Welcome to the Sonae's First Half 2019 Results conference call. During the introduction, hosted by Mr. João Dolores, Sonae CFO, all participants will be on a listen-only mode. After the introduction, there will be an opportunity to ask questions. If any participant has difficulty in hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. I will now pass the conference over to Mr. João Dolores. Please go ahead, sir.
Hello, good afternoon everyone, and welcome, and thank you for attending Sonae's results conference call for the first semester of 2019. Together with me today, I have the CFOs of our businesses, Rui Almeida from Sonae MC, Paulo Simões from Worten, Miguel Moreira from Sonae Fashion, Luís Mota Duarte from Sonae Sierra, and also our investor relations team. I will start by giving you the performance highlights for each individual business in the portfolio, and then I will cover Sonae's consolidated figures for the semester before opening up to Q&A. Starting with the businesses, Sonae MC had another strong quarter of sales performance, market share gains, and underlying EBITDA growth. In the first half of the year, turnover reached EUR 2.2 billion, an increase of 10% year on year, with a strong like-for-like growth of 3.9%, mainly driven by increased volumes.
A note regarding the expansion program, which continues with 30 new company-operated stores, which include five Continente Bom Dia stores, which is, as you know, our proximity format. In terms of profitability, Sonae MC's underlying EBITDA margin increased 40 basis points. This was driven by the positive impact of transportation lease agreements, which were reviewed in Q2 and now fall under the IFRS 16 accounting standard. Without this effect, the margin would have stayed in line with last year at 9.1%. I would also like to highlight the integration of Arenal in Spain, which is evolving according to plan. Arenal posted solid double-digit growth in the semester and is in the process of executing an important expansion plan in Spain. It opened up one store, one flagship store in the first half of the year, and already two stores in Q3.
Looking at Worten, Worten had a better sales performance in Q2 than in Q1, with 2% like-for-like growth. In the semester, turnover stood broadly in line with last year at EUR 473 million. I would like to highlight the growth of online sales, which stood above 50% in the semester, which is good evidence of the efforts the business is doing in the digital front. On the other hand, profitability decreased when compared to last year's results, and the performance in Spain mainland was particularly disappointing. We have decided to implement an ambitious program in Spain targeted at improving profitability in this geography, and this will happen in the near term. This program includes a reduction of local head office costs and also closing a number of loss-making stores in the coming months.
Regarding Sonae Fashion, the business achieved a very positive performance in Q2 across all brands, with a total like-for-like sales growth of 10.2%. In the first half of the year, turnover grew 7.5% like-for-like and 3.5% year on year. This was mainly driven by a strong omnichannel evolution across vendors. This top-line performance and also the ongoing transformation plan fueled the improvement in profitability. Underlying EBITDA increased EUR 2.3 million and reached a margin of 6.3% in the first semester. It's worth highlighting that all brands have been increasing also e-commerce sales very strongly. In the semester, online sales increased by more than 30% year on year as a whole in the business. ISRG, which as you know is the entity resulting from the merger between Sports Zone and JD Sprinter, maintained a strong track record and continued to post solid growth levels.
Turnover in the six months ending in early May increased 14% year on year, and EBITDA almost doubled from EUR 13 million last year to EUR 25 million this year, implying a margin of 7.8%. JD and Sprinter continue to show very positive results, and the refurbished Sports Zone stores are improving sales and profitability at high double-digit rates, which is also a very good sign. This is happening by leveraging new store layouts and operating models, as well as different assortments which are more appealing to consumers both in Portugal and in Spain. The contribution of ISRG to Sonae's accounts increased EUR 6 million year on year, and we expect further improvements in this contribution in the near future. Sonae Financial Services had another positive quarter, with both financial and operational indicators growing significantly year on year.
Turnover increased by 20% year on year in the semester to EUR 17 million, and underlying EBITDA was up by EUR 2 million, reaching a margin of 23%. The Universal Card reached another important milestone in June. It surpassed 800,000 cards, and market share of total credit card production reached 12.5% in June, up from 11.3% last year. Sonae Investment Management continues to actively manage its portfolio of investments. In the first half of the year, the company invested in four new tech companies in different areas such as cybersecurity, data analytics for retail, and also telco technology, mainly mobile network automation, and has recently sold its stake in both Saphety and WeDo, with the latter transaction only impacting our accounts in Q3. Regarding operational performance, in the first semester, turnover grew 30% to EUR 93 million.
