Welcome to Sonae's first quarter 2018 results conference call and webcast. During the introduction, hosted by Mr. Luis Reis, Sonae's Chief Corporate Center Officer, all participants will be on a listen-only mode. After the introduction, there will be an opportunity to ask questions. If any participants have difficulty in hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. I would now like to hand the conference over to Mr. Luis Reis. Please go ahead, sir.
Hi, hello everybody, and good afternoon. Good afternoon.
Welcome, and thank you for attending our first-of-results conference call. Together with me, I have Rui Almeida and Miguel Alvarez, both CFO of Sonae MC and Worten , and also João Dolores, our Central Planning and Management Control Head of Area, and obviously our IR team. After a brief introduction, we will obviously be open for Q&A. Before starting presenting the first-half results, just a couple of notes on three important issues that have been announced during the first half of Sonae's period. The first one has to do with the potential IPO of Sonae MC, just to make sure that—and to make clear that under the current Market Abuse Regulation, we are very limited on the information that we can give to the market. All the information has already been posted and published, both in our website and in the earnings announcement.
The only three relevant issues that I can announce are, first of all, that we are still evaluating and studying the operation. Second, that the full perimeter that will be listed has already been communicated to the market, and it includes both Sonae MC and all its subsidiaries, together with Sonae RP, the real estate arm of Sonae that is allocated to retail stores. Finally, the fact that we have appointed the three global coordinators for the operation: Deutsche Bank, Barclays Bank, and BNP Paribas. Those are the only information I can give regarding the potential IPO of Sonae MC. Second, regarding Sonae Sierra, we've announced to the market, and we've hosted a conference call on the subject. We have assumed the intention to acquire an additional 20% stake on Sonae Sierra.
At the time of the deal, we've clarified the strategic importance of this move, mostly related to the fact that it's a sector that we like, that we know, that brings to the group more international exposure. This deal is actually subject to international authorities' approval in several countries where Sonae Sierra operates. We do hope that this deal will be finalized and concluded before year-end. Finally, last but not least, and following the announcement to the board of Sonae from Paulo Azevedo and Ángelo Paupério, that they didn't want to continue to be executives in Sonae, the board of Sonae, after an extensive period of selection, recommended to F&R the designation of Cláudia Azevedo as the next CEO of Sonae.
F&R has accepted that recommendation, and that has been also communicated and clarified to the market, and there are press releases and releases to our stock market authority in our website, also to clarify completely this issue. Those were three of the main points that happened on the side of the accounts during the first half of 2018. Regarding the accounts, once again, we are very, very pleased with the figures. We are posting very solid growth at top line, 6.6%, and at the same time, we managed to preserve profitability with underlying EBITDA pretty much stable, margin of 6.3%, growth in the margin of 6.3%, and a stable margin of 4.9 percentage points. Operational results have a significant growth, 40%, and net income also a significant growth of 34%, that pretty much influenced by an extraordinary operational Sonae Investment Management regarding the sale of OutSystems.
Regarding our group's capital structure, it's very solid, remains very solid, even increased. Its robustness net debt has decreased by EUR 95 million on a first half where we grew CapEx by 25%, and we also kept growing our dividend by 5%. Financial leverage stood at 38.3 percentage points less, 2.8 percentage points when compared with the first half of last year, once again showing the strength of our balance sheet. Going division by division, or mainly concentrating my efforts on the divisions that have not yet posted results, and starting with Sonae MC, it was really the star of our results during the first half. Very solid performance in a very tough competitive environment. We've once again grown our market share. We've been growing market share in Sonae MC for 11 quarters now in a row.
Very resilient top line, but at the same time, also a very resilient profitability with EBITDA growing on absolute terms and with EBITDA margin being sustained when compared to last year. The growth of 7.2 percentage points off on off is composed from a growth of 2.7 percentage points in like-for-like terms, and that has to be considered with an inflation on the backdrop of it of around 1 percentage point, which means that we have a growth in volumes of around 1.7 percentage points. Regarding Worten, also a very solid performance, mostly at top line. EBITDA pretty much stable when compared with last year. It was a slightly more difficult half in terms of EBITDA in Worten because due to the integration of the Iberian operation, we made some logistic changes in our Iberian operation.
