Americana Restaurants International PLC (AMR) Earnings Call Transcript & Summary

Welcome to Americana Restaurants Q1 2023 Earnings Presentation. My name is Sonika Sahni, and I'm the Head of Investor Relations at Americana Restaurants. Today's discussion will be led by Amarpal Sandhu, CEO of Americana Restaurants; and Harsh Bansal, CFO and Chief Growth Officer. We will conclude with a Q&A session to answer any questions you may have. Before we start, I would like to remind you of the disclaimer provided in our presentation, which applies to this call. I will now hand over to Amar, who will begin with the presentation.

Thank you, Sonika. Good day, everyone, and thank you for taking the time to be with us today. We'll start by recapping our KPIs for quarter 1 2023, followed by a Q&A session, as Sonika had mentioned earlier. Some key highlights. We had a good start to 2023 and Q1 performance is in line with our operating plan, further building on the strong performance of 2022. As of March 31, our portfolio has grown to 2,228 restaurants. Our new store expansion has been quite healthy, over the last 12-month period. with 236 openings. This includes 210 openings for our Power Brands, KFC, Pizza Hut, Hardee's and Krispy Kreme. Furthermore, in Q1 2023, we opened 49 gross new restaurants versus 33 gross openings for Q1 2022, and this is a 50% improvement year-over-year. In addition to that, as of March 31, we had another 63 restaurants under construction. This demonstrates a healthy pipeline and gives us the confidence that we are on track to deliver on our guidance of 250-plus net new units in 2023. Revenue for Q1 2023 was $589.4 million, a 2.1% increase year-on-year. Despite the partial shift of the holy month of Ramadan to Q1 of this year, last year, Ramadan was during Q2 in the first -- in the second quarter of 2022. And as many of you are aware, there is a significant impact on out of home dining across MENA during the holy month, as muslims observed fasting, prayer and reflection. And families and friends typically gather to enjoy home cooked food rather than eating out. Up until the start of Ramadan, the period from 1st January 2023 through 22nd March, the like-for-like revenue grew a solid 7.5% versus the same period in 2022. The business generated adjusted EBITDA of $126.9 million, with a healthy EBITDA margin of 21.5%. This is a 5% -- 5.6% decline versus Q1 of 2022. Furthermore, net profit for the quarter stood at $58.1 million, down 19.2%, resulting in a net profit margin of 9.9%. The year-on-year decline in adjusted EBITDA and net profit was largely due to high cost inventory carryovers that were impacted by commodity inflation. Also lower sales and fixed cost deleveraged in March because of Ramadan, currency devaluations in Egypt and Lebanon and higher depreciation as a result of accelerated new restaurant openings in quarter 1 of 2023 versus quarter 1 of 2022. It's important to note, however, that there were no surprises and the factors mentioned are accounted for in our 2023 operating plan. We will discuss these in more detail within the financial review section. In addition, we remain disciplined in our CapEx deployment, allowing us to maintain a very healthy balance sheet and strong overall financial position. With this in mind, we are well positioned to meet our growth and capital expenditure commitments, as well as support our dividend policy. Moving on, some key updates for quarter 1. During the first quarter of the year, we continued to progress on several operational and strategic fronts. One of the major milestones was the kickoff of the KFC and Pizza Hut launch for Baghdad, Iraq and the first restaurants opened, last month. The response has been very encouraging, and both brands are significantly exceeding projections. We see Iraq as a greenfield opportunity for us, which further strengthens our regional presence, and we are building a strong pipeline to accelerate the expansion for the balance of this year. We are also pleased to report that Peet's Coffee has successfully launched 2 locations in the UAE, offering a unique experience with coffee enthusiasts. As you may remember, Peet's is a new addition to our portfolio, adding further depth to our coffee vertical. Peet's Saudi launch is on track for Q3 of this year. We had 3 restaurants under construction currently. And we continue to build the pipeline in both the UAE and Saudi for a successful scale-up of the Peet's brand. In addition, as part of our customer-first approach, we launched a loyalty program for KFC which is focused on providing a differentiated experience to our customers, improve retention and also repeat rates. The pilot is running in select KFC stores in the UAE and Saudi Arabia, with a full-scale rollout planned across those 2 countries for quarter 2 of this year. We have also developed a proprietary technology platform to manage our last mile delivery logistics. The Americana last mile platform is focused on automating and driving efficiencies in our delivery fleet. This proprietary platform has been launched in over 200 stores in UAE, Qatar and Bahrain, and we have plans to expand its coverage to Oman, Kuwait and Saudi Arabia in quarter 2 of this year. We're also pleased to report that the company was recognized in quarter 1 with 2 distinguished awards. First, the Gallup Exceptional Workplace Award for fostering an inclusive and engaging environment. Americana is now a 2-time winner in consecutive years, and this is a strong testament to the ongoing people and culture transformation at Americana, where we pride ourselves in cultivating a performance-driven values-led culture. The second award is the Yum! Global Digital Disruptor Awards. Recently, Americana was recognized as a champion of large-scale digital transformation at Yum!'s Global Convention in Singapore, which was held in February. So that's a summary of some of the key highlights. At this point, I'm going to turn it over to Harsh, who will review the financial section.