This was fueled by the integration of two new cybersecurity companies, which we recently added to the portfolio. In any case, on a comparable basis, turnover would have grown 13% year on year. Underlying EBITDA stood at EUR 0.3 million in the first semester, mainly influenced by the consolidation of recently acquired companies and also by a less positive performance of WeDo, which still impacts our accounts in this quarter. Moving on to Sonae Sierra, Sonae Sierra had a quite positive quarter in operational terms, registering a 4.8% like-for-like growth in tenant sales and 4.1% in rent. Proportional EBIT increased 5.7% year on year to EUR 55 million in the first semester, and direct results were up 9% to EUR 36 million. These results are driven both by the positive performance of the investment portfolio and also the services division, which more than offsets the impact from the sale of assets.
In terms of portfolio management, Sonae Sierra completed several transactions. The main highlight is the merger agreement between Sonae Sierra Brazil and Aliansce Shopping Centers, which was already completed in Q3 and which creates one of the largest shopping center operators in Brazil. Additionally, during the second quarter, Sonae Sierra sold three shopping centers: Dos Mares, Leiria Shopping, and Solingen. During Q2, Sonae Sierra recorded a one-off loss in the sale of one specific asset, which is the main driver behind the company's negative indirect income and also behind Sonae's non-recurrent line, which impacts consolidated EBITDA. This was a planned sale of a relatively small non-strategic asset in a secondary location in Germany, which we co-owned with a financial investor. I must stress that this is an isolated case, which reflects specific transaction dynamics.
In total, Sonae Sierra has already sold seven assets this year, three assets in Q3, and apart from this case, all assets, particularly the larger investments, were all sold broadly in line with their book valuation. On the development front, we would like to point out the expansions of Norte Shopping and Plaza Mayor, which are evolving according to expectations. The Designer Outlet at Plaza Mayor is planned to open in Q4, and Norte Shopping opened in August a brand new food court, which represents Sierra's innovative and on-trend asset management capabilities. Those of you joining us for our capital markets day in October will have the opportunity to see this new space firsthand. NAV stood at EUR 1,364,000,000 , reducing EUR 91 million versus year-end 2018, mainly reflecting the dividend distribution of EUR 115 million.
Regarding NOS, NOS, as you know, has already announced its first half results in July, but we would just like to stress its solid performance yet again in Q2. Turnover grew 1.8% year on year, EBITDA increased by 2.8%, and net results also increased by 6.4%. The company's transformational plan is on track, and we are witnessing a good free cash flow generation momentum in the company right now. Finally, looking at our consolidated figures, Sonae showed a solid performance overall in the first half of the year. Turnover increased 11% year on year to almost EUR 3 billion, and underlying EBITDA grew EUR 48 million or 24% to EUR 243 million. This positive underlying EBITDA evolution, coupled with a growth in the equity method results of EUR 25 million, more than offsets the negative evolution in non-recurrent items and led EBITDA to increase 10% year on year to EUR 284 million.
All in all, net income group shares stood at EUR 38 million, down from last year's EUR 80 million, and this decrease is more than explained by the strong capital gain registered last year related to the Outsystems transactions. Regarding our capital structure, and on a comparable basis, Sonae's net debt decreased by EUR 131 million year on year to EUR 1.19 billion. Considering all asset acquisitions and disposals in the last 12 months, total net debt stood at EUR 1.76 billion at the end of June after the dividend payment of EUR 88 million. Gearing at the group level continued to decrease and reached 0.5 times, and funding costs and average maturities remain at very comfortable levels. All the companies in the portfolio maintain conservative balance sheets. Sonae MC posted a 2.3 times net debt to underlying EBITDA level versus 2.7 times last year.