Namely, we've changed both the logistic operator and the transport operator that support our Spanish operation, and that had a small non-structure influence on the first half EBITDA, but that was pretty much absorbed or completed during the half. Nevertheless, very, very solid top line performance and also a very stable performance at EBITDA level, which would have been greater if not for the effect I've already mentioned. Regarding our fashion division, obviously, as you all are aware of, it was one of the toughest quarters for fashion players. We were no exception to that difficulties. We had to face a very late summer on top of what was already a late winter last year, so it was really, really a very tough quarter. Nevertheless, we managed to post a small growth in terms of top line, which is quite significant under the current context.
EBITDA was slightly positive if we exclude the contribution of two brands that we are starting up and that were inherited from the merger of SportZone. When we merged SportZone to build the ISRG , Sonae decided to keep and to try and develop Deeply and Berg, which are two brands that are one dedicated to mostly surfwear, Deeply, and the other one outwear, Berg. Obviously, since we are starting those two operations, we are incurring in startup costs at this stage, and those two have mostly contributed to the negative EBITDA of the half. Regarding Iberian Sports Retail Group, we are reporting figures for that particular entity for the first time. Due to the different timelines of reporting between Sonae and JD Sports, we are now reporting the figures between February and May, and those figures show already very positive signs resulting from the integration of operations.
Turnover is growing 7.8%. EBITDA is improving. Underlying EBITDA is improving EUR 2.7 million, and that's benefiting from the contributable brands which are integrated in this group: JD, both in Portugal and Spain, Sprinter in Spain, and SportZone in Portugal and the Canary Islands. All the brands are posting positive evolutions on EBITDA, and we are very happy with the initial results of the merger process and very optimistic regarding the future results of these merged entities. Regarding Sonae RP, two notes. One to say that the first half was pretty much no news half, everything being in line with last year. Gross book value of EUR 1.284 million, net book value of EUR 900 million. Just a note also here to say that we are continuing to be active in the sale and lease-back market.
Portugal continues to be quite interesting in that arena, so we might have some opportunities there, but for the moment being we have no operation to announce. Regarding Sonae Financial Services, it has kept its very good momentum, turnover growing 27.5%, underlying EBITDA reaching EUR 2.2 million on the half. Quite impressive if you think that this operation has been launched slightly more than two years ago. The number of credit cards on its star product, Universo, has surpassed 660,000 cards, also a very significant number, so very positive figures on this small but nevertheless important division of Sonae. Regarding the two biggest divisions outside Sonae MC, Sierra and NOS, most of them have already posted their results. Regarding Sonae Sierra, it has been also a very positive first half, obviously negatively impacted by the depreciation of Brazilian Real. Nevertheless, operational results have continued to be very positive.
Global occupancy rate stood at 95.8%. Tenant sales have grown 3% in Europe and 1.3% in Brazil in local currency, very, very positive results here. Also keeping a very strong development portfolio with projects being developed in Nuremberg, Malaga, Cúcuta, Zanata, Parma, and also expansions on North Shopping and Cologne. Regarding NOS, also a company that has already published its results, once again we are very happy as a shareholder of NOS with a very solid business performance, grossing turnover, operating profitability, operating revenues, free cash flow, EBITDA minus CapEx, all the relevant numbers in NOS pointing towards positive figures. Very, very happy shareholder regarding our participation in NOS. Sonae Investment Management, I'll spend slightly more on Sonae Investment Management. It was really a positive half for Sonae Investment Management.
From one side, because it has managed to achieve a significant number of new investments, eight new investments, mostly focused on cybersecurity and other technological investments close to our telecom field, but also one or two investments in the retail arena. Out of all of those investments, there is one that I would like to particularly mention, which is the acquisition of Nextel. Nextel is going to be merged with S21Sec, and the combination of those two companies together with other acquisitions that we've already made in Portugal and also outside Spain will create the biggest cybersecurity group in Iberia and already one of the largest cybersecurity groups in Europe. This is a particularly exciting moment to operate in the cybersecurity field. It's an area that is growing very, very fast.