Thank you, Amar. So we will start the financial section with new store openings. We are on track to deliver our net new restaurant opening target of 250 to 300 per annum. It has been a good start to the year with 49 gross openings in Q1, which is 50% higher of what we opened during the same period last year. We have closed 4 restaurants which resulted in net openings of 45 during Q1. We have a strong pipeline in place. If you look at chart on the right, we have 199 units between under construction, lease approval and feasibility approval, which gives a very clear visibility of the openings in the next 2 quarters. In addition, we are further building the pipeline, and we have 30 additional sites which are under review, which would go into site approval, as well as lease secured over the next couple of months. In terms of payback, though we are not presenting it as part of Q1 results, the numbers continue to be strong and are in line with what we have reported in February, which is in fact 2 years. We would be reporting detailed paybacks during our H1 results. Moving on from new store openings to revenue. If you look at chart on the left, we closed Q1 revenue at $589 million, which is 2% higher than Q1 2022. Contribution from any source was $40 million. In terms of LFL, just before the start of Ramadan, which is from the 1st January to 22nd March, we did 7.5% LFL during that period. Given the Ramadan seasonality, overall LFL for Q1 was at 1.7%, which impacted our overall revenue growth, as well as a profitability given the operating leverage, which we will discuss in detail in the later slides. In addition, FX impact largely driven by Egypt and Lebanon has also impacted the overall revenue growth. And if you look at the chart on the right, our contribution from stable currencies increased by 82% -- from 82% to 83%. And given the strong performance of Power Brands, share of Power Brands have actually increased from 93% to 94%, highlighting the strong fundamentals of the stable currency business as well as the performance of Power Brands. Now we go into the detail of revenue performance by brand. KFC performance continues to be strong with double-digit LFL, if we exclude the Ramadan seasonality, which is till the 22nd of March. Pizza Hut had a very strong quarter with positive LFL growth despite of Ramadan seasonality. In particular, Pizza Hut UAE performed well and actually exceeded expectations during quarter 1 in terms of LFL. Hardee's performance has been robust in UAE and KFC with some softness in Kuwait and Qatar impacting the overall revenue growth. Historically, Kuwait has been the strongest market for Hardee's, which has been under pressure due to restrictions on expat visas and competitive dynamics. However, we have seen pickup in Q2 post-Ramadan and we are seeing positive signs in terms of Hardee's performance in Kuwait. On Krispy Kreme, very strong performance in terms of overall revenue with a 10.6% growth. LFL has been largely impacted by KSA performance given the intense competition in sweet treat and indulgence category, as well as significant new openings for Krispy Kreme. Just as a reference point, we opened 77 stores of Krispy Kreme between 1st April 2022 and 31st March 2023. Before we go into the profitability slides or the profitability metrics on the next slide, let me explain the cost of inventory movement as this has been the significant driver of margins in Q1. As highlighted during our last earnings call in Feb, H1 2022 had a positive impact from low cost inventory carryover from 2021. And if you look at the chart on the left, in Q1 2022 and Q2 2022, our cost of inventory was the lowest. It started picking up in H2 2022, given the commodity headwinds we saw last year. This has carried over into Q1, and it would -- it is expected to carry over into Q2 as well, given the inventory carryover, but we expect it to taper down, as we speak into H2 2022. If you look at Q3 2022, which was most impacted at 33.1% cost of inventory, we're already 0.6% better than Q3 2022, and we are currently at 32.5%. And we expect the cost of inventory to further go down in the subsequent quarters. We expect overall cost of inventory for full year to be largely in line with the last year. And as we explained earlier, H1 2023 would be similar to H2 2022. Having said that H2 of 2023 should be similar to H1 of 2022, which results in largely a similar cost of inventory over the course of the year. Now here are the profitability metrics. So margin and profitability, given the Ramadan seasonality and the commodity pressures, there has been some dip in the profitability. Having said that, given the ongoing focus on cost, we have been able to recover some of that through ongoing cost initiatives. But the two big reasons which I already explained, one is cost of inventory which impacted the margin by 2.3% in Q1 2023, and the second is operating leverage on the P&L due to Ramadan seasonality. So we went from 7.5% LFL just before the start of Ramadan to 1.7% LFL, which had an operating leverage impact on the P&L, which should even out by Q2 given the seasonality of the shift in Ramadan. On the net income level, we saw some deleveraging because of leasing-related depreciation and finance costs, which you can see in the financials. That was an additional $8.3 million impact compared to Q1 2022. Here we talk about our cash flow and CapEx. So the working capital side, the focus on inventory, reducing the inventory levels have seen some results. So if you look at it, we have reduced the inventory from $174 million to $154 million by 31st March 2023. And our DIO is largely in line with the target DIO, which we have. In terms of payables, we have seen reduction in payables. This has been driven by the high interest rate environment, especially the smaller suppliers are facing the pressure. And as said, there has been some reduction in the payables. We will continue to work with our suppliers to increase the payables, but we expect the pressure to remain till the time the interest rate's cycle eases out. CapEx has been largely in line with our expectations. So, we are 5.3% of the revenue, largely driven by new store opening CapEx. That's in summary about the financials. Revenue performance has been robust. While we had impact due to Ramadan, we were able to mitigate the impact driven by NSO performance or NSO revenue contribution. In terms of margins, the 2 big contributors were cost of inventory and deleveraging due to Ramadan, which was partly mitigated by the cost initiatives, and cash flow has been largely in line with our expectations. So now, I will hand over to Amar to go through the way forward.

