level to assume for the next quarters after the recent acquisitions?
Okay. Thank you, Joao, for your questions. Fernando, do you want to take the MC questions first, and then I'll take the Gabon?
Absolutely. Just starting with the calendar effect, as you mentioned. So when you look at the impact on Q1 from Easter, we have around 2%, slightly above 2% from the Easter impact in terms of the leap year, we have an impact of slightly above 1%. So in total, the impact for the quarter was about 3% from the Easter and the leap year. And that's obviously a very important aspect to mention in the accounts. When you look at the consumer trend, as you rightly mentioned, last year in Q1, we were seeing an inflation of around 20%. This year, we are seeing inflation around 1% -- food inflation around 1% in Q1, and obviously, that has an impact on consumer behavior. So what we have seen in Q1 was the stopping of the trading down. We are not seeing a significant trading up movement, but we are seeing a stabilization in terms of the consumer profile and the weight of the private label in our sales. I would say that's the key point in terms of the consumer trends we are seeing in the Food division.
Okay. Thank you, Fernando. So on Musti, as you probably know, Musti has stopped giving guidance to the market following the acquisition made by Sonae. So we are not providing official guidance to the market also because we are reviewing the current strategy and value creation kind of the company. But what I can tell you is that the company is going to accelerate its expansion, namely in Sweden and Norway, where it still has significant room to grow its presence. As you know, the company was originally based in Finland, where it has a market share of roughly above 32%. In Sweden, the market share is slightly below that. So it's in the high 20s. And so our goal is to bring that level to the same level as Finland. In Norway, where the company has opened up more recently, we have a market share of roughly around 16%, 17%, and the areas where we see the highest expansion potential for the company. And so we will continue to open up new stores, particularly in Norway and also still in Sweden in the next few months. But we will probably give you a better update on that in the coming earnings calls. In terms of net financial costs. Well, as you know, I mean you now know our new debt level following the recent acquisitions that we've made. Obviously, net financial costs, we expect them to be slightly higher in the next few quarters given the fact that we have increased debt and that interest rates are still to come down significantly vis-a-vis the recent increases in the last few years. But if you assume that we have an average spread of around 1%, and we are indexed to obviously, the interest rates that are out there in the market. I think it's relatively easy to make an estimate of what it would equate to in terms of financial costs.
And we're moving on to a question from José Rito from Caixabank Bank.
So on Sonae MC, my first question is which players are losing ground for the market share because you have been seeing a very strong performance from Sonae. The same applies to [indiscernible] is also gaining market share. So which players are losing ground and also for Sonae MC, what has been the market share evolution year-to-date, if you can share that? The second question, also on the Sonae MC is related to the gross margin evolution. So you mentioned that you are not seeing any further trading down. If you can share how much was the excision of the gross margin year-to-date. And when I say year-to-date, it's basically to eliminate the positive calendar effect from Q1? Also related to that, if the EBITDA margin increase in Q1 has any positive contribution in terms of margin terms from the calendar effect? And finally, a last question on Musti. So there were the recent changes you mentioned in terms of the targets. Just to understand, is this to be aligned with the fact that Sonae also does not provide targets or because the strategy might change for the company?
Yes. So thank you, Jose, for your questions. I'll take the most one first. So the fact that the company removed its targets was obviously that those targets were set in a different context, in the context where the company had a diversified shareholding base. And right now with the level of control that Sonae has, we obviously have a different value creation plan for the company, one which is more accelerated in terms of investment and growth. And that's why we decided to stop providing or removing those targets from the market. You're right that Sonae typically has a history of not providing guidance to the market, but we will be updating you with the objectives that we have for the company and also with a track record that we will continue to see in the next few months in terms of execution of that strategy. Fernando, do you want to take the MC questions?
