Good afternoon. We welcome you to Sonae's Quarter 1 2023 results conference call. During the presentation hosted by Mr. João Dolores, Sonae's CFO, all participants will be on listen only mode. There'll be an opportunity for question and answer at the end of the presentation. If you wish to ask question during the question and answer session, you may do so by pressing the star key followed by one on your telephone keypad. If you are experiencing any difficulty in listening to the conference at any time, please make sure you have your headset fully plugged in, or alternatively, please try calling from a different device. I now hand over the conference 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 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 what concerns salaries.
Nevertheless, our businesses proved once again their resilience and adapted quickly to mitigate these impacts, namely by absorbing parts of the inflation levels to protect households and continue to deserve the preference of consumers. Before we cover the results of 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 circa 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 Bankinter Consumer Finance to create a 50/50 joint venture, which aims to become a leading consumer credit operator in Portugal.
Finally, Bright Pixel, our corporate venture arm, continued to expand its portfolio of technology companies, having executed three new minority investments. Already in the second quarter of 2023, the results of the tender offer over Sonaecom were disclosed. We now own 88.8% of the share capital in the company and 90.5% of the voting rights, and therefore, Sonaecom will remain listed and focused on executing its investment and value creation strategy. Together with Balaiko, our Spanish partners, we notified JD Sports of the decision to exercise a Buy or Sell Option, which is foreseen in the existing shareholders' agreements of Iberian Sports Retail Group. We expect an outcome of this process during the second half of this year.
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 first 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 continued to adapt to the evolving consumption behaviors in a context of abnormal food inflation and high interest rates, which again pressured household disposable income. The focus of our team at MC was on adapting its product offering and offering the lowest possible prices to consumers. In the quarter, MC's total turnover increased 13.5% year-on-year, with a like for like growth of 11.8% to EUR 1.5 billion, with a growth of 8.9% in hypermarkets and 17.4% in supermarkets. We also continued 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 product categories and services.
The company's turnover increased 9% year-on-year in the quarter, with a like-for-like of 7.5% to EUR 284 million, fueled both by the online and offline channels, as the company continued to gain market share in the Portuguese markets. Regarding profitability, consolidated underlying EBITDA increased 11% year-on-year to EUR 137 million with a slightly lower margin than last year. MC was the main contributor to this evolution, given the positive top-line performance, significant efficiency gains, and also lower energy prices offsetting the efforts to absorb parts of the inflationary pressure that we felt. Also a different product mix and clear trading down movements on the part of consumers. In Q1, underlying EBITDA at MC reached 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 non-recurring items as last year we had registered some capital gains on assets sold by BrightPixel. 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, BrightPixel had posted an EUR 8 million gain from an asset revaluation after a financing round. 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 you look at our balance sheets, total net debt decreased to EUR 922 million versus EUR 931 last year, and the group's capital structure remains solid with a low level of leverage, significant liquidity levels, and also a stable debt maturity profile of around four years. At the end of Q1, our holding LTV decreased year-on-year to 7.4%. Regarding our business units, the leverage ratios also remained at conservative levels.
MC's total net debt to EBITDA ratio stood at 2.8 times 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. At NOS, net financial debt to EBITDA ratio stood comfortably below two times at 1.7 times. Going forward, the outlook remains volatile. We do expect to continue to see inflationary trends and rising interest rates, this should continue to impact the disposable income of households. We must continue to have the ability to manage this situation and adapt to this uncertain environment.
As a holding company, we will continue to support our portfolio companies to quickly adapt to this demanding context and future-proof their business models, always with a focus on social and environmental responsibility. Given our solid financial position, we have the ability to sustain harsher times, but also to capture investment opportunities that may arise in the near term. Thank you very much for listening, and you can now open the session to Q&A.
Thank you. As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad. We will take our first question from Jose Rito from CaixaBank. The line is open now. Please go ahead.