NOS registered a financial net debt to EBITDA of two times in line with last year, and Sonae Sierra's LTV decreased to 29%, and the holding LTV stood at 14%. Overall, we are quite pleased with this set of results, and looking forward, we will remain focused on driving the good operational performance of our businesses up to the end of the year, and we will also continue to pursue our strategy of unlocking value across the portfolio, which should enable us to further strengthen our balance sheet in the near term. I will now end this brief overview of our first half results and invite all of you to ask questions. You can please open the session to Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session.
If you wish to ask a question, please press Star and One on your telephone keypad and wait to be advised your line is open. Please state your first and last name before you ask your question. Should you wish to cancel your request, please press Star and Two. Once again, Star and One if you wish to ask a question. We will now take our first question. Please go ahead. Your line is open.
Hello, can you hear me okay? It's Tim from Santander.
Hi, Tim. Yes, we can hear you.
Good afternoon. A few from me, if I may. Selling great like-for-likes at Sonae MC. You say it's mostly volume. What was the gross inflation, the inflation in the quarter? I think it was a little under 1% in the first quarter. Can you quantify what the Easter impact was?
What sort of momentum should we look at going into Q3? Can you sort of tell us about what the exit rate is, please? Also on MC, the EUR 8 million IFRS Q2 impact, I mean, what you're trying to say is realistically we should make a prior year adjustment, seems to be the message. I am a bit surprised that there's not sort of a little bit more operational leverage coming through given the very strong like-for-likes. Yeah, then on Sonae Sierra, that EUR 115 million dividend. Can we expect sort of repeats of that in the coming years? I mean, I think it's just a function of asset sales and capital recycling. A comment on that, if I may. One last one. No sale on leasebacks, I think, in the whole of the first half.
Has this process stopped, or is it just sort of on pause for the moment? I'll leave it there for now and let someone else have a go. Thanks.
Thank you for your questions, Tim. I will hand it over to Rui to answer the Sonae MC questions, including the one on sale on leasebacks, and then I will ask Luís to cover the Sonae Sierra one. Rui?
Okay. Hi, James. This is Rui Almeida speaking. Regarding the inflation rate, in the second quarter, it was around 0.1%, and the Easter effect, as we said last meeting that we had, last conference call that we had, was about 2%, 2 percentage points. Because last time we worked together, we said that the first quarter sales were impacted by the Easter effect, but without that impact, our like-for-likes would be higher comparing to what we were presenting in the very first quarter.
Regarding the EBITDA margins, yes, they are impacted by the fact that we were reviewing and completing all the additional transportation lease agreements according to the new standards of IFRS 16 rules. Yes, we are investing a lot. We are growing a lot. We grew a lot in terms of like-for-likes during the first semester. We grew almost 4%, and we are very happy with the levels of EBITDA margins as we continue to present very high levels of EBITDA margins, and we think they are very standard figures, sorry, benchmark figures that we will need to continue to have in our company, and we keep to maintain those levels that we feel very confident and very comfortable with. Regarding the third question you raised, was it related to the sale on leasebacks?
Yes.
Right?
Yes, indeed.
Regarding the sale on leasebacks, what we said in the past was basically we continue to have the ambition to maintain 40% of our freehold in our portfolio of assets. We are very keen to continue to use assets to sort of a very opportunistic deal that we intended to have in our portfolio. If we see any very good opportunity to take into account, we will consider that, or to capital recycle in order to continue to have those 40% in our freehold in our portfolio, and then continue to grow in our company because we will continue to invest heavily in the areas that we feel underpenetrated comparing it to our competition, I mean, in Portugal as well, is in the proximity segment in terms of supermarkets.
Okay. Rui, thank you for that. Just could I just confirm, sorry, the inflation number that you first gave me, was it 0.1 or 0.9?
0.1. 1 point.
0.1. Okay. Thanks.
What percentage of the figures that we have. Exactly.
Okay. Just also on the exit rate, what's the momentum like going into 3Q? Are you seeing people trading up?
Yes. Yes, people are continuing to be trading up in our, at least in the Portuguese market. There are several categories that are benefiting from that situation because we are benefiting from a very good momentum in the Portuguese market. People continue to be trading up in several categories in our stock. We are seeing a very positive momentum.