Absolutely. I'll go one by one, but if you have any questions or follow-up questions, let me know. So in terms of the market share, as John mentioned in the beginning of the call, we have seen a positive evolution of market share year-to-date. So we have increased our market share in food retail in Portugal in Q1 2024. In terms of who are the players who are losing share, I'm obviously not going to comment that in detail. What I would say is we are seeing, obviously, a significant change in the competitive landscape. With recent entrants, obviously, as you mentioned, gaining share with their expansion. We are seeing mergers, as you know, with [ OSHA and DIA]. We are seeing also the traditional channel, not expanding the way the modern channel is expanding. And so we are seeing a lot of different movements here. But I would say that full focusing on MC, we have been quite focused on our value proposition and reinforcing it and also reinforcing our expansion in convenience, as you know. And as a result of that, we have seen a positive evolution in terms of market share. Going to the question of margins and starting with the gross margin, I did mention that trading down was not happening in Q1 2024. But I would emphasize that we have seen pressure in terms of gross margin in Q1 2024. No trading down, but still gross margin going down because of the competitiveness of the market and the investment in price that we have done in Q1 2024 to remain competitive and having price leadership in the market. And so those effects are different. When we go down to EBITDA margin and following the question you typically also ask, in terms of gross margin, we have seen a slightly decrease in gross margin in Q1 2024, as I mentioned. In terms of the staff over sales, we have improved the ratio also because of the strong top-line performance, but also because of efficiency measures we have put in place, the energy costs have had also any negative impact because despite the low energy costs, we have seen an increase -- a significant increase in access tariffs in Q1 2024 versus Q1 2023. On the other side, on the other costs, meaning logistics, head office, shrinkage. We have, as you know, put in place a very strong efficiency measure plan, and we have seen a significant improvement there. And that overall led to an EBITDA margin increase of 0.2 percentage points in Q1 2024. But as you mentioned, it's important to say that it's not fair to compare exactly Q1 '24 with Q1 '23 because having the Easter in the leap year in 2024, obviously, helps in terms of the turnover performance and obviously has a positive impact on margins. So that comparison -- the slight increase we had in the EBIT margin of 0.2 percentage points also needs to bear in mind that we are in a quarter where the calendar effects are also quite positive.
Okay. Understood. And on the energy costs, so going forward, do you expect it to be same wind or headwind we have been seeing the decline on energy cost, I'm not sure if you have a change.
Can you repeat the question? It was difficult to follow.
Yes. So going forward over the coming quarters, if the energy costs will be a positive or a negative for the margin evolution energy cost, year-on-year.
Yes. So year-on-year, as we mentioned in the last call, we expect the energy cost to have a negative impact on our margin. As we are all seeing the energy prices are quite low, I would say, but the access tariffs, there were EUR 20 per megawatt hour in the first semester of 2024. And for the second semester of 2024, the estimate we have, given the government disclosures is around EUR 40 per megawatt hour. And so we expect, depending obviously where the spot prices will land, we'll expect a continuous pressure from the energy costs over sales.
Okay, Jose. Maybe just to give you a little bit more color on the Musti question. As you know, the company had previously set out targets in terms of revenues, growth, also profitability, balance sheet, net debt to EBITDA, and also dividends. So I think it was -- I think it's -- we made this clear to the market. But in any case, I would like to stress that our focus really right now is going to be on growing the business. And so that entails that I would not expect any dividends to be paid by the company in the next few years, and that was articulated to the market because we want to fund growth, and we feel there's an opportunity for the company to reinforce its dominant position in the 3 markets in which it operates and also eventually find international expansion opportunities. The company had a target of EUR 500 million in sales for this year. We would like to accelerate that. So we would like the company to achieve higher levels of sales already this year, even if at the short-term expense of profitability, given the investments that we need to make to grow the company. And in terms of leverage, as you know, we have a quite conservative and prudent view on leverage. And so although we could expect to see a higher level of leverage than the company has right now. It's currently very conservatively levered. That's below 2x net debt to EBITDA. I wouldn't expect to see a very high level of leverage in the company in the next few years.
[Operator Instructions] Thank you. Next, we have António Seladas from AS Independent Research.