Ah yes, i have a question on Sonae MC. In terms of like-for-like evolution in the quarter, if you can break down what was volumes 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 weighting percentage of sales this quarter versus last year. This will be two questions on Sonae MC. 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 Buy or Sell Option, what you are seeing that could change eventually to create further value versus the situation as it is. Thank you
Very good. Ze, 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. Look, ISRG is a partnership that has generated significant value for Sonae and for all partners throughout the last few years. It's a partnership that we have enjoyed being a part of over the last years. 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. 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.
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, irreconcilable. We decided to exercise this option that we have in the contract to be able to clarify positions. What will happen is that either JD will take full control of this company or ourselves and the Spanish family will do 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.
The one in which we end up selling, obviously, the valuation at which we will sell will be an interesting valuation and one that is significantly above the NAV that we report in our earnings announcement. If the decision is for JD to sell, we will take control of an assets which we like, where we see growth potential and where we would be following the same strategy that has been followed up until now. This is a bit 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.
We will wait for that decision to occur, and then we will be able to elaborate a little bit more on the future of this company, whether it is under our ownership or not. Would you want to take the MC questions?
Yes, sure. I will as well. Thank you as well, and thank you sir for your questions because they are very, very important to explain our performance. In fact, regarding volumes during the first quarter, we lost some volumes due to the fact that we in January, as I mentioned in the previous call, we were comparing ourselves, the performance of the company comparing to a pandemic period, where 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 this, that type of situation, we lost some volumes to the performance that we were having last year. Again in March, it occurs that in March last year, the crisis in Ukraine, in fact, what happened is the majority of the consumers in Portugal started to buy in order to holding the kitchen, et cetera, in order but they bought a lot to prevent any crisis that could might have happen in the weeks after. In fact, when we compare these two months comparing to last year, we see that the volumes decreased slightly.
In fact, our volumes decreased in very first quarter, minus 3%, minus three percentile points. Answering to your question is the effect, as João said a while ago, inflation rate was roughly around 20% in Portugal, but the average baskets increased only by 16% or so, or 15%-16%, due to the fact that the majority of the consumers are now buying more private label. As you may understand, the private label is cheaper comparing to the suppliers brands, we are now having the baskets of our families being smaller comparing to what has been in the previous years. That explains that the average basket is growing at a lower pace, but volumes continue to decrease.
Continue or continued to decrease because we are now seeing in last months that volumes are now stabilizing, and we are doing slightly better in terms of volumes comparing to happened last year in the second quarter. Now answering to your question regarding margins. Well, in terms of margins, this year we have two situations. Coming back to the previous question that you raised. In fact, we are now seeing a lot of trading down movements happening.
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 EUR, has lower margins because the products are 30%-50% cheaper comparing to the, depending on the categories surely, but are cheaper comparing to the suppliers brands. Consumers are in a very difficult situation due to the disposable income, it's due to inflation, interest rates, etc. They are preferring to buy cheaper products with very high levels of quotes. We see this situation happening and we feel very comfortable because the consumers are preferring to buy our brand because they trust our brand, they trust our products.
Nevertheless, we see that margins are in EUR, margins are suffering due to that. This quarter, we could counterbalance the decrease in EUR due to the fact that people are now preferring private labels and the trading down phenomenon is happening with the benefit that we are getting due to the fact that the energy costs are in a total different scenario comparing to what happened last year, where the prices were so high that we couldn't compare the energy costs comparing to the previous years.
In fact, this year, due to the fact that we are implementing Several measures in order to save, to save some, to improve our e-efficiency gain in terms of energy, in terms of trying to add some of the costs and even the prices, stock prices are lower. We benefit from that situation could then and we see that we could counterbalance the costs or the decreasing margins that we see due to the fact that people are now preferring private labels compared to the suppliers brands.
Okay. I understand, Rui. Just a question, in terms of Easter impact, any impact in Q1, just to clarify if there was any impact, positive impact?
No.
because of the earlier Easter this year.