Okay. Thanks, Rui.
Okay. Hi, Tim. This is Luís from Sonae Sierra. In terms of your question around our dividends, our dividend policy typically reflects two factors.
One is we typically distribute a percentage of our operational profits, and we distribute also part of the proceeds from the sale of our assets. The part we distribute is typically agreed on a specific basis. The EUR 115 million you've seen that we paid this year is as a result of the significant asset sales that we did over the course of the last year. We are currently in the market conducting asset sales, so the dividends that we will pay going forward represent that share of the operating profit, but also the rate at which we reinvest and the rate at which we do conduct asset sales.
Okay. I shouldn't be looking for a sort of a similar number for next year, given that you said there were significant asset sales last year.
Yep. It's very difficult to say, Tim. It depends really on the rate of asset sales.
Okay. I understand. I understand. Thanks. Okay.
Thank you. We will now take our next question. Please go ahead. Your line is open.
Hi. Can you hear me?
Yes.
Hi, Juan. [Joong In ] from JB Capital Markets. Thanks for taking my question. The first one on Sonae MC, could you please tell us how the market share has evolved since the beginning of the year? A second question on Worten and then this new program in Spain, could you please give us some color on the amount of costs that you expect to spend in this program, and how many stores do you expect to close? Thank you.
Okay. Rui, can you take the first question, then Paulo will take the second one?
Yes. Sure. Regarding market share, we increased our market share according to our calculation, our estimate, between 20-30 basis points in the Portuguese market in the first semester of this year.
Hi, everyone. Regarding Worten, we have decided to move ahead with a transformation in the business, adapting Worten into the competitive context we have in Spain and that we foresee going forward. We have decided to close nine stores that we saw that they are not economically recoverable in the foreseeable future, so we have decided to close them. Those nine stores, with that movement, we should be able to, in addition to some savings in the headquarters, in total, we should be able to save on a yearly basis around EUR 3 million. That is our expectation.
Just a quick follow-up. You should save on a yearly basis EUR 3 million, but do you have upfront costs with this program with, I don't know, people and so on?
Yes. Obviously, with the movement that we are doing, we have some costs of closing the stores with the people that we have involved and some with the real estate owners. That is a bit too soon to say because we are still in the negotiation with all those parties. It is a bit soon to say. Having said that, we think that at our underlying EBITDA level this year, we should have a neutral impact between savings and costs. Underlying EBITDA should not move a lot for the year.
Thank you very much. Very clear.
Okay. Thank you.
Thank you. We will now take our last question. Please go ahead. Your line is open.
Yes. Good afternoon. José [Ruiz] from CaxiaBank [ BPI.]
Hi, José.
My question on Sierra, the cash in with the sale of assets in Q2, in the release, it is mentioned for EUR 150 million of open market value. How much was this in terms of any impact to Sierra? If you could provide a little bit more color on this, we'd be grateful for us. Second question on Sonae MC. Question regarding Mercadona. If you have felt any impact in the surrounding stores or in any specific category related to this, and also in terms of margin outlook, you mentioned that you expected greater strategic margin going forward. Have you noticed any change in terms of competition due to Mercadona? That will be my second question on this. Finally, on Worten, just a follow-up. You mentioned this EUR 3 million potential impact at the EBITDA level from the restructuring that we have planned for this business.
Is this enough to be at break-even in terms of EBITDA in Spain? That's it. Thank you.
Okay. Let's start with Luís answering the Sierra question, then we'll move on to Rui and then Paulo.
José, I'm not entirely sure I understood some of the question, but I'll try to answer it, and if it's not what you're looking for, let me know. The EUR 115 million that was mentioned is around the dividend that Sierra paid to the shareholder s [grown] and to Sonae .
Sorry. In the release, you mentioned EUR 450 million open market value of the assets that you took, right? I was asking how much is the NAV cash in attributable to Sierra.
Okay. The reduction in NAV from the sales is around EUR 62 million. That's the NAV of the assets that we sold. That was your question, is it?
Yes. EUR 52?
62.
Okay.
Okay. Rui, can you answer the questions on Mercadona, please?
Yeah. Sure.