It's simultaneously an area that is very relevant for all of our businesses, but it's an area where we believe we can be a player of relevance and eventually in the future also generate some significant capital gains in this arena. Also mentioning capital gains, Sonae Investment Management, the other side of it is to invest and also to cash in when it's time to cash in in some of its investments. During the first half, we had a significant operation regarding OutSystems. As you know, we had an indirect participation through the Armilag fund that we bought around one and a half years ago, and we sold half of our participation on OutSystems. OutSystems has been valued above EUR 1 billion, effectively becoming the first Portuguese unicorn.
Due to that operation, we've cashed in and also reevaluated the percentage that we still own in OutSystems, and the combination of those two operations has resulted in a capital gain of around EUR 48 million, so it was very relevant for Sonae Investment Management, both building its portfolio and also making a significant capital gain on one of its most relevant investments. All in all, a very important first half for Sonae, not only because we've achieved a significant number of important points regarding our holding strategy, but also because the results are very, very positive. I will open now for Q&A. Thank you, you all, for being in the middle of listening to our conference.
Thank you, ladies and gentlemen. As a reminder, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced.
If you wish to cancel your request, please press the hash key. Once again, that's star and one for any questions. The first question comes to the line of José Rito. Please ask your question.
Yes, good afternoon. My first question on the retail markets, if you could provide an overview of the competitive landscape, if we had any change versus the previous quarters, and how do you expect this to evolve? My second question related to the Sports and Fashion division. Following the losses in H1, what is your view regarding this business EBITDA contribution for the full year? Also related to this, regarding Deeply and Berg, is the company planning to open stores? Can you explain the attractiveness of these two brands? What do you expect to achieve in terms of profitability? We know the brands were inside SportZone. If you could provide some reference of how much further the profitability of these brands inside SportZone will be great. My third question related with Worten. Top line continues to evolve well, but EBITDA and EBIT remained flat.
You flagged the logistic changes. Could you detail how much was the impact in the quarter or in the half related to these logistic changes? If it's only these that impacted the profitability of Worten? Finally, a small question on Sierra. If you could detail how much was the dividend from the company? Thank you.
Okay, so lots of questions. I'll try to start with a very easy one, which is the competitive landscape of Sonae MC. I'll ask Rui to give you a color on that.
Hi, there. Regarding the landscape, the competitive landscape that we are witnessing today, it's pretty much very intense, more intense than the first half of last year. Following the second half of last year, it will be pretty much the same, very intense. All banners, all competitors are doing very intense promotional activity. The promotional activity is very intense, but I feel it is more or less the same that we witnessed in the second half of last year.
Okay, thank you.
The second and the first question, I would ask to Rui to continue.
Yeah, I will continue. I will just hand it over. I'll take the end of the end, the Sierra and Sports and Fashion. I'll hand it over to Miguel to make a comment on Worten.
Hi, José. On Worten, we cannot actually go and quantify precisely the impact on EBIT from the logistics transformations. It was noticeable, mainly in the second quarter, and it is clearly the largest contributor and contributing with much more than half of the slight deterioration in the EBITDA ratio. This was not the only impact we have on the first semester and especially on the second quarter. There is a slight Easter effect that benefited us in the first quarter, and the flip side of that is on the second quarter. There was also an impact from the weather, not as impactful as we would see, for example, in fashion, but we also suffered a bit in the sale of air conditioning, fans, refrigerators, those seasonal products that electronics retailers always stock up a bit for the summer season.
When the weather does not help, as was the case this year, especially in the second quarter, sales were a bit harmed by that, but also margin is harmed by that because those are relatively healthy margin products, and not selling them in May, June actually creates a bit of a stock increase that then puts pressure on margins at the end of the quarter. Those were the main impacts for the semester.
Okay, and just to confirm, the weather in the east was stronger than the World Cup, assuming that the World Cup had a positive impact in the quarter.
Absolutely. The World Cup had a positive impact, not as large as we had it four years ago, but there was a positive impact witnessed mostly on TVs. The impact from the weather on refrigerators, air conditioning, and ventilation was much, much stronger than that.
