Sonae : SGPS SA, informs on 2018 Sonae MC SGPS SA Management Report

Management Report, 2018

Sonae MC, SGPS, SA

(Translation from the Portuguese original)

Management report and Accounts, 2018

00.

Introduction

Sonae MC, SGPS, SA (hereinafter referred to as Sonae MC) is the Sonae Group company which aggregates the Group's food retail business, as well as the management and operation of real estate assets to support this activity. Sonae MC, formerly known as Sonae Investimentos, SGPS, SA, is the result of a reorganization of shareholdings and a restructuring of the perimeter (currently composed of Sonae MC, Maxmat and Sonae RP's operating assets) carried out in the context of the process of preparing admission to listing on the regulated market of Euronext Lisbon.

Sonae MC is a leader in the food retail sector in Portugal, and is present in several business areas through a diversified portfolio of brands and formats, including: Continente (urban hypermarkets), Continente Modelo (large supermarkets), Continente Bom Dia (Proximity supermarkets), Continente Online (e- commerce platform) and Meu Super (franchise stores) in food retail, and Well's (health, well-being, cosmetics and optics), Go Natural (supermarkets and organic restaurants), Bagga (coffee shops), Note! (stationery, books and gifts), ZU (articles and services for pets and veterinary), and Maxmat (DIY, retail building materials) as adjacent businesses.

01.

Market context

Uncertainty and volatility have marked 2018, a year with major stock markets' corrections, large fluctuations in oil prices and heightening geopolitical tensions. Last year the World saw a protectionist shift, with USA and China escalating a trade war and imposing mutual trade tariffs to import goods, contributing to the rise on risk aversion.

In Europe, the European Union and the UK government signed a withdrawal agreement for the UK exit but it failed to get the UK's parliament's support, adding more ambiguity regarding Brexit as the deadline approaches. Moreover, the European Commission and the Italian government clashed over its deficit proposal due to doubts over Italy's commitment to the consolidation of its public finances.

In Portugal, economic activity has remained robust with GDP growing by +2.1%, driven mainly by the domestic demand and particularly by the continued growth in private spending. Growth was backed by a gradual improvement of labour market conditions, with solid rates of job creation and unemployment reaching the lowest level in 16 years (7.0%).

Management report and Accounts, 2018

Nevertheless, growth decelerated last year reflecting a natural moderation as the economy approaches a more mature phase of the cycle. After a notable performance in 2017, both investment and exports growth returned to more sustainable levels.

Private consumption remained particularly dynamic, taking advantage of the high levels of consumer confidence and the favourable financing conditions. Overall, consumer credit conditions continued largely supportive with interest rates remaining at low levels. The hike in real estate prices also contributed to a strong wealth effect providing an additional boost to private consumption growth.

Although private spending in durable goods remained strong, it started to show some signs of moderation. Retail sales lost some strength in comparison with the past year (+4.6%), namely in non-food categories (+4.3%), while retail sales of food and beverage accelerated (+4.9%). Moreover, spending in hotels and restaurants remained strong (+7.7% and +5.3%), boosted by non-resident's spending.

Analysing in greater detail the food retail sector in Portugal, last year was characterized by: i) growth in supply, observed in the evolution of total sales area, ii) diversification of trade formats, with an emphasis on convenience and proximity, iii) increase in the level of demand of customers and change in their consumption patterns; and iv) stabilization of the weight of promotional activity in the sector's sales, despite remaining at high levels when compared with other references in the European context.

Specifically, in 2018, the evolution of the installed base of supply registered a slower growth pace when compared to previous years, having increased by about 1.8%, with the opening of an additional 41,000 sqm of retail area. Contrary to the previous year, the increase in supply occurred at a slower pace than the nominal growth of demand, benefiting from the dynamism of the latter.

3

Management report and Accounts, 2018

02.

Key activity highlights

In 2018, Sonae MC's consolidated turnover amounted to 4,308 million euros (of which 4,191 million euros related to sales and 116 million euros related to services), corresponding to a growth of 6.2% over the same period of last year. Growth in turnover was driven by the expansion of the portfolio, particularly in proximity formats, and by a 3.0% increase in sales in the comparable universe of stores (LFL).

In the full year, Sonae MC consolidated its market share and leading position in the Portuguese food retail sector, benefiting from the implementation of a set of actions to improve the value proposition for customers, namely:

∙Continuous commitment to competitiveness and improvement of value perception, both in price and in promotions;

∙Increased consistency in the quality of perishables, in particular in fruits and vegetables;

∙Continuous innovation and extension of the ranges of own brand (food and non-food);

∙Exploration of new opportunities in the proximity segment, through the accelerated expansion of the Continente Bom Dia stores (13 units opened in 2018);

∙Double-digitgrowth in online channel sales, supported by sustained improvement in efficiency and effectiveness throughout the supply chain;

∙Strengthened presence in the "Health & Wellness" segment through organic development efforts (e.g. opening of 24 Well's stores in 2018, double-digit sales growth in the Bio & Healthy range), complemented by surgical acquisitions (e.g. purchase of biological supermarkets Amor Bio).

During 2018, the Group continued to develop its real estate monetization strategy, completing two sale and leaseback transactions in the fourth quarter, which generated a total cash-in of 77 million euros and an accounting gain of 37 million euros. At the year-end, the Group's freehold stood at 45%.

In 2018, the Group's underlying EBITDA totalled 319 million euros, increasing by 18 million euros compared to 2017, corresponding to a stable underlying EBITDA margin of 7.4% and maintaining best-in-class profitability levels. This performance capitalized on a continuous effort of operational excellence and consequent gains in efficiency and agility, thus accommodating the reflexes of the highly competitive environment found in the Portuguese food retail sector, the strong investment in the optimization and expansion of the Group's store portfolio and respective impacts on wage costs, namely an increase in personnel costs to 523 million euros, a 7.1% rise compared to 2017.

4

Management report and Accounts, 2018

Sonae MC's EBIT also posted a solid performance, growing 14.1% year-on-year to 194 million euros in 2018, representing an increase of 24 million euros and an EBIT margin of 4.5%, despite of a 9.3% increase in depreciation and amortization, which amounted to 146 million euros, reflecting the strong investment in expansion and remodelling carried out in previous years, and an increase in provisions and impairment losses amounting to 13 million, resulting from one-off effects.

Consolidated net income for the year attributable to shareholders amounted to 649 million euros, of which 152 million euros refers to continuing operations (36 million euro higher than the same period last year) and 497 million euros to discontinued operations, mostly related to the aforementioned "carve-out" process.

03.

Investment

Throughout 2018, Sonae MC materialized a global investment of 241 million euros, fulfilling its ambitious plan of openings and refurbishments, including:

∙Investment aimed at delivering the Group's expansion program, particularly in proximity formats, enabling it to finish the year with a global portfolio of 1,108 units (including franchises) and a total sales area of 853 thousand square meters (growth of 3.6% on the basis at the end of previous year);

∙Investment aimed at the planned refurbishment effort of a selective set of retail units, in order to leverage productivity gains and ensure that these units remain as a reference in their respective areas of implementation, which included more than 30 relevant interventions during the period.

5