Hi, Rui.
Thank you for your question. Regarding Mercadona, Mercadona is a very strong player, and as you know, we have a lot of respect for them. They have been doing a tremendously very good job in Spain, in Spain, getting a very good market share, very important market share in Spain as well. It is too early to give you some very important conclusions about what is the first impression in Portuguese. Yes. We only had opened four stores in the beginning of the first store running beginning of July. It is too early to give you impact in terms of to give you some figures in terms of impact.
Up to now, there are no material impact in our top-line performance because they are only four stores, and this is not as important as other players that enter in the market or even a player in the Portuguese market that opens a new store in the Portuguese market. Regarding the other issues that you were mentioning, regarding what is the most important conclusion that we get from a very important player entering the Portuguese market? Regarding the pricing policy, they have a very different pricing policy comparing to ourselves. They use the everyday low price pricing policy. We use a totally different pricing policy with a higher low pricing policy that we believe this is more suitable to the Portuguese consumption patterns.
We continue to have sort of a very good advantage because we have a loyalty program with much less information that continues to give us very good advantage in terms of planning the promotional strategy and with very good results both in terms of efficiency and effectiveness. We feel very comfortable to continue to pursue our strategy, to continue to lead the market, even considering that this very important Spanish player is coming to Portugal with 10 stores as they announced for this year.
Thank you. Thank you, Rui, for the answer. Just a follow-up. Has Sonae decided to be a little bit more aggressive on prices due to Mercadona in some specific regions following the opening, or are you seeing other players doing that? Or not exactly at the moment?
Not at all.
Generally, I cannot tell you that precisely because what we generally do and what the companies generally do is they sort of promotional activity when they are launching, competitors are launching a very specific store, for instance, as we are doing. We launch one store that will be in the south. We see that some competitors of ours, they generally consider special campaigns and promotional activity in order to fight against us. Basically, what competitors do across the country, across the world, in fact, in order to compete when a new player is entering in a specific market. Frankly, I don't know if we can say or it is very too soon to say that we will have a different price positioning or a different pricing, well, different margin positioning towards this market because I think it's too soon. Even the range, we didn't change a lot the range.
In fact, we did not change the range. We are improving the range, as we are improving every day the range to offer to our customers according to the value proposal that we offer to our customers. Frankly, I do not see much difference between what we were having last year, for instance, and what we are having today. Thank you.
Paulo?
Hi, José. Thank you for your question. As you know, we see Worten as an Iberian operation, and we have a lot of integrated activities. We are not seeing this as Portugal and Spain. Overall, obviously, the saving that we have with closing the stores and restructuring the central structure in Spain will be supportive for the future results of Worten. I will not add much more to that.
Can you confirm that you are well, I understand that it's basically an Iberian operation, but it seems that the focus of the restructuring is in Spain. Basically, I was trying to get a little bit some sense of how much it could represent Spain in the Iberian space in terms of EBITDA contribution.
Yeah. We do not disclose EBITDA by geography, so we will not be doing that right now. Again, we see this as an Iberian operation, and obviously, what we have decided to do was to close stores that we did not foresee as being economically recoverable in the future. That was the main reason we decided to close the stores. The Spanish market is clearly more aggressive and much more competitive than the Portuguese one.
There are some stores that we thought that would not fit this level of competitiveness, and we decided to move accordingly and adapt the business model in this geography. We cannot predict going forward, but that is all.
Okay. Thank you. Can you confirm at least following the closure of these nine stores, all the stores will be part of the EBITDA contribution at the store level at least?
It will depend a lot on how the market goes going forward, obviously. We will be attentive, as we were up to date, looking at opportunities to improve the portfolio of stores in Worten in whatever geography that we are working on. Spain is not an exception to that. We will be looking for opportunities to improve going forward. For the moment, these are the ones that we have identified that we should move ahead and close.
Okay. Thank you.
Thank you, José.
There are no further questions at this time.
Okay. Thank you very much, everyone, for all the questions, and looking forward to speaking with you again in our Q3 results conference call.
Thank you. That does conclude our conference call today. Thank you all for participating. You may all disconnect.