Okay. Okay, thank you. Just in terms of competition, probably stable in Spain, or have you been witnessing an increase from Amazon or MediaMarkt?
We see the same competitive landscape in the sense of a highly competitive market where all the main European retailers are or have been present. Amazon, as far as we know, is still with a positive sales performance. We have also been in a positive trend with the exception of these impacts that I just mentioned. As far as MediaMarkt, what we see is that their promotional activity, together with some other big players like Carrefour, has continued to be strong. We've noticed, for example, that MediaMarkt came back to days without VAT, as they call it, something that they had abandoned for two years. They came back in Spain, so the pressure is higher than it was before.
Okay. Okay, thank you.
José, regarding Sierra, I believe that I've heard you asking about dividends. It's true that Sierra has registered the intention to distribute dividends, but Sonae has not yet received those dividends. That will only be subject to payment after the conclusion of the deal that has been announced and that we expect, as I said, to be concluded before year-end. Okay? Is that clear?
Yes, but I think that the NEV was already adjusted for the dividends.
Yeah, it has been adjusted in Sierra, but we have not yet received the impact on that on Sonae. Okay? Regarding Sonae Sports and Fashion questions, starting with Deeply and Berg, indeed they are, you should consider them as two in a very early stage startup brands. In a way, we are acting upon those two brands. In what consists a little bit of our tradition as being entrepreneurial in our spirit, we have identified two potential opportunities there. Deeply will be a pure online brand, mostly dedicated to surf at this stage. It might expand to skating or skiing, but at this stage is mostly dedicated to surf. As I said, it is a pure e-commerce. It might have, and at this current moment, it has one or two pop-up stores, but just to get a feeling for consumers' reactions to the brand.
Berg, again, also a very early stage startup brand on a totally different market, outwear market, a mixture of technical products with a little bit of fashion to add to the technical products. It is mostly being sold through wholesale with some in-store corners, plus also a strong bet on e-commerce still to be fostered during the second half of this year. Those brands are, as I said, at a very initial stage. Obviously, we are betting on those two brands, so we are investing in those two brands, which means we are losing money at the EBITDA level on both brands. They will both have a period for us to evaluate if they are real opportunities or if we think that they are not real opportunities, and if that will be the case, we will exit those two markets.
For the moment being, we do believe that on both cases, we might have a chance, so we are investing on those two brands. You can see that it is taking a toll on our EBITDA margin because just for the alphas we have said, the EBITDA would have been marginally positive without the contribution of these two brands. You can easily make the reverse calculation to identify the size of the investment on Berg and Deeply during the first half. Regarding all the other brands, which, as I said, are supposed to be the marginally positive EBITDA during the first half, and we are talking about four brands: Salsa, Losan, Zippy, and MO. We do expect a better second half. Obviously, the weather is very unpredictable, but we do expect a better second half, and we believe that we will recover.
is not completely when compared to last year, but we will recover significantly during the second half. Actually, we are not seeing any structural problems on those brands, and I think that it is worthwhile mentioning the fact that during the very difficult first half, we managed to control stocks and to control cash flow in a very positive way for those four brands, which means that the four operations are very well managed, very well kept in control. If we get a favorable weather during the second half or even a slightly better weather than last year's weather, I am sure that we will post a significant improvement on both the front line, but also on EBITDA on those brands.
Okay, thank you very much.
You're welcome.
Thank you. The next question comes to the line of Philippe Rosé. Please ask your question.
Hi. Good afternoon, everyone. Thank you for taking my questions. My first one relates to Sonae Sierra and to two different questions. The first one regarding the potential M&A in Brazil, whether you can let us know what could be the timeline for a decision, the next steps, and what is the goal of Sonae with this move. The second question regarding the outlook for yield compression for the rest of the year for the most important markets, whether you still see room for further reduction of the rental yields for your most important markets. My second question relates to Worten. Okay, you mentioned in the case of fashion, Rui said you think that you could recover part of the worst performance that you had in the first half. You could have in the second half some recovery in more normal weather conditions.