Thank you, Harsh. Now, we would like to reiterate the focus areas for 2023, as mentioned in the earnings call that we conducted earlier this year. Growing the restaurant portfolio remains a top priority for us. As such, there is no change to our guidance to open 250 to 300 net new restaurants annually. As mentioned in our earlier calls, we will over-index in KSA, as we believe Saudi Arabia provides compelling opportunity both for the Power Brands, as well as our incubator brands such as Peet's. In addition, we are very excited about the greenfield opportunity in Iraq with the recent highly successful launch of KFC and Pizza Hut last month. So we will continue to drive accelerated growth in Iraq as well. Second point, given Egypt's overall macroeconomic environment, this country remains a focus for us in 2023. While we are believers in Egypt's long-term potential, we have made a conscious decision to pull back on capital deployment for the time being. The sheer focus remains on operations excellence and cost efficiencies through DBB initiatives. On the revenue front, we are working on smart pricing as well as disruptive value to ensure that we continue to mitigate the transaction decline. Also, as mentioned by Harsh earlier, we remain focused on driving improvements in our gross profit margin by the second half of 2023, once our existing strategically built inventory is phased out. On top of that, we will continue to dedicate time and investments to further develop our digital offering and optimizing our off-premises revenue channels as seen through the pilot launch of our loyalty program and the last mile platform. And finally, we will continue to scale up new growth opportunities. Some examples for that are Pizza Hut in Saudi Arabia. We finished 2022 with 30 openings, and our target for this year is certainly to top that. We also have Peet's Coffee scale-up plans for UAE and Saudi. And then, we mentioned earlier, KFC and Pizza Hut in Iraq. Just as a reminder, something that we have shared previously, we expect our new brands to reach portfolio level margins within 24 to 36 months, as we continue to drive brand's strength and scale up. Once again, thank you for joining us today. And at this point, we will open the lines for any questions. Back to you, Sonika.

[Operator Instructions] Our first question is from Henrik Herbst from Morgan Stanley.

I have a couple of questions. Firstly, if I could just follow up on -- I think you mentioned, if I heard you correct, you mentioned transaction decline in your final remarks. Maybe, I missed it during the sort of broader presentation, but maybe you could talk a little bit about that and clarify that, perhaps. And then secondly, I was just wondering if you could talk a little bit about what you're seeing in terms of broader consumer demand in your main markets. I guess, inflation as lower consumer sentiment really is at pretty high and I mean consumer should be pretty strong, but we are hearing some concerns from other corporates. So I was just wondering, if you could maybe give us a bit of a rundown of your main markets, I mean, in particular, Saudi, UAE and Kuwait.