The first one is -- well, is mainly related with Musti and it's escalated with the performance of the first quarter but finish of March, at least looking for the figures and taking in consideration the conference call, it seems that figures were on the weak side and some pressure on gross margin. And currently, we see we need to decrease some prices on some items for the coming quarters to -- well, I did not understand well, but maybe because they are losing market share or have some pressure from the competitors. So I don't know if you want to comment on this. And if the performance of Musti regarding the first quarter was in line with your expectations or not? Thank you very much.
Okay. Thank you, Antonio, for the question. You're right. As you know, the company already announced its results to the market a few weeks ago. You're right that the Q1 performance was, I would say, weaker than in previous quarters. This has a lot to do with the macroeconomic conditions currently mainly in Finland. The company is -- the country is facing a slowdown in private consumption, and that's where 40% of the revenues of the company are generated. We are seeing some trading down movements there that have an impact on both food products for pets, but also accessories and discretionary products. So the pressure on gross margin was the reality in the first quarter. It's composed of 2 different main impacts. One is, you're right. So one, there was some more price aggressiveness on the part of Musti to maintain its market position. The company did not lose market share in our estimates. So the company retained its leadership position and it did not lose market share in any geography. And actually, in Norway and Sweden, it continued to gain market share and increase its leadership position. Half of the pressure on gross margin was related to that price competitiveness that for us is, as you know, in most of our business nonnegotiable because we want to remain leaders and maintain our market position. The other half was due to exchange rate effects. As you know, the company operates in 3 different geographies, Finland, that is a euro country, but also Sweden and Norway where currencies are different. And obviously, because you buy products in euros or dollars and you sell them in a different exchange in different currency, there was an unfavorable evolution in this quarter, which accounts for half of the pressure on the gross margin. So I would say that this is something that obviously we cannot fully control. And our expectation is that we will see improvements along the year up to the end of the year. It's probable that in Q2, we will still see some pressure on gross margin vis-a-vis historical figures, but we expect this to be recovered in the next few quarters, not only driven by external factors but also by things that the company is doing to improve its gross margin, namely in-sourcing a great part of the production of its own label into their production facility, which will have a direct impact on the gross margin of the company. And so key messages, yes, a bit weaker performance than in recent quarters. No, we are not losing market share. The company is still strong and still getting market share in total in the Nordics. And the pressure in gross margin is expected to ease up until the end of the year.
Okay. Just if I could question on Sonae MC. So I know that we don't like to talk about margins for the coming quarters. Nevertheless, it seems from your answers before that improvement on margin, EBITDA margin, 20 basis points was mainly due to the Easter and leap year reflected. So should we conclude that over the coming quarters, you were not -- you should not be able -- I'm taking in consideration the energy cost, you should not be able to improve margins or not necessarily.
I would say that it's difficult to predict as of today. As I mentioned, we are seeing a slightly decrease in gross margin because of the pressure on the prices on the strong competitive environment that we're seeing in the Portuguese market, as you well know. In terms of the energy costs, we are also seeing some pressure. That being said, as you know, is a much smaller component of our cost structure. And we are putting a lot of emphasis on our efficiency measures, which we are being able to successfully implement. So I would say difficult to predict where the EBITDA margin will land over the next quarters, but we remain confident that we did a strong sales performance, we'll be able to do a good job to really predict if we're going to be able to increase, decrease or maintain it flat. I would say it's probably too early given the uncertainties in terms of the macro environment, the consumer environment. And so I'll prefer to leave that question for the end of the second quarter.
Thank you very much and congratulations for the figures.
Thank you. As there are currently no further questions in the queue, I would now like to hand the call back over to you, Mr. Dolores for any additional or closing remarks.
Okay. Thank you very much for attending our Q1 results conference call, and thank you for making it this early in the morning. We will be back in July for our Q2 earnings announcement call. And we expect, as was mentioned, to produce positive results also in Q2, continuing the good trend and the good momentum of the first quarter of the year. Thank you very much, everyone, and talk to you soon.
Thank you for joining today's call, ladies and gentlemen. You may now disconnect.