My question relates to Worten because I understand that Q1 was more normal. When we had these issues in Q2, there was a reduction in the margin, but in Q1, you managed to have a better margin. Should we expect that in the second half we could be closer in terms of margins to the trend posted in Q1? A small improvement of the margin of Worten in the second half. That is my second question. My final question relates to the fashion business, and sorry to come back to that, but I think that for, I do not know, tracking these four brands, and typically in the past, we talked more about MO and Zippy, which had a lower profitability than Losan and Salsa. I think that there is already a mystery on a quarterly basis of a very strong volatility in the profitability of these formats.
My question relates to strategically and over the long term, the profile of Sonae, is it the sort of assets that Sonae wants to have that are so much exposed to the volatility of the collections in a market that should remain quite competitive? A little bit strategically, whether this volatility that we have had in the past, and I know that you have taken several steps to try to contain this, but we continue to have this volatility on a quarterly basis. Are you changing your view regarding these formats due to this volatility, or are you still very unconfident that you will be able to put this division back on track and with a more stable contribution in terms of EBITDA to the group? Thank you very much.
Okay. I'll hand it over to Miguel to answer the Worten question. I'll then pick up the other two.
Hi, Philippe. On the second semester, as you know, we normally do not give away forecasts in these calls. What I can tell you is up until now, July and August have been more normal months and more in parallel with what we have in Q1 in terms of sales and margins. The issues we have on supply and logistics in Q2, they are normalized, as Rui has already said in the introduction. The weather for Worten is not a very important factor except for the peak summer season for air conditioning, refrigerators, etc. We should not suffer or benefit a lot from any changes in the weather in the coming months. Based on what I said, I think we hope that Q2 is a bit of a deviation from what we had in Q1, but not more than that.
As I said, no forecast for now.
Okay. Thank you very much.
Regarding the other two questions, starting with Sierra and starting with the question regarding yields, we do not expect any further compression on yields in our assets in any geography. You should expect flat yields for the remaining part of the year. Any impact on valuation on our assets will only come from its operational performance. We might have some impact, but they will only be attributable to operational improvements. Regarding the M&A in Brazil, I have to give you a note of caution there. Sonae Sierra Brazil is a listed company, so this issue has to be and should be totally commented on and has to be dealt with by Sonae Sierra Brazil, which has its own shareholders and its own governance structure. Obviously, we are on the side of watching what is happening there and trying to influence it.
As a shareholder of Sonae Sierra, we are always open to opportunities to generate value, but the real comments have to be made by Sonae Sierra Brazil. Regarding fashion, yeah, it's true that there is volatility on a quarter-by-quarter basis, but that volatility has to be expected in a way because, for instance, Losan, which is our and all the businesses that are also driven, have two quarters with positive EBITDA and two quarters with mostly, if not -0 EBITDA. All the other fashion businesses have moments of the year where they have bigger sales with bigger margins, other quarters with sales. Volatility is present all along the value chain of fashion retail. Having said that, I'm trying to give you the flavor that you should look at fashion more on a year-on-year basis than on a quarter-by-quarter comparable basis.
Your question still stands, and your question was mostly regarding strategically, does this sector make sense for Sonae? Are you still willing to put some chips on this particular sector? Our view for the moment being is that it's an interesting business. It's a business that can help us on our most important guideline, which is internationalization. Today, more or less 45% of the sales done in the fashion division are done outside Portugal, which is very significant for Sonae as a whole. This is a business that we are willing to keep investing on for a couple more quarters, years, I would say.
As always, we are a very active manager of our portfolio, so we will be always considering opportunities to enhance value if we do see that at the point in time we are not able to generate sufficient returns on the invested capital on these particular businesses. Having said that, I want you to separate clearly the four brands that I've mentioned, the four mature brands: Salsa, Losan, Zippy, and MO from the two startup lines that will continue to post negative numbers at least for the next couple of quarters. That has to be split. Regarding the other four brands, the mature brands, again, there, Salsa and Losan are performing quite well. During the first half, Losan did perform mostly in line with last year.
Salsa, obviously, had a negative comparable performance regarding last year because of the impact on weather that has, as you know, impacted all fashion players in the world. Unfortunately, for competitive reasons, we will not give you brand-by-brand EBITDA, but I hope that this information that I gave you helps you have a clearer view on the performance of the portfolio that we have inside the fashion division.