Sure, Henrik, always good to hear your voice. The transaction comment was specific to the situation in Egypt. So I think, there's probably some misunderstanding there. The overall -- yes, so the overall situation, we saw really strong momentum in UAE as well as in KSA, and the business remains exceptionally strong in 2 of our biggest markets. We did see some softness in weight as well as in Qatar for different reasons. Qatar obviously, the World Cup impact and everything associated, all the infrastructure builds and the activity that was going on with that. In Kuwait, it was more with some structural changes with visa cancellations, et cetera. And we saw that across the market. So it wasn't just us. It was affecting the country. However, we are seeing a very good recovery during Ramadan Eid, where it was phenomenal performance. And even, post that in Ramadan and Eid, we are seeing a really good recovery in Kuwait. Very strong performance in Kazakhstan and Morocco across various other geographies. So that's kind of an update of what's happening across the markets.

And you're seeing no sort of signs of consumers cutting back, trading down anything like that in Saudi or UAE.

Nothing in Saudi and UAE for sure. We are not seeing that. Our brands continue to perform very well. We were concerned on the -- because we were lapping expo from previous year. We thought we would have some softness in UAE, but we have been pleasantly surprised UAE remains quite strong for us.

The next question comes from [ Fasol Coney from CNN ].

Yes, just a couple of questions for me. Starting with the explanation for Ramadan, I'm just struggling to understand kind of how the impact of kind of 10 days between last year and this year has kind of -- so kind of negatively impacted kind of the results. If we could just get some color there.

So if you look at chart on the left, in the 9 days of Ramadan, which is from 22nd to 31st of March, we saw a 45% decline on the revenue. And that was driven by the seasonality of Ramadan because last year, the Ramadan was in Q2 rather than Q1 and every other Ramadan shifts. So that's -- the revenue impact, which we had due to Ramadan. And given our business, a significant chunk of our costs are fixed or semi variable in nature. So that has an impact on the P&L just because of the leverage. And that resulted in dilution of margins, as well as impact on profitability due to Ramadan.

So just to clarify, you're saying that in those 10 days, you had a 45% decline in revenues, and that's kind of where the operating leverage of the business was negatively impacted, yes?

Yes, that's right.

And can I just also ask other income was also down, quite significantly. If you could give color there, as to why that was the case.

So other income as such is a very small component. And this is just because of Lebanon is going through hyperinflation, and that we have to follow the IAS 29 and we have to do hyperinflation and that has an impact. So it's just a comparable versus last year. And we have certain rental income in Egypt. Just because of the FX in Egypt, the rental income and the logistics income went down because most of the rental and logistics income come from Egypt, where we own certain real estates. And that's just because of the FX, which we used for Egypt last year versus this year.

Okay. And then, if I could just also ask if you could give color on the expansion in the financial calls, kind of what your expectation is for the rest of the year?

So again, we have not given specific, I would say, guidance for the year, but we are very much on plan and intact in terms of medium-term guidance. As far as cost of inventory is concerned, which if you look at -- if you're going to start on the right -- next chart. If you look at cost of inventory, in Q1 '23, we saw a dilution versus Q1 '22 of 2.3%. Having said that, over the course of the year, we expect the cost of inventory to be largely in line with last year. So that, which has been guiding our margins, which has been guiding the profitability in Q1, we expect it to even out during the course of the year. But otherwise, on the profitability, we are very much in line with our medium-term guidance, which we have given earlier.

That's very helpful. And then, if I could just make a quick comment. I don't know if the presentation was widely distributed. I don't happen to see it on your website. If you guys could share that, that would make the call a lot more helpful, if we could have access to the presentation in real time.

So Fasol, that will be uploaded on our website later tonight or tomorrow.

Our next question comes from Taher Safieddine from JPMorgan.

Taher from JPMorgan. Just a couple of questions from my side, please. First one is on this adjusted like-for-like of 7.5%. Can we just get an understanding on transaction versus basket? I'm just trying to gauge here with inflation, there's still ability for pricing to come through. So maybe, if you can shed some color on that, that would be very helpful. The second question is just on the EBITDA margin. In your press release or earnings release, you're still reiterated the medium-term EBITDA margin expansion of 250 to 300 basis points. But I'm just trying to understand, should this be more back loaded in a sense that it will come through more 2024 onwards, given we're still dealing with these inflation -- commodity cost headwinds? So maybe, if you can just add also some color on this margin trajectory will be very helpful. And just a follow-up from the CFO, you talked about some pressure in Hardee's operation and Krispy Kreme. I've missed that. If you can just explain what has happened exactly in these 2 brands.