No, no. Thank you for question. In fact, Easter happened this year, second quarter. Sorry, second quarter, like last year. There is no big, no relevant situation to be spot. In fact, what happened is that they, in terms of seasonality, is pretty much the same that happened last year. The seasonality of Easter is this year like in last year in second quarter.
Okay. Thank you. João, you mentioned that, if JD decides to buy eventually, this will be positive in the sense that you'll be above the NAV reported. In the case of Sonae buying, is the NAV a good reference, valuation for a potential acquisition?
Look, the value at which JD can buy or sell is exactly the same.
Okay. Okay. Understood.
It there's a nuance which is, if we sell at that value. If, so if we, if they buy at that value. If they sell at that value. Then we sell back to them the JD banner, which is owned by ISRG.
Yes. Okay.
Which is an important consideration when you calculate the figures at the end of the day.
Mm-hmm. Okay. Thank you.
Okay. Thank you, Jose.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We are taking the next question from line António Seladas from AS Independent Research. The line is open now, please go ahead.
Hi. Good afternoon. Actually I have two questions. First one is related with Sonae MC. Very positive margins. My question is related with costs. The costs over the first quarter, they are a good proxy for the rest of the year, for the remainder of the year. That is the question, if you can answer. Sorry. Second question is still related with 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. I guess that if Sonae and your Spanish partner will buy, the expansion will be outside Iberia. If you can confirm, please.
Thank you, Antonio. I'll take the sports question one first. That is not exactly the case. We do have a clear growth strategy in the company. That growth strategy is primarily concentrated in Iberia. We still see a lot of room to grow in Iberia, both offline and online. Specifically, there are some regions in which we are represented, particularly in Spain, where we still see a lot of potential to grow. That being said, we also see some potential to grow internationally. We will, we would, if we are to remain shareholders in the company, we would explore those opportunities. I think the disagreement with JD goes beyond the international footprint of the company.
It's more a disagreement on the segment itself. JD has gone public saying that their key priority is to grow the JD banner concept, and this segment in which Sprinter and Sport Zone operate in Iberia, which is much more of a mass market athleisure segment, is not a segment where they see their priorities going. Right? I think that's the main point of disagreement. And we do believe in this segment. We have seen the results in the recent past, and we still see a lot of potential to grow. Actually the brands themselves, the international brands, the main ones, also see a lot of potential in this segment. 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.
That answers your question.
Just a follow-up. Sorry to insist on this, on this point.
Yeah.
You mentioned that the multiples, if you sell or if you buy or, well, the value of transaction will be the same if you are selling or buying. However, if you are buying, you will sell the segment that JD likes. My question is, I guess that the multiples will be the same, so.
Again, the, yes, the valuation methodology is the same. I cannot disclose much more detail because this is.
Okay.
confidential information. The valuation methodology is the same.
Okay.
When we are able to disclose the final transaction, we will do so.
Okay. Thank you very much.
Rui, do you want to take the question on the costs, in Q1 for MC?
Sure. Hi, Antonio. Well, regarding what will happen in terms of costs for the rest of the year, well, I think it's just to give you a proper answer. What I tend to say that is up to now, I at least thought in the second quarter, I would tend to say that the, it will be pretty much the same comparing to what happened in the very first quarter. For the rest of the year, well, looking back to what happened in last quarters or even in last year or in 2021, it's so good. Things are still volatile. I would tend to say. If you don't mind, it's just soon to give you a proper answer.
After that, I don't know. What is happening.
for instance, in terms of, in terms of inflation, or what we are witnessing this is, that these days is basically the inflation is now decreasing. The prices we are having, for instance, in mid-May are pretty much the same level of prices that we were having in end of March. Meaning that inflation month-over-month is pretty much new. Problem is that when we are comparing the inflation year-on-year, we will continue to have high levels of inflation, as João said in the very beginning. The inflation will start at least, from what we are seeing, and we are accommodating, et cetera. We are basically feeling that the inflation will start to decrease comparing what we have in previous years.
In terms of costs, yes, in terms of costs, probably the level of costs, in during the second quarter, third quarter, and fourth quarter will be the same that we had in the very first quarter of this year. We are pressured on that situation with the impact of the increase in terms of wages and like João said in the very beginning. Other issues like for instance, I don't know, probably safety costs, they are also increasing due to the fact that the wages that have increased this year. As the remaining lines of the cost structure, like for instance energy.
Energy on the, it's just soon to give you a proper answer. I apologize for not being more assertive on them, on those, in those issues. Thank you.
Okay. The annual increase on wages was done over the first quarter, or should we expect more increases more over the rest of the year?
No, no. Was already done in the very first quarter. We a ll year up to now, we don't see any, or at least not in our agenda to do other increase as we did in the very beginning of this year.
Okay. Thank you very much.
Thank you.
Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take our last question from line, João Pinto from JB Capital. The line is open now. Please go ahead.
Hi, everyone. Thanks for taking my question. I have two for Sonae MC and two regarding the deal 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 of MC as a % of sales? Do you think that the lower energy prices will be enough to offset the trading down effects and have stable margin for the remaining quarters? On the deal with JD Sports. First, the stores, the JD Sports that you would sell back to JD Sports in case you end up acquiring the company, how much do they represent the Iberian Sports Retail Group sales?
The second question, if you were to acquire, will you, and your Spanish partners acquire in the same proportion of your current stakes? There's a possibility of you acquiring the entire 50% stake of JD Sports? Thank you very much.
Thank you, João, for your questions. Again, I will take the sports ones first, and then I will ask Rui to cover MC. Regarding ISRG, JD Sports banner in Iberia weighs around 30% of sales and results of the company. 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. No, acquiring the full 50% is probably not the base case scenario. 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 wanna cover the MC questions?
Yeah, sure. Sure, sure. Thank you, João. Hi, João. 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. Similar to last year, the benefit is around 1 percentile point of turnover. In fact, what happened is in terms of private label last during the first quarter of 2022, where we were having roughly 30% of weight in terms of the private label, in terms of the total fast-moving consumer goods turnover in our portfolio of products.
The first quarter of 2023, we have more than 35 percentile points in terms of weight of the fast-moving consumer goods turnover. What happened during 2022 is the weight of the private label increased slightly during the year. We reached by year-end, we reached levels, very high levels comparing to what we had in the previous years. Yes, the private label continues to increase, but not at the same level. We are hoping that we are expecting not growing at the same pace that did during the last quarters of 2022. What I mean is that we see some benefits from the energy cost this year.
We see that the trading down phenomena is here to stay. We see that the weight of the private label in our turnover will start to continue to grow but at lower pace. We think that we need to counterbalance this impact in our PNL. Continuing as we are doing today with the energy to the efficiency gains and also with the good performance that our formats continue to have. Having said that, as we said during last calls, it's very difficult to state or to see what will be the margin for the company at year-end.
What we will continue to say is that we fight and we think that our target is to continue to increase our margin in EUR. In terms of margin will be very difficult to say what will be the final figure and what will be the trend. Obviously, it depends on the cost evolution, and definitely will depend on the evolution of the private label weight in our turnover. Again, comparing to what happened last year, the weight of the private label in our turnover was very significant, significantly high, higher comparing to what happened in 2021. Hello?
Yeah, yeah. Well, you're on.
Hello?
Hello.
No. Are you listening to me?
Yes, yes.
Oh, sorry. The network probably is not working. Are you aware I think I don't know what you. Hello?
Yes, on
Hello.
You're here with us.
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. Again, I was basically saying that the weight of the private label, it continues to increase but not at same pace it was increasing last year. We think that we will reach higher levels of private label of weight of private label during the year. Yes, we feel that we could having some benefits from the efficiency gain to mitigate the some deterioration in terms of margin due to the trading down phenomenon. Thank you.
Thanks, Rui
That's very clear. Thank you very much.
Thank you as well.
Thank you. It appears no further question 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. Talk to you soon. Bye-bye.
Thank you for joining today's call. You may now disconnect.