Thank you very much.
Thank you. Next question comes to line of Tim Attenborough. Please ask your question.
Hi there. Good afternoon, Tim. A few have already been asked, but just a couple more from me. In the second quarter in MC, could you just clarify what the calendar impact there was? I'm guessing sort of 2%-2.5%. With the weather impact, which formats outperformed in like-for-like terms? Was there any particular differential there? With new space running at over 4%, would that be correct to model that out for the full year? Will it just slow down in refurbs and openings in the second half? On Sonae IM, could you give us some more color on the merger of S21Sec and Nextel? I think your shareholding was 60% before. What did you come down to there? Was there any implied valuation there? Anything sort of crystallized or anything that you've revealed there?
Lastly, on NOS, you keep talking about taking a portfolio management approach. Would you like to increase your stake there? Is there any chance that your ZOPT partner might be willing to let some go? I'll leave it there for now. Thanks.
Okay, Tim. I'm sorry. We are a little bit lost here with NOS, but I'll get back to you on that. I'll ask now Rui to answer you on the second quarter effects of Sonae MC.
Hi, Tim. This is Rui speaking. Regarding the signal effect in calendar that we had in the second quarter, what basically did to this signal effect related to the Easter? As Luis mentioned in the first quarter in a conference call of results, in fact, when we presented the figures regarding the first quarter, they were impacted positively by the Easter effect. Back then, Luis mentioned that the signal effect would be enough to put the like-for-likes around 2.3%-2.5% in terms of sales. In fact, in the first half, we presented 2.7%, meaning in discounting the signal effect, we had a very positive performance during the second quarter in Sonae MC. Regarding the other part of the question, I apologize because we are not able to give you guidance regarding the sales to the year-end.
Tim, regarding your question on NOS, it's a little bit difficult to give you a very straight answer because, as I said, we like the assets. We like very much the results. We believe that the company has significant room to improve its results and the way it's been evaluated by the market. We do see that in the next years, so we are hoping for an improvement on that particular asset. Having said that, I've already clarified that we at least intend to stay put with our position in NOS. I can't rule out the possibility of slightly increasing our position in the company, but that is not being discussed today. We have a very stable and comfortable agreement with our current partner.
As long as that remains, we will continue to manage the company and to influence the company through ZOPT the way we've been doing up until now with very successful results as per our evaluation. You shouldn't expect any substantial movement there in a short period of time. Regarding Sonae Investment Plan, yeah? Was that clear?
I said thank you. That's clear on NOS.
Okay. Okay. Regarding Sonae Investment Management, unfortunately, I would not be able to give you exact numbers for very obvious reasons, but I have to start by saying that we did buy S21Sec for a time. It was a distressed asset. We basically took over the company just by assuming its debt. It was a very interesting transaction, and then we injected some capital to restructure the company. Now we have merged it with Nextel. Nextel is a sizable company that was predominantly operating in the Basque Region and in the north of Spain. The combination of the two companies, as I have mentioned, has created the by far leader in cybersecurity in Iberia. We have, together with Nextel, around 500 people, more than 400 engineers on cybersecurity, which are quite significant. The combined company is already in the blue in terms of EBITDA figures.
Sonae has a stake in the combined company above 80% and full majoritary rights. We will be able to be in control of the future of that company. That is as far as I can go on giving you some color on these operations. I am also sure to tell you that the business is going quite well. S21Sec has a significant number of customers, not only in Iberia but also in Latin America, also starting in some U.S.-based companies. We are also expanding the influence of this company towards Central Europe. We have some interesting operations in Central Europe just being finalized. We do hope that this is an asset that will generate a substantial amount of value in the years to come for Sonae.
Okay. Thanks. Sorry, you said your stake is above 80%. I didn't mean to.
Slightly above. Slightly above 80%.
Okay. That's true. Thank you.
Thank you all for attending our conference call. I hope that we've been of help to you and that we've clarified some of the issues. I hope to see you again in November after our first quarter results. Thank you for attending once again.
Thank you, Luis. Conclude our conference for today. Thank you for participating. The call will now disconnect.