So Taher, that's a loaded question, so we'll split it between Harsh and myself. In terms of transaction, we have a healthy growth removing the Ramadan impact. We have a healthy growth in transactions as well as check. So there's no decline on that side. And secondly, on Hardee's and Krispy Kreme, as Harsh mentioned in his presentation, Hardee's is over-indexed in Kuwait. That's a significant weight in the overall Hardee's portfolio. And we did see some softness in Jan and Feb in Kuwait for Hardee's. However, the recovery has been quite good. And for the full quarter, Hardee's has positive LFL. And the performance in KSA was very strong and UAE is very strong as well as well as our market in Hardee's performance in Kazakhstan. On Krispy Kreme, also Harsh touched on this in his presentation. One, yes, there is a challenge in KSA because very competitive segment in coffee, sweet treats and indulgence, as well as we have opened roughly circa 70 new Krispy Kremes across our portfolio. So there's a cannibalization impact as well on the LFL. Plus in Egypt, which was a very strong market we were going up against the early launch phase of the brand. But overall, Krispy Kreme revenue is circa 11% positive. So, I'll turn it over to Harsh to answer the profitability questions.

Can you please go to the margin side? So Taher in terms of profitability, let me -- first of all, if you look at GP, we had a valuation of 2.3% in gross profit or in cost of inventory, if you look at Q1 2022 versus Q1 2023. Having said that, if you look at the next slide, our EBITDA margin was -- the dilution of EBITDA margin was close to 1.8%. So there is a reduction in terms of margin dilution from gross profit to adjusted EBITDA of 0.5%. And as I mentioned earlier, we expect our gross profit to be largely in line versus last year, and that will happen because we expect the gross profit to be better in H2 compared to H2 of last year, given the drop in the commodity prices, as well as the flow -- the carryover of the pricing. And that should flow to an EBITDA level. So the dilution which happened in GP level should not happen at an EBITDA level as well. So we expect there should be margin expansion at an EBITDA level, if you compare to last year, and we remain in line with our guidance, which is 250 to 300 basis points in the medium term.

Our next question is from Aaron Armstrong from Ashmore.

Perhaps just to cover up on one that was asked previously, on the like-for-like growth, the mix of price versus volume. I think, you said that both were positive. But could you give any more detail on that, please?

Aaron, I hope you are well. Good to hear your voice again. Yes, so we saw fairly, I would say, about 1/3 of that was in transactions and about 2/3 in check, but positive growth on both sides on transaction and check. And this is the 7.5% of pre-Ramadan. So from 1st January to 22nd of March. Obviously, Ramadan, we are not taking that into account here. Ramadan over Ramadan was a fairly strong performance as well versus last year. So that was, in fact, better than 7.5%. Ramadan and Eid combined this year versus Ramadan and Eid combined last year.

And have you been raising prices on a like-for-like basis year-to-date?

So we have, in some countries, taken pricing. And as we highlighted earlier, we continue to review pricing on a periodic basis. And it's not only pricing we look at. I would say, various menu optimization opportunities, be it sizing, be it pricing, be it launching LTOs, which are slightly more premium. So we have taken pricing in some of the GCC markets as well. But for sure, in markets like Egypt and Kazakhstan, we have been taking pricing more just because of inflationary pressures we are seeing in some of those markets. But pricing, we look at every month and wherever there's an opportunity, we do take pricing.

That's great. And then, looking at the store addition numbers for Q1, if we just annualize that for the full year, if we were to just time it by 4, that would obviously be a little bit below the full year guidance. In a typical year, are your openings normally back-end loaded? Or are there any other kind of context you can give that? What is it?

So you are talking about new store openings, just to clarify?

Yes. I think, you opened 45 net new stores in Q1. But to hit 250 for the full year, the run rate would need to pick up in subsequent quarters. Is that how you see things? Is it normally a back-end loaded process for you?

It is back end loaded. Even, if you look at the comparison versus last year, a significant chunk was opened, especially in Q3 and Q4. And while, we have opened 49 which is significantly higher than Q1 last year, and last year, just as a reference point, we opened 220 gross stores. So we are in line with our guidance of 250 to 300, and we have visibility, as I mentioned earlier, 199 restaurants, which are either under construction site secured or feasibility improvement.

And Aaron, just to give comfort, that 49 number in Q1 has significantly increased, just in over the last month. Because at the end of quarter 1, we had 63 under construction. So a lot of those have been converted